I’ll Show You Mine if You Show Me Yours!

Do you remember what investing in the late 90s was like?  You could put $5000 into a tech stock, and at the end of the month it could be worth $100,000.  If you were as ignorant as I was, you probably thought you were a genius back then.

As “brilliant” stock pickers, my friends and I really did hang around the stereotypical water cooler in the PE office of the school we taught at.  And we bragged about “ten baggers” and “twenty baggers” before the deck of cards fell with the Nasdaq’s collapse.

I was one of the wimpy investors.  Sure, I made some dumb picks, that “geysered” for a while and then disappeared into a hole, but I didn’t lose a lot.  You’re sorely mistaken though, if you think I’m going to pull the wool over your eyes and not tell you about the dumbest thing I ever did with money.  I’ll show you mine, if you show me yours.  Deal?

Here’s the story:

I “lost” more than $250,000.  And not all of it was mine.

Pulling alongside the curb in front of Darryl Klein’s office, I was skeptical, but hopeful.  It was 2003, and a friend of mine had been investing with Klein for years.  My buddy Rob and I stepped out of the car and eyed Klein for the first time.  He was standing on the sidewalk in a creased shirt, sleeves rolled up, and a wavering line of smoke coming from his cigarette.

Rob and I had driven an hour and a half to meet Klein, who had invested a mutual friend’s money for more than 5 years, averaging 54% annually in the process.

In fact, he made like clockwork, 4.5% per month.  It was a set interest rate that makes Bernie Madoff’s former “results” look as exciting as a roll of toilet paper.  Our friend (who was retired) had been traveling the world on his “interest payments” which, with the consistency of a metronome, hit his bank account every month.  His $75,000 investment paid him $3,375 per month, every month, for 60 straight months.

First hearing about Klein’s Instacash Investments in 1998, I advised my friend not to invest with them.  But it was tough watching him make money hand over fist, and eventually, Rob and I wanted part of the action.

Klein explained the business:

“People come in here looking to borrow money, short term.  They’re often real estate agents and contractors,” he claimed, “looking to buy something before their home sale commission comes in, or looking for some short term money to finish with a building project that they’ll soon get paid for.”

Call us foolish, but we stayed in our seats to hear more.

“I take possession of their cars, legally,” Klein practically crooned.  “They get to drive them, but before I loan them money, I take official ownership of the cars.”

Here are the nuts and bolts of the business he described:

1.  The borrowers couldn’t borrow more than 1/5th of the value of their car.

2. The car had to be free and clear—with no loans or liens against it

3.  The loan’s interest rate was legally over the limit, so he got around that by charging an outrageous pawn broker’s fee.

4.  Nobody was allowed to take their car off Vancouver Island while they still owed him money

5. People who defaulted on the loan had their cars repossessed, and a quick call to the local dealership resulted in a very fast sale to recoup the loan money….and more, if possible.

The carnage came because I talked, and so did Rob.  But my mouth was bigger.

Friends lined up to invest in what was eventually revealed as a Ponzi scheme.  My buddy (I’ll call him Jake) gave Darryl $100,000.  My investment club invested more than $24,000.  I invested $7000 and convinced my parents to add $5000, which was more than they could afford to lose.  Another friend took out a home equity loan and invested $50,000 he couldn’t afford to part with.

Of course, the deck of cards eventually collapsed and I was indirectly responsible for “losing” what might have amounted to hundreds of thousands of dollars.

And no….that’s not the reason I now live in Singapore rather than Canada.

What about you?  What’s the dumbest financial thing you ever did?  I showed you mine, now show me yours.





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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6 Responses

  1. I remember reading about this story on another one of your blog posts, but I never imagined just how rough it was. It takes balls to admit when you've made a real bone-headed move! However, what's important is to learn from your mistakes so that you don't repeat them, and from what I've read, you have definitely recovered from yours and gone on to succeed!

    My biggest financial disaster was taking out a loan when I was younger in order to afford a new car. I just ended up with a lot of debt on my neck and I was barely covering my bills. I was the poster child of the guy with the empty wallet. I now know that leverage is something you should only deal with to invest, with home ownership being one of the only exceptions. Certainly not for cars! 🙂

  2. Hey Kevin,

    Thanks for the comment!

    The only good thing about doing dumb things is that the dumb things always give us the best stories later. Our friends are far more entertained to hear about our failures than any successes we might stumble upon, right?

    I was pretty lucky with the instacash debacle. I only invested $7000, so that's all I lost. But I told way too many people about this "great investment" that made 54% annually. It was tough watching guys I knew making this money, so I eventually caved and went for it.

    But while I hemmed and hawed over the years about it, (before investing) other friends of mine decided to go for it. They first heard about it through me, so I feel partly responsible for their losses. Yeah, they were all "big boys and girls" capable of making their own decisions, but if I had kept my mouth shut, many of my friends would be a lot wealthier today because they wouldn't have invested in Instacash.

    The loan you took out for that car….. it's weird Kevin. No matter how much you may try to convince some kid in the future not to go for a similar deal, there's something people need to learn for themselves. They'll figure that your experience was just a bad one, and that they won't get financially burned if they try it. Rare is the young man who can take advice from someone older and wiser, don't you think?

    Thanks again for the great comment Kevin!

    Andrew

  3. Well, my story is not as dramatic as yours Andrew or Kevin, I've never borrowed lots of money (except for my mortgage) and I was (still am) far too gun-shy in my early 20's to invest in anything in a big way. That's probably because I spent anything I had in Toronto bars. If the Madison Ave. Pub in Toronto had a share purchase plan, I would have long since owned the place, maybe even the block it sits on….

    Anyhow, in my late 20's and for years afterward, I plowed about $3000/year into my blue-chip equity mutual funds and some international fund with little care or concern about their performance. I don't know why it took me almost 5 years to figure out the funds were duds, barely making any gains in the early 2000's, but alas it was the wake-up call I needed to get my financial house in order. I didn't necessarily lose tons of money, but I didn't gain any for retirement either.

    I'm still learning, learning lots actually, but watching my funds grow like molasses was a lesson I will never forget.

    Andrew – I think baring your finanical soul like you did above was great. The Ponzi was no doubt a great lesson for you and given what you've learned, it certainly appears you're doing everything possible to avoid any remote repeat offence. Good on you man!

  4. Andrew Hallam says:

    Financial Cents:

    Did you ever figure out how much you could have made with a basket of diversified indexes instead. Your opportunity loss might not have been that high, if you were dealing with the years between 2000 and 2005.

    For fun, check out the results of the couch potato portfolio from that time to use as a benchmark. You might not have done as poorly as you think.

    http://www.canadianbusiness.com/my_money/investin

    As for baring the financial soul, I'm glad you enjoyed it. The only thing better than learning from your mistakes is learning from someone else's.

    Thanks for the comment!

    Andrew

  5. Thanks for the link Andrew…I'll check it out. I don't think I'm "down" too much which is my good news story.

  6. Thanks for sharing that. I don't think it's a daily 1% rate though. That would be about 400% plus each year, if compounded.

    Whatever time period it's using, the language states "Up to 1%" implying that it could be as low as 0%…indicating that 1% would be the maximum.

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