Not realizing when to hire professional help.
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By John Rekenthaler | 03-17-17 | 06:00 AM | Email Article

Bad Portfolio
Thanks to those who have sent me stories of your greatest investment mistake, as I requested last week. (If you have not yet done so, I can be found at The tales will appear in upcoming columns.

John Rekenthaler is Vice President of Research for Morningstar.

Today’s account, however, was not a submission. Rather, it was supplied by Wednesday’s The Wall Street Journal. In October 2008, as stocks languished near their 20-year bottom, Marty Bannon—the father of White House Chief Strategist Steve Bannon—sold his entire stock portfolio. This, we can surely agree, was an investment whopper.

Let us count the ways:

1) At the time of the sale, Marty Bannon was in his late 80s, and was 100% invested in equities. His only other asset was a small house. (Presumably, he also received monthly Social Security/pension payments.)

2) That 100% in equities was placed into a single stock,  AT&T .

3) Bannon not only attempted to time the market, but did so in the most dramatic and drastic possible way, by going from fully invested in stocks to owning none at all.

4) This decision was not made after consulting a financial advisor. Bannon had no financial advisor.

5) This decision was not made after discussing it with other, nonprofessional parties. 

6) The reason for the sale was because everybody seemed so gloomy. The economy was sliding; companies were going bankrupt. The headlines were worrisome. And, reports Bannon, Jim Cramer advised people who might need cash during the next five years to sell their stocks, immediately.

7) Bannon never got back into the stock market.

It would be difficult to make more investment errors than that. Marty Bannon ticked every available box.

Bad Forensics
Of this fact, Bannon seems unaware.

True, he briefly acknowledges his own responsibility. “Shame on me that I made that decision.” But it’s fairly clear from the context that Bannon does not believe that he was the primary culprit. “The government created this problem,” he later states. His son Steve names additional miscreants: “Silicon Valley, Wall Street, Hollywood.”

How so? Those parties did not force Bannon to put everything into a single stock, force him to sell that position at a low price, then prevent him from repurchasing that security (or, better yet, buying a diversified portfolio of mutual funds). Those actions were Bannon’s decisions, and nobody else’s. 

Nor did those alleged culprits prevent Bannon from seeking professional help. And boy, did he need it. On his own, he was 100% invested in a single stock, while in his late 80s, and watching the investment media for guidance. That man had far surpassed his level of expertise. He should have hired out. 

Me, Too
Which leads to my confession. As with Bannon, I once needed to have hired a professional, and as with Bannon, I failed to do so. That omission cost me, dearly.

The year was 2005.  Morningstar had gone public in May (through an unusual “Dutch auction” process that bypassed the traditional investment bankers), and my previously theoretical stock options had now become real. Almost all of them expired in 2008. What to do?

My question was not whether I should cash out when exercising the options, or opt to hold the stock. I wanted to have as much equity as I possibly could. Nor was I concerned about diversification. That would come in time; for the moment, having everything in MORN stock was all right. Rather, my concern was in timing. When to exercise those options?

(Yes, in being 100% in equities, and 100% in a single position among those equities, my decision resembled Marty Bannon’s. However, our situations were very different. I was 44 years old, with many working years ahead of me; was a Chartered Financial Analyst with an MBA degree, and had worked in the investment business for 17 years.  Nor would I ever, under any conceivable circumstances, be swayed by Jim Cramer's market-timing advice.)

Dumb and Dumber
I got my options-timing decision completely, totally wrong.

Dutifully recalling the options-pricing theory that I had learned from my study, I “knew” that options always have time value. That is, an option is always worth more than its current exercise price. Well, there you go. If the option will become more valuable over the years, then best to wait until near the end to exercise.

That was remarkably stupid thinking (to use the word generously), because such theory only applies to those who are buying and trading options, with no intention of holding the underlying asset. In addition, as with many academic theories, it fails to consider taxes—which are a large, crucial item for those who exercise stock options. In short, I was utterly without a clue, without even knowing that I was without a clue. 

I had failed to think through the issue. Nor had I done that which was truly necessary, which was to hire an expert who had already done such thinking. 

The Lord took no pity, and I got burned. As with Bannon, my timing could scarcely have been worse. I waited until the first part of 2008 to exercise the options—shortly before they expired, see how smart I am being?—and thus acquired a high tax liability, because stock prices were steep. I then retained the shares. When stocks collapsed in the second half of the year, my tax liability was almost as large as my entire financial worth.


Fortunately, from that point onwards I righted the ship. I found a professional and got tax advice, selling newly acquired shares near the market bottom. That generated large tax losses that could be used, fitfully (things got complicated because the Alternative Minimum Tax was triggered), to offset my previous tax liability.

That was step one in atoning for my error. Step two was to get back into the stock market. I repurchased a large chunk of my Morningstar shares after the wash period had expired, and also used the opportunity to diversify. For the first half of 2009, as the stock market was near its very bottom, I was buying rather than selling. That very good decision went far—although not all the way—in redressing the bad decision.

Then, I hired an accountant.

Owning Up
Marty Bannon is not to blame for wishing to own his former employer’s stock, or for having qualms in October 2008. He spliced telephone lines for a living and had no desire to develop something of a second career by becoming a self-trained investment expert. Completely understandable. Most retirees make the same decision.

Bannon's mistake lay in not realizing what he did not know. He does not appear to have since reached enlightenment, as he states that the key lesson he learned in 2008 was that other people are "dumb." Half right, Mr. Bannon. Half right.


John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

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