GrigsbyCo Retro Post: Jessie’s Story

May 22, 2008 – 11:00 am

Before HelpMyCashGrow.com, I ran another blog at GrigsbyCo.blogspot.com. I spoke mainly on investments but I then realized I loved the entire aspect of personal finance so much more. Since investing still compliments personal finance, I have decided to present a few posts from my old blog to my new one. I hope you enjoy this “Retro Post.”

Original Publication: Jessie’s Story

The market will be closed tomorrow in honor of President’s Day, so enjoy the time off if your place of work is giving you the day off as well. Unfortunately, for myself, I will have to treat as any other work day. My place of employment is a 24 hour, 7 days a week facility, and with all the maintenance equipment I have to handle, it’s a shame these servers can’t maintain themselves.

I visited Michael Masterson’s Blog the other day and found an interesting post entitled How to Get 15% on Your Money This Year. This isn’t you’re typical, SIGN UP NOW AND GET 15% ON YOUR CASH TODAY!!! deal. Oh no, far from it. This an excellent real life example of a conversation between Michael and a woman named Jesse as they speak about “risk & rewards”. Enjoy:

She earns $35,000 a year as a substitute teacher. He [husband] owns a business that provides them with about $80,000 a year. They have about $600,000 in equity in their home and a summer cottage, plus about $250,000 in cash and savings accounts.

First off, Jessie should receive some congratulations that she has been able to save such large amount. There are MANY people in this country, myself included, that are struggling to make ends meet. Jessie, on the other hand, is doing what most people are not, which is planning for her long-term future.

“We got a tip on a stock last year, and made a nice chunk of change on that,” Jessie tells me. “A friend of mine says that he can get us into a hedge fund that guarantees 35 percent a year.”

Any reader of the “Intelligent Investor” knows that one of the top rules of Benjamin Graham’s donts is “Don’t Buy On A Hot Tip” - without doing the research on your own. Now she may have done great with her last advice, but all of those good things come to an end. Especially if she expect to beat the market by 35% every single year.

We talk about the fundamentals of stock investing. I explain to her that, for a hundred years, the stock market has been averaging about 10 percent annually. I ask her if she really believes a hedge fund could outperform that long-term average by 350 percent. She doesn’t know, but she’s willing to find out.

And here is one primary reason why you shouldn’t buy on a hot tip. Frankly, because you don’t know what the risks are that lie ahead of you. And if you don’t know the risk you could be putting yourself in a dangerous position, especially with dealing with hedge funds. But how much risk was Jessie willing to take? Find out as Michael tries to educate her.

I say, “Let’s assume that this hedge fund has indeed delivered 35 percent to its investors for some period of time. To get that kind of return in the future, it needs to be more than good. It needs to be lucky. Would you invest in it if there was a 50 percent chance you’d lose every penny?”

“Hell, no,” says Jessie.

“How about a 20 percent chance?”

No again.

“How about a 10 percent chance?”

Still a no.

The only risk she would take, she says, is a one percent risk. And she isn’t too comfortable with that.

First off, playing with the market, there are always risks involved. No matter how high or how low of the risk, it is still involved. Large-cap, small-cap. It exists and there’s no turning away from it. Jessie wants high returns and no risks, which is basically only a fantasy.

There are really only two options when it comes to getting a 15 percent return without taking any giant risks, I explain. And those two ways are by investing in a small business and/or real estate.

I don’t understand this, because people lose money on small business and real estate alike. Small Business still go bankrupt. Real Estate is not always a promised sell, and then there’s foreclosures to consider. If you visit this blog, you’ll see this guy is struggling to make ends meet to pay off a multi-million dollar debt

“I’m too old and tired to do that sort of thing,” she says. “I need something simple and easy. Something I can do in my spare time that will be fun and won’t stress me out.”

“Like investing in hedge funds?” I ask.

“Right,” she says.

“Oh. Now I get you,” I say.

Well in the end, what did Jessie learn? Nothing. That entire conversation was a waste of her time, but not Michael’s; because he publicizes this post to educate others before jumping into the market headfirst without the proper preparation. Currently, I am playing defensively as possible, reading and educating myself on all aspects of the market and even running practice simulators to test my theories. It won’t be for a while before I feel the confidence and take the role of an enterprising investor/trader. So what did I have to say on the article? Here’s the comment I left (sorry for the MANY typos):

patience is the true key to virtue, and if Jessie’s story is like any of your other average stories, then I feel her hedge fund investments (considering she embarks on it), will bring about an awful time for her. hopefully, she finds what she hopes, but there are two many lessons and rules that she violates against Mr. Market within just a few paragraphs that you mentioned.
- Don’t buy on hot tips
- Don’t try to outperform the market
- Be willing to take risk.

And those are just a few I can think of off the top of my head.

I wish the best for Jessie and her financial situation and aspirations; and I hope everyone takes a lesson from this and consider the three rules mentioned above in my post before taking the step into the investment world.

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