One of my bigger mistakes in life was to spend two years doing an MBA. ‘Herd mentality’ usually leads to disastrous decisions. After completing my MBA, I discovered Scott Adams and his cartoon character ‘Dilbert’. Dilbert(and effectively Adams) taught me more about management and how companies ‘really’ work, than two years I spent at a business school.
Interestingly, in the recent past, I have also picked up some basic personal finance lessons from reading a few books written by Adams. In his latest book How to Fail at Almost Everything and Still Win Big, Adams shares some of his experiences and draws a few personal finance lessons from them.
When the dotcom boom was on, Adams invested in this start-up called Webvan. “You could order grocery-store items over the Internet and one of Webvan’s trucks would load your order at the company’s modern distribution hub and set out to service all the customers in your area,” writes Adams.
He thought that Webvan would do for grocery what Amazon had done for books and bought the shares of the company. As the dotcom bubble lost steam and the stock price of Webvan fell, Adams bought more stock (probably following the strategy of dollar cost averaging). As the price of the stock fell, he repeated this process several times.
As Adams writes “When management announced they had achieved positive cash flow at one of their several hubs, I knew I was onto something. If it worked in one hub, the model was proven, and it would surely work at others. I bought more stock.”
A few weeks later, Webvan went out of business. “Investing in Webvan wasn’t the dumbest thing I’ve ever done, but it’s a contender…What I learned from the experience is that there is no such thing as useful information that comes from a company’s management.”
Adams also talks about this phenomenon in the context of professional stock analysts in his book Dilbert and the Way of the Weasel. As he points out “Professional stock analysts can do something that you can’t do on your own, and that is to talk directly to senior management of the company. That’s how a stock analyst gets all the important inside scoop not available to the general public, including important CEO quotes like this: “The future looks good!””
After his disastrous experience with Webvan, Adams decided to that get some professional help in investing all the money that he was making once the royalties of Dilbert started to pour in. As he writes in How to Fail at Almost Everything and Still Win Big “I didn’t have the time to do my own research. Nor did I trust my financial skills…My bank, Wells Fargo, pitched me on its investment services, and I decided to trust it with half of my investible funds. Trust is probably the wrong term because I only let Wells Fargo have half; I half trusted it. I did my own investing with the other half of the money.”
The results of the half trust weren’t any good either. “The experts at Wells Fargo helpfully invested my money in Enron, WorldCom, and some other names that have become synonymous with losing money. Clearly investment professionals did not have access to better information than I had. I withdrew my money from their management and have done my own thing since then,” writes Adams. He has been investing in index mutual funds since then.
Adams discusses the problem of listening to so called experts in Dilbert and the Way of the Weasel. As he writes “My problem is that I listen to financial experts, who give valuable advice for moving my money from me to them. My first clue that experts are less than omnipotent might have been that they all recommended different and conflicting things. The one thing that all their recommendations have in common is that is that if you follow their advice, they will get richer.”
Adams also talks about the importance of investors concentrating on systems and not goals. “Warren Buffett’s system for investing involves buying undervalued companies and holding them forever, or at least until something major changes. That system (which I have grossly oversimplified) has been a winner for decades. Compare that with individual investors who buy a stock because they expect it to go up 20 percent in the coming year; that’s a goal, not a system. And not surprisingly, individual investors generally experience worse returns than the market average,” writes Adams in How to Fail at Almost Everything and Still Win Big. This is a simple but a very important point to understand for every investor.
In fact, Adams once even tried to write a book about personal investing. As he writes in Dilbert and the Way of the Weasel “It was supposed to be geared toward younger people who were investing for the first time. After extensive research on all topics related to personal investing I realized I had a problem. I could describe everything that a young first-time investor needs to know on one page. No one wants to buy a one-page book even if that page is well written…People would look at it and say, “That’s all well and good, but I’m paying mostly for the cover.””
In fact, the plan was not even one page. It was just 87 words and here it is:
Make a will. Pay off your credit cards. Get term life insurance if you have a family to support. Fund your 401k to the maximum. Fund your IRA(individual retirement account) to the maximum. Buy a house if you want to live in a house and can afford it. Put six months worth of expenses in a money-market account. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement. (as described in Dilbert and the Way of the Weasel) (401k and IRA are essentially what we call provident funds in India).
These 87 words summarise all that is there to know about personal finance.
The article originally appeared on www.FirstBiz.com on February 15, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)