My $1,000,000 Wharton Education

Had someone warned me that my 2-year business school education would ultimately cost me more than a million dollars, I might have thought twice about enrolling at Wharton. But, as my corporate finance professor, the late Isik Inselbag, was fond of reminding us, “a sunk cost is sunk.” And so, instead of regretting the possibility of early retirement, I’ll continue to reflect on my initial forays into investing as an instrumental part of my secondary education. Expensive yes, but probably worth every penny.

Within months of picking up my undergraduate degree in mechanical engineering in 1985 I was at the Dayton offices of Merrill Lynch opening up my first CMA account. I still chuckle at the thought of running into a friend’s father, a local big producer at the firm, who inquired as to whether I was running an errand for my father.

Like many things, profitable investing is a skill acquired through trial and error. Over the next few years I was all over the board - dabbling in stocks and mutual funds, writing covered calls on high-growth tech and biotech stocks, adding margin to the mix to leverage my insights. In hindsight I didn’t make a lot, but learned a few key lessons that stick with me still. Among them, covered call option strategies are “win a little…win a little…lose a lot” propositions – especially when paying pre-discount broker commissions!

When Black Monday reared its ugly head on October 19^th, 1987 I sunk with the rest of the go-go crowd, down a whopping $20,000 plus in one day. Fortunately I had the wherewithal to hold steady and recoup a good portion of those yet-unrealized losses over the coming year. Still, it became clear to me that investing was best viewed as a long-term proposition – there are no “free lunches”. I regrouped and dedicated myself to looking for companies with great growth prospects that I could hold for years, not months, and set my sights on getting a business education that would teach me how to better evaluate stocks.

About this time, Dell Computer was filing for their Initial Public Offering (IPO). I knew their business model was head and shoulders above those of IBM and Compaq and became quite comfortable that the company’s price advantage coupled with the quality of their products should allow them to continue taking market share. Valuation? Couldn’t tell you, as without formal financial education, it was impossible for me to compare apples (or should I say IBMs – with their steady-state profit margins) with oranges (Dell’s money-losing, yet high-growth venture). Still, the offering looked intriguing and I decided to invest, not at the IPO, but in the secondary market after the stock had a chance to settle down. After all, this was still soon after Black Friday, investors remained skittish, and the prospect of a company’s stock doubling during its debut was remote.

I finally took the plunge in June of 1988 (see trade confirm above), plucking down about $3,000 for 300 shares. Happy camper that I was, I was determined to hold for the long-term. I entered grad school in the fall and continued to follow the company’s escalating battles with IBM, Compaq and Gateway and recognized the company’s stagnant profits to be a growing pain.

Alas, even the best laid plans go astray. While a fool and his money may soon be parted, a full-time grad student and his money likely parts quicker. In my last semester of business school I found myself down to my last few thousand dollars and needing to pay tuition. Looking back on things, I should’ve hit my parents up for a loan…pleaded, begged, whatever. Instead I reluctantly sold my Dell shares, took a small loss and remained solvent throughout the remainder of my education.

Those shares – I didn’t really follow them closely over the next few years, but somewhere around 1997, I checked in again. Suffice it to say, they did alright without me. Went on to split a few times – alright more than a few…

Shoulda’, coulda’, woulda’…c’est la vie.

Lessons Learned
While I didn’t pocket the big change on this investment, it did provide a fertile learning opportunity. A few thoughts to ponder -

1. Common sense is not so common. What I viewed as obvious – that Dell’s business model was far superior to those of IBM and Compaq – wasn’t so obvious to most investors in the early days of the company. Instead, as is often the case, public shareholders focused their attention primarily on earnings growth, largely missing the long-term, industry changing, implications of a superior business model. In my opinion, the same is true of Google today, though I would hazard it’s pretty well reflected in the GOOG’s price.
2. When investing in an early stage company and, though public I’d suggest that Dell was early stage in 1988, look for the fundamental difference that’s going to drive success and remember that investing in growth stocks is about patience and letting the concept play out over long, long periods of time. Buy a small stake and hold, hold, hold.
3. It’s really, really tough to resist the temptation to sell as an opportunity unfolds, especially when the initial investment is substantial. In my opinion, this is another argument in favor of small initial positions. You’ll sleep better as the psychological factors associated with short-term price swings should be much more manageable.
4. For mature companies, earnings and free cash-flow growth are key metrics for gauging value. Not so for early stage, renegade companies capitalizing on new business models or concepts. Instead keep your eyes on top-line revenue growth. If the concept takes hold, the explosion in revenues will signal it and more likely than not, management will find a way to turn that revenue growth into profits.
5. Stock splits are extremely powerful compounding tools, let them work for you.