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My Worst Investment

Michael Flack

WHILE READING the great books on investing, studying financial theory and reviewing our investment performance are essential to becoming a better investor, sometimes it can be useful to learn from the mistakes of others—because what not to do can be even more important than what to do. As Otto von Bismarck may have said, “Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.”

Which brings me to me.

In 1995, I was a lieutenant in the U.S. Navy stationed in Pearl Harbor, Hawaii. I shared an office with another officer who was a Navy SEAL. Lieutenant O’Brien—or Obie, as he was called—was the prototypical SEAL, handsome, tall and perhaps the most confident man I’ve ever met. Obie walked the halls with a swagger that said, “I don’t care what you just said, now listen to what I’m going to say.”

And I must admit that (for too long) I did. He and I would talk about investing and, while I’ve forgotten most of our conversations, I do specifically remember him saying, “You need to get some hard assets.” He then mentioned that he invested in gold and silver through a man named Barry Bellefontaine.

Mr. B had monthly seminars, which were held within walking distance of my apartment, which made it quite easy to attend, so I did. It was a typical hotel conference room setup, with rows of chairs, some soft drinks on a table and a sign-in desk. The whole affair lasted about an hour and it was quite obvious that this was not the first presentation he had given.

He mentioned that he thought the stock market and Hawaii real estate were overvalued, that he had sold most of his stocks and his house, that inflation was coming, and that gold and silver were the way forward. Not just any gold and silver, though, but the collectible coins… that he sold.

To this day, I’m not sure why, maybe it was the romance of old coins, or the historic allure of gold, or the idea of being able to actually hold an investment in my hands, or perhaps the confidence of Mr. B, but I bit hard. The main sales pitch revolved around purchasing 1991 brilliant uncirculated half-ounce American Gold Eagles, which until this point had the lowest mintage of any half-ounce Gold Eagles.

The idea was that this investment was a twofer: a play on rare coin collecting and the soon-to-be-increasing value of gold. After meeting one on one with him, I bought 20 Gold Eagles. I also wound up buying three Morgan silver dollars, including one that was quite rare, though I can’t remember exactly what the investment angle was. Man, was I eager. As I type this, I’m thankful I didn’t “invest” even more.

I can still remember leaving Mr. B’s offices, slightly paranoid, carrying my treasure in a special case that he gave me free of charge. I immediately took them to my bank, where I now had the added benefit of paying $100 a year to rent a safe deposit box.

Everything went along swimmingly, with Mr. B sending me monthly statements indicating the steady rise in the value of my coins. I went to a few more seminars, where now he was advocating that, in addition to gold and silver, I may want to invest in a couple of small-cap stocks listed on the Toronto Stock Exchange.

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Then one day I was watching TV and heard a teaser for that evening’s nightly news that went something like: “Local financial advisor scams gold investors, news at 11.” Well, they had my attention and I tuned in at 11. There was the station’s investigative reporter, mentioning how numerous locals may have been scammed by investing in rare coins and showing grainy undercover footage of guess who: Mr. B. It appears they couldn’t interview him, though, as he’d fled Hawaii on a boat to parts unknown. I almost crapped my pants.

I confirmed all the sordid details the next day when I tried to call Mr. B on the phone and then visit his offices. As I stood outside the locked door to his now vacant offices, it all fell into place:

  • He was a smooth operator—super smooth. Well dressed and coiffed, he always had an answer to every question.
  • The value of my “collection” on my monthly statements was Madoff-like in its consistency.
  • He had previously disclosed that he had sold his house in Hawaii. He was preparing for a quick getaway.
  • He didn’t do the hard sell. He cast his line, let me bite and then made me do all the work.

A few weeks later, I was contacted by a coin dealer, who offered to give me a complimentary review of my collection. He was a nice enough guy and appeared to be a straight shooter who informed me that, while my collection was genuine, I had overpaid for each coin and, for some pieces, grossly. He tried to let me down easy, but my mood wasn’t helped when, at the end of the consultation, he asked if I’d ever considered investing in U.S. Mint commemorative coins, as they were sure to increase in value.

