Thursday, March 12, 2009

Nortel vs. Beer

I offer the following story with apologies to Dean Staff who appears to be the author of the original version.

Big Ted lived a full life and died in the year 2000, leaving only $10,000 to be split equally between his sons Ted Junior and Tim. Tim took his $5000 and immediately invested in the hot stock of the day, Nortel. After paying the sales commission, he got 40 shares.

Ted Junior was more like his father and decided to spend his money on a huge party for his friends. Ted’s $5000 paid for 166 cases of beer that was all consumed in a huge bash. It took a week to clean up after this party. Ted piled all the empties in the back of his garage and forgot about them for a long time.

A month ago, Ted decided to clean out his garage. A few of his friends who had partied with him over 8 years earlier helped bring all the empties back to the beer store. There was surprisingly little breakage, and Ted got back enough from the empties to buy 13 more cases of beer for another smaller party.

This time Ted took the empties back to the beer store promptly for a return of 13x$2.40=$31.20. This was just enough to buy another case. He finished the last beer in that case last night and cashed in the empties this morning for $2.40.

Over his coffee this morning, Tim was checking his stocks. At the bottom of the list was the sad line showing his shares of Nortel. After the 10 to 1 reverse split of Nortel stock, Tim’s 40 shares had turned into only 4 shares. They now trade for only 10 cents each. Tim’s original $5000 investment is now worth $0.40.

Ted the partier put everything he had into beer three times, and he still has more money than his brother Tim who invested “for the future.”

People are likely to see different morals in a story like this. Some will say “live for today.” Others might say that stocks are too dangerous. I think the real moral is to avoid buying the hot stock of the day and make sure that your investments are properly diversified.

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