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In Gratitude for My Most Painful Financial Lessons Learned

Part 1: A “Gloom Boom Doom” Mindset 

Ever since I founded The Cogent Advisor in 2010, I’ve tried to write at least one post each year, usually toward year-end, to reflect on life’s blessings and express gratitude to clients, friends, colleagues, and – most of all – my family.

This year, I also want to express my gratitude for something a little different: the challenging life lessons I’ve learned about managing my own and other people’s money.

Much of my early education came the hard way. That said, I wouldn’t take back a single day of it, not for all the Guinness Stout in Ireland. After all, my most challenging life experiences became the biggest reasons for why I’ve become what I am today: an independent wealth manager and fierce fiduciary champion for my clients’ highest financial interests.  As a bonus, I’ve also become a better, happier investor myself.

But I get ahead of myself. Here’s my story …

In the Beginning: The Trading Years

Think back to October 13, 2000 – the dawn of the new millennium. My wife and I had two young children at home and were expecting our third. We were plenty busy every waking hour, and we spent far more hours awake than asleep!

Career-wise I was thriving as a local commodity trader at the Chicago Mercantile Exchange (CME). This was back when open outcry was the norm, not yet replaced by the silent stealth of electronic trading. It was possible to make startling sums of money incredibly quickly, and equally possible to lose even more, even faster. The daily stress was palpable.

Admittedly, I relished the chase, energized by the physical, competitive nature of the pits. To succeed, I didn’t have to be right all of the time. I just had to be right more often than not. Most days, enough days, I returned home tired, satisfied.

Still, an ongoing tug-of-war ate at my satisfaction. To succeed, I had to take enormous concentrated risks with my own assets, placing thousands of trades, every minute of every trading day, always on margin. At the same time, I needed to save and preserve assets for my family. Often, these opposing interests would conflict.

So, sometimes I worried. I worried about whether I could withstand the pressure. I worried I might make a mistake. I worried something unpredictable would happen that would be out of my control. Most of all, I worried whether I’d arranged our personal finances – my family’s investments and reserve funds – to sustain us, no matter what.

Then one day, that fateful Friday, October 13th, one of my greatest worries came horrifyingly true.

My School of Hard Knocks 

It was a mild fall day in Chicago at the end of a pretty good trading day. As usual after returning home, I fired up our home computer to check our personal portfolio. Just a quick look-see.

What I saw, puzzled me. One of the “safest” funds we owned, the Heartland Short Duration High Yield fund, displayed a huge loss. Almost half of its value had disappeared overnight.

My first reaction was: This must be a mistake; a computer glitch?  After all, this was our reserve fund – the money that wasn’t ever supposed to be put at risk. The company’s literature described the fund as being as safe as a checking account.

Imagine my panic when I discovered it was no glitch. The loss was real, hitting me like a sucker punch in the gut. As later reported in the Los Angeles Times, the manager had overconcentrated in healthcare and multifamily housing bonds. They ended up having to abruptly “recalculate” the fund’s worth after having misreported its true underlying value. The event was literally unprecedented in the municipal bond market, at least at that time.

An Epiphany in the Making

The experience was awful for me and my family. Even worse, I soon learned that most of the fund’s shareholders were teachers, public service retirees and other everyday investors whose life savings had vanished in what amounted to a collapsed Ponzi scheme. Heartland’s actions were so egregious that its chief executive and six other executives later settled charges with the U.S. Securities and Exchange Commission pertaining to their mismanagement of the fund; they paid a $3.5 million fine and other civil penalties to resolve the government’s allegations. 

I know this because I agreed to act as lead plaintiff in a class action suit, dedicating seven years of my life trying to recover the most amount of money we could from the fund, its managers and even its auditors (who had looked the other way as the meltdown occurred).

My initial impetus was to recover what we could, while taking steps to ensure this would never happen to my family ever again. Never!

Along the way, I discovered something else about myself that became a driving force behind the rest of my career. I realized how intensely rewarding it was to help my fellow shareholders. As lead plaintiff, you must make informed decisions that affect everyone – gathering information from a wide and diverse team; acting on behalf of everyone else in the class; and above all, doing what’s best for everyone (even if it’s not necessarily the best for yourself).

It was a humbling honor to be in this position. The early experience became the epiphany in my life that led me to become a fee-only, fiduciary wealth manager. Just as I had experienced in that class action suit, I wanted to always be found sitting on the same side of the table as my clients, with similar skin in the game.

From “Gloom, Boom and Doom,” to Evidence-Based Inspiration

Having my clients’ best interests at heart was a good start. But my journey toward being a fiduciary advisor was not yet complete. I also had to have it in mind, by ensuring my advice was worth heeding. For that, I still needed to stop following financial forecasts peddled by the likes of “Gloom Boom Doom,” and embrace the important lessons about prudent money management and informed risk-taking. How did I make the change? Watch for my January post, when I’ll complete my personal tale of transition.