No. of Recommendations: 10
“If you think your IQ is 160 but it’s 150, you’re a disaster. It’s much better to have a 130 IQ and think it’s 120.” These words were spoken by Charlie Munger at the 2009 Berkshire Hathaway shareholder meeting. I can only wish I had heard this wisdom ten years earlier.

A decade earlier, the dot-com mania was in full swing. In 1999 I was in high school and had been investing for several years using funds earned from mowing lawns and various business ventures I started. My investment record had been favorable, and I had earned outsized returns on the backs of Internet darlings such as C|Net and E*Trade. My performance record and a cursory reading of The Intelligent Investor led me to a rather “optimistic” interpretation of my IQ.

Believing I was on the cusp of making the next great Internet fortune, I began purchasing shares of Xoom.com, a provider of free websites and clipart (not to be confused with the payments company now owned by PayPal). I read the 10-K, poured over press releases and used the company’s products. Revenue was scarce at $8 million in the previous year, and I somehow convinced myself that the money-losing business would grow enough to warrant a market cap 60x this amount. Worst of all, I concentrated my investment to the point where it comprised 90% of my portfolio. Gone was any semblance to the admonitions of the Intelligent Investor and in their stead was the mantra that guys like Warren Buffett were out of touch.

At first my optimism seemed well placed. Shares doubled over the course of the next few months. Xoom announced a merger with Snap (an online comparison shopping tool) and General Electric’s NBC unit. The combination would give GE 53% ownership and voting control of the company. I was ecstatic as the shares advanced another 50% and the company was renamed NBCi. I blissfully ignored declining metrics in what should have been a period of intense growth and absolutely ignored the firm’s commitment to purchase nearly $400 million worth of advertising from NBC.

Anyone with an IQ above 80 should have been able to see the inevitable as reality hurtled towards my portfolio. Revenue grew to $120 million over the next two annual reports, offset by annual losses as high as $600 million. You would be hard pressed to find another company that could lose money from operations as fast as this one. I sold the entire position in June 2000 as the company not only announced losses would be higher than expected, but that its revenue base was projected to decline. The result was a loss of nearly 50% from my average cost basis and a drawdown of roughly 80% from the height of the market. The company was eventually absorbed back into General Electric for approximately $2/share and mostly shut down a few years later.

It is said that losing money is the best teacher. My losses from this investment where larger than my outlays on college tuition a few years later and arguably more formative in my investing process. I came away humbled and determined to never find myself (or others) in such a situation again. While there are many lessons to be taken from my missteps, a few are worth mentioning for the benefit of those reading:

• DO NOT LET OVERCONFIDENCE TAKE OVER YOUR PORTFOLIO OR ANY ASPECT OF YOUR LIFE. I let favorable investment results in an extreme bull market fool me into thinking I was a better investor. I have spent the last 18 years studying (two college degrees, investment certifications, books, travel and personal investment research) how to become a better investor and I find that I typically have more questions than concrete answers whenever I tackle something new. Knowing that you don’t know everything is an advantage and should be at the core of research.
• Know that reading 10-Ks and other SEC reports is not enough. You must truly understand what is being communicated through these documents and be able to use them to develop a cogent description of how an investment will go about earning a return sufficient to offset your initial investment
• Diversification is a safety mechanism worth implementing in a portfolio. An 80% drawdown takes a 400% gain to bring a portfolio back to breakeven. Even investments with a 99% chance of success can be catastrophic if a 1% event occurs. A 1% chance of failure compounds into a 50:50 chance of failure after 40 periods, and any sequence of returns multiplied by a 100% loss is a total loss. I remain a concentrated investor (high-conviction positions sometimes grow to surpass 10% of my portfolio) but I no longer approach the extremes in concentration witnessed with NBCi.
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