Published by Robert W. Huntley, CFP®, CHFC®, CKA® Founder & Wealth Advisor
In the summer of 2000, someone I knew for about 5 years calls me with a question. He wanted to know if he should sell his Enron bonds or keep them.
Enron at the time was in the early stages of corporate death. Up until its bankruptcy in 2001, it had been the darling of the roaring 90s stock market. It was founded in 1985 by Ken Lay and Jeff Skilling and had become the topic of all the news magazines and was generally considered a business leader and innovator. The problem was, it was largely ‘smoke and mirrors’ when it came to their financial reporting and the story was beginning to unravel. They were in effect “cooking the books” to make things look better than they were.
However, because of all their press, Enron’s reputation was stellar, up to the point that people could not imagine the company going out of business.
So back to the individual that had asked me earlier about Enron bonds. From what I knew of him, he is the type of individual that exercised caution when making decisions, and rarely made decisions quickly. As it turns out, 6 months earlier he had taken a phone call from a broker out of New York he did not know and ended up falling for the pitch. This was at a time when Enron and Ken Lay were in the news and the stock had fallen big time. Enron bonds had also sold off and were selling at a deep discount. Because of this, it may be easy for an investor to think they can buy the bonds today at a deep discount, wait for them to mature in a couple of years, and make an easy 15% to 20%.
If I were in a position to give advice to someone holding Enron bonds at that time, I could anticipate the conversation having gone several ways, but I’d like to highlight that working with a trusted advisor can be advantageous to you:
For example sake, let’s say an investor invested $200,000 in Enron bonds, and those bonds kept falling in value to a point they’re down to about $90,000. In an unfortunate circumstance such as this, as tough as it may be to accept the loss, it’s sometimes the right move to get out of the position and take the hit. As we saw overtime, Enron bonds did eventually become worthless, and this piece of advice would have helped anyone salvage at least some of their investment.
I’ve often thought about the investor who bought those bonds from a broker at an even larger discount. They must have been even more convinced they’d make a killing.
Loss: Approximately $110,000 in about 6 months.
Investors sometimes obsess a good deal over costs of investments, ie. fees and commissions. This may not always be the best approach.
I share this example sometimes with people considering hiring us as their Advisor. It’s a great example of one of the primary values you get when working with a trusted Advisor. The Advisor helps avoid making decisions based on emotion and can stand between you and a “Big Mistake.”
Typically, in my opinion, mistakes tend to fall into one of four categories:
- Greed – looking for quick returns
- Fear – buying into the doom and gloom (constant and never-ending) and reacting accordingly
- Tax Ignorance – big landmines all over the place in the tax law, particularly when dealing with IRAs, 401ks, and the like
- Procrastination – not getting the legal documents done, the beneficiary forms updated, the property titled into the new trust, or the insurance you know you should get… until it’s too late
Human beings haven’t changed since 2000. We’re still just as emotional and easily distracted as ever. We have tons of information, but we still need something else. We need other people to help us think through our decisions and stay grounded in reason and reality. We need wise counsel from a trusted source.
Trust = Time + Relationship.
Finding someone to work with who is knowledgeable, has integrity, and the resources to tap when needed is valuable. You spend time building a relationship, so they know you well and you know them. That’s where trust is built.
Having a trusted person who is there to help remind you of what matters, urge you to get things done, and talk you down when you are on the verge of reacting in fear or greed, well that’s pretty important.
What price do you put on that? (or the absence of it)
In this particular example, the price could’ve been about $110,000.