This week future hall of fame basketball player, Tim Duncan of the San Antonio Spurs disclosed that he lost $25 million over the course of his career due to an unscrupulous financial advisor and personal friend. We can learn from his losses. Here are my investment lessons:
Lesson #1 – Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. – Warren Buffett
Investment Interpretation – As Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t …pays it.” If you lose money, you can’t compound it. Before making any investment, first think downside risk, then only consider the potential for profits.
Tim’s case – I peg Tim’s losses closer to $100 million if he had slowly grew his wealth by 5% on his investments. Going forward, these losses will compound throughout the remainder of his life.
Lesson #2 – Trust but verify
Investment Interpretation – Never place your full trust in anyone. If you don’t understand your investments, get a second opinion from an accountant or seek the opinion from another financial advisor.
Tim’s case – He had no idea how to track his investments. If you are unsure of how your money is being invested, seek a second opinion.
Lesson #3 – Invest only when there is full transparency
Investment Interpretation – Your money should be held at an independent entity such as a brokerage account that separates your money from your advisor.
Tim’s case – A best practice is to have an accountant or attorney value privately held investments. Tim never assembled such a team.
Lesson #4 – No conflicts of interest
Investment Interpretation – Investments should be made that are in your best interest and are made to achieve your goals.
Tim’s case – He invested in companies in which his advisor was part owner. The advisor made investments that benefited him, not Tim.
Lesson #5 – Avoid complex and complicated investments
Investment Interpretation – If you don’t understand it, don’t invest in it. Keep it simple and invest in what you know.
Tim’s case – Tim was making investments in private equity – hotels, beauty products, sports merchandising and wineries. Non-public investments should only be made by specialists who have assembled teams that have shown a significant track-record of success.
Lesson #6 – Pay attention and review your investments
Investment Interpretation – You should review your statements every 3 months and have an annual review with your advisor. Don’t wait for an “event” that causes these losses to be uncovered.
Tim’s case – All of Tim’s losses occurred over a 8 year period (2005-2013). These losses were discovered as part of his divorce proceedings.
Lesson #7 – Monitor your investments against a benchmark
Investment Interpretation – You CANNOT manage risk in your portfolio if you do not set an appropriate benchmark.
Tim’s case – He would never play basketball without boundary lines nor should he invest without a benchmark.
Lesson #8 – Make investments with qualified investors
Investment Interpretation – A good practice is to invest with a Chartered Financial Analyst (CFA) or with a qualified advisor that has shown a successful track record of investing.
Tim’s case – He invested with an unqualified advisor who was a personal friend. If you invest with a friend, be sure they have the academic background, experience, and qualifications to provide you financial advice.
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