A couple of months ago, the Market Dad was over for dinner. Market Galhad just whipped up a tasty batch of a pasta dish affectionately known as “Almost, But Not Quite Lasagna.” The conversation turned to the experiment that is this column, about which Market Dad commented, “We’ll probably only hear about your winners.” So I started thinking, when is the last time I heard anyone speak of their losing investments? We rarely hear of the disasters, the wipeouts, the crash-and-burns. But if you’ve invested for any length of time and have exposed your capital to at least a moderate level of risk, you have war stories to tell. It’s strangely satisfying to sit down over a beer and talk about the bad old times. Everyone begins their story with, “so you think you lost money? Let me tell you about the time I got really slammed!”

Before we get too far into this, I have to tell you something: I hate losing money. I despise and loathe it. As any seasoned investor will tell you, it’s not just about the money. OK, it’s 90% about the money. However, many times it’s also about a failure in strategy. It sounded like a good idea at first, but then something went horribly wrong. Well, this column will provide a chance for me to purge my tank of investing misfortune.

If I’m going to come clean, I might as well come clean. My motives aren’t entirely pure. In fact, I’m being selfish, careful, and superstitious all at the same time. Although I was trained in the behavioural sciences, I can’t help but wonder if there are Market Gods, lords of the loonie, buddhas of the buck. If there are, I’m sure they pay attention and are quick to punish arrogance. That’s why traders consider it bad luck to brag about performance. It’s like the golfing buddy who is way too happy about his score. If he harps on it, you know the next round will be a stinker. In order to balance my account and keep me hitting the fairway, I’d like to tell you a story…the story of my worst damn investment experience, period. So crack open a cold one.

The whole sorry episode began in early 1998, with an initial purchase of shares in Laidlaw at $20.50; a price that will live in infamy. Here’s a company that began life in the 1950s as a trucking concern. By the early 1970s, the firm diversified by acquiring several school bus services. Then it was waste management. Remember all those garbage trucks that used to have the red, white, and blue Laidlaw logo on the side? Let me refresh your memory:

As far as my rods and cones are concerned, this might as well be a picture of the devil…or George Steinbrenner. But things were different in the 1990s, and the logo of Laidlaw was a mark of success. It was being added to ambulances, emergency rooms, and then inter-city buses via the purchase of Greyhound. Very different businesses to be sure, but they shared a common characteristic: Their respective markets were highly fragmented, with plenty of candidates for anyone interested in consolidation. Size has its privileges. The bigger you get, the more concessions you can wring from suppliers.

Laidlaw’s strategy was clear: growth by acquisition. And acquire they did, to the tune of several hundred smaller companies (38 in 1998 alone). Questions began to arise as to the focus of the company. In an annual report, the company responded:

“While Laidlaw’s businesses may appear quite different from each other, actually they have many common themes, practices and management techniques… All Laidlaw businesses provide services essential to the North American public. As a specialized transportation company, Laidlaw safely moves people, either as passengers or patients. In addition, Laidlaw-managed physicians extend patient care into the hospital emergency setting. Laidlaw is well placed to benefit from changing North American demographics - rising numbers of school-aged children and young adults, and aging baby-boomers with more time for vacations and an increasing need for healthcare services.”

Makes sense. Makes a lot of sense. Makes the acid come up my esophagus. However, it was hard to argue with success and most investors were regarding Laidlaw as a compelling growth story. With roughly 40% revenue and income growth in 1998, why should anyone have been concerned? The targets were being met and the valuation was reasonable given the growth rate.

To further the growth agenda, the company launched a $2 billion (US) takeover of chemical recycling company, Safety-Kleen. It seemed like a logical addition to Laidlaw’s waste management division, even if a fair amount of debt was involved. Laidlaw had no problem finding cash, as bankers were bending over backwards to keep the good times rolling. The company had momentum and the stock reflected it. It was all up, baby! Then we heard about some accounting problems at Safety-Kleen.

Much of what happened after that is a blur. There were a series of write-downs in the Safety-KLeen investment, but Laidlaw remained confident in the future. Take this from one of their announcements:

“We carry our investment in Safety-Kleen on our balance sheet at $738 million and in keeping with belief that there is substantial opportunity for Safety-Kleen’s stock value to appreciate, we expect to hold this interest for some time.”

Shortly thereafter, Safety-Kleen filed for bankruptcy and another $738 million was wiped away. However, the debt remained and there was a lot of it: Make it $4 billion to be exact. Now the bankers were decidedly less accommodative. Then we started hearing about margin squeezes and regulatory issues in the healthcare division. The company had momentum and the stock reflected it. Only this time, the momentum was downhill. “Can this company continue to grow at such a torrid pace?” was replaced by “Can this company meet it’s financial obligations?”

The answer to both questions was a resounding no. So in late 1999, I liquidated most of the position at $7.65. For those of you keeping score, that’s a 62.6% loss. Serious pain.

“Laidlaw, you’ve got me on my knees, Laidlaw, I’m beggin’ darling, please!”  -what Eric Clapton would have been singing, had he owed Laidlaw like theMarket Guy

However, this isn’t the end of the story. In Part Two I’ll tell you about how I made the situation (and my losses) much, much worse and what I learned in the process. “So you think you lost money? Let me tell you about the time I got really slammed!”

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. His new office has large windows, so he brought in a plant. Make sure to plant yourself withmail@marketguy.ca