The U.S. Navy is big on compiling “lessons learned.” In this case, I think you’ll agree they’re quite obvious and there’s no need to recap, except for one final pointer: If you’re in the market for a house in Bali, be careful who you deal with.

Michael Flack blogs at AfterActionReport.info. He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.

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UofODuck
UofODuck
3 months ago

Sadly, this sort of scam remains common today. In my local newspaper this morning was an ad from a private mint, offering readers the chance to buy “valuable” privately struck 1 oz. silver coins for about 3X their metal value. This is the same company that also offers readers a chance to buy bags of “unsearched” silver dollars, again for 3X+ their numismatic value, in the faint hopes of finding an actual rare coin. Given that these ads appear regularly, I can only assume that people are buying these coins. Too many so-called investors are really little more than gamblers, looking for an easy way to make money. Real investing – as most of us learn the hard way – requires time, patience and discipline, and much of the time is very boring.

Roboticus Aquarius
Roboticus Aquarius
3 months ago

Every investor has their story. I think of it as the price of admission.

Mine involves investing far too much in front-loaded high fee funds in a wrap account, pre and post tax. I console myself that I avoided the Variable Universal Life Insurance plan, which many of my coworkers fell prey to. I still felt like a moron.

The day we emptied those accounts I celebrated! (Some went to down payment on a house, some to established accounts at Fidelity)

Arnold Hold
Arnold Hold
3 months ago

Coin collecting can be interesting, but almost never a profitable investment. If the coin was not a circulating coin, it is not worth holding on to. Good move on passing on the commemorative coin offer, these coins are always a gyp.

Scrooge_McDuck88
Scrooge_McDuck88
3 months ago

Gold is up 400-500% since you bought it, I am sure there’s worse investments you’ve made since then??? Kodak, IBM, WorldComm, Enron, BlackBerry, numerous .com’s…. Yes you could have had much higher returns elsewhere, but there was plenty of investment options that turned to crap too.

mjflack
mjflack
3 months ago

Scrooge_McDuck88, My calculations put the return on gold since 1995 at 6%, much less than the S&P 500 or IBM. In so far as Kodak and Blackberry go you may be correct, but the “lesson” of my article wasn’t about the return, but the process (or lack of one), as one could look at investing in a share of Blackberry as being superior to lighting a $100 bill on fire. Note: I did invest in Enron, but I’ll save that for another article.

Scrooge_McDuck88
Scrooge_McDuck88
3 months ago
Reply to  mjflack

Okay so 6%. You’ve never had a return below 6%? You’ve never lost 50-100% on an investment???? If so, that’s what you should be writing on. Hence my point that this couldn’t have been your worse investment.

mjflack
mjflack
3 months ago

Scrooge_McDuck88, thanks for the editorial advice, but I think I’ll be my own counsel when it comes to determining good subjects for my articles.

Ben Rodriguez
Ben Rodriguez
3 months ago

As you are a world traveler, I wonder if you’ve ever thought of a vacation to Bali to confront this guy? I’d love the satisfaction of seeing his face.

mjflack
mjflack
3 months ago
Reply to  Ben Rodriguez

Ben Rodriguez, That’s an idea. Though this guy was so smooth, I’m worried it might end up like the episode of Seinfeld (The Baby Shower) where Geroge spends the whole episode talking about confronting the ex-girlfriend who poured Bosco on his favorite shirt only to end up awkwardly trying to curry her favor. I’m worried that I might confront him and then wind up buying a house from him.

Ben Rodriguez
Ben Rodriguez
3 months ago
Reply to  mjflack

LOL. Well, worst case you end up with a timeshare in Bali.

Mik Cajon
Mik Cajon
3 months ago

“Never trust a prophet making a profit”..unknown.

Scrooge_McDuck88
Scrooge_McDuck88
3 months ago
Reply to  Mik Cajon

Brilliant!

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