Building Wealth I (Kim Iskyan) was barely 21, and fresh out of college. My father had given me $5,000 left over from a college savings account. His single condition was that I invest it in the stock market.
Armed with a liberal arts education and a few months' worth of scanning the Wall Street Journal – qualifying me as a grizzled veteran by today's Robinhood-trader standards – I was ready to earn my fortune in the stock market.
At the time, like until a few months ago, tech was hot... But instead of software-as-a-service and social media stocks and video streaming, personal-computer ("PC") companies were the high-growth tech darlings of the market. In particular, PC maker Dell was one of the can't-miss investments of the day.
But I was young and impatient. I didn't want to bother with a boring large cap. I figured it was "done" – and as a self-modeled early-stage contrarian, I wanted a stock that was a bit less obvious.
So I skimmed a few computer magazines my computer-geek roommate had left on the coffee table. There, I came across my dream stock: Zeos International.
From making its first PC in 1987, the company had been named by Fortune magazine in 1991 as the fastest-growing public company in the United States... and had beaten big, slow Dell by rolling out laptops using the latest chip. Ahead of its time, it even had a palmtop pocket PC on the market.
The clincher was that the computer magazines I flipped through were full of Zeos advertisements. Surely, I figured, this was a near-guarantee of continued strong sales.
Due diligence – such as it was – complete, I called (no online trading back then) Charles Schwab and plowed my $5,000 into Zeos.
Unfortunately, what the glossy ads didn't tell me (and what I didn't learn until it was too late) was that Zeos made a lousy product. Its computers broke down frequently and getting them fixed was next to impossible. Customers were uniformly unimpressed. Zeos' marketing blizzard and gimmicks like 24/7 customer service temporarily hid the fact that it wasn't making computers that people wanted to buy.
Later, my computer-savvy roommate pointed out that the quality of the newsprint of Zeos ads in computer magazines was inferior to that used by Dell and other PC makers. (I asked him to next time pass on this kind of critical insight before I pulled the trigger.)
So in hindsight, it was no surprise that the share price of Zeos International slowly melted... The business had peaked by the time I bought shares. In late 1994, Zeos was put out of its misery when it was acquired by another computer company – after Zeos had lost $13 million on revenues of $229 million in its most recent fiscal year.
Two years after my enthusiastic purchase, loss-making Zeos was bought by a rival, which the next year stopped making Zeos computers altogether. I eventually sold my shares for a small fraction of my initial investment.
In the meantime, shares of Dell rose from a split-adjusted $0.25 per share in late 1991... to $50 per share by the end of the decade. If I had kept it simple with my $5,000 and bought Dell, I would have earned a compounded 80% a year to reach $1 million by 2000.
In terms of opportunity cost... I'd made a $1 million mistake.
But I did learn a few valuable lessons from that first investment mistake that I still have to sometimes remind myself of...
1. Sometimes, being a contrarian isn't worth the trouble (or money). The opportunity cost of investing in Zeos rather than Dell was enormous. I thought I'd be smart by not doing the obvious thing. Sometimes, the obvious thing is the best thing to do.
2. Don't invest in an industry you don't understand. It's like skipping through a minefield. Either stay away from companies in sectors that you don't know as well as you know your spouse's name – or find a good analyst who does.
3. Rapid growth can be a bad thing. Zeos was growing fast, but quality suffered – and that was its downfall. Don't be taken in by big revenue or profitability growth because the underlying quality of the company's product and operations is a lot more important.
4. Right-in-front-of-your-eyes indicators can be misleading. Just because (for example) there are lots of cars in the supermarket parking lot doesn't mean the supermarket is making money – it might mean that their prices are too low to make a good margin. And a lot of ad pages on cheap newsprint might mean that a poorly managed company is trying to grow out of its quality problems.
5. Quality matters. In the end, if you produce a lousy product, people won't buy it from you. That's all there is to it.
I've made a lot more mistakes since Zeos. But I hope I haven't repeated these. And I hope you don't, either.
Best regards,
Kim Iskyan
June 2, 2022