The First Rule of Intelligent Investing You Need To Know

To make the long story short, Sam convinced me that he could be doing a better job than me in managing my money.  Without bothering to read the Special Situations Prospectus, filled with all kinds of footnotes and disclaimers explaining that the 18 percent return was just a fuzzy guess, I quickly filled the necessary papers to hand my savings to Sam—that was my small mistake. The big mistake was that I convinced my then girlfriend and future wife to hire Sam to manage her money, too!

As it turned out, my decision to hire Sam to manage my little savings account was a disaster.  First, Sam didn’t work for free; and he didn’t intend to manage my money either. He was a middleman. He did charge me a 4 percent commission for the privilege to turn my money over to the Special Situations fund team, which charged another 2 percent annually for management fees. Ouch! Here goes 6 percent of my money for the first year. Second, the fund performed poorly for a couple of years, and when the crash of 1987 came, it lost 25 percent of its value. Double ouch! Coping with this loss was one thing, explaining it to my wife was another!

At the beginning, I was angry with Sam for not explaining to me all the costs and risks associated with investing in the Special Situations fund, as it was part of his job to do. Eventually, I did get mad at myself.  Why did I have to hire Sam to manage my money in the first place? What did Sam know about money management that I didn’t? After all, I did have a Ph.D. in economics. What sort of credentials Sam did have that made him an investment advisor?

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