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.
