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Convertable Preferred

January 12, 2014

Many years ago, a colleague was telling me about his penny stock trades.  He didn’t have much money to invest, but he enjoyed taking the occasional flyer on a penny stock.  This talk got me thinking about investing.  I wasn’t interested in penny stocks, though, but something more substantial.  I began reading the financial pages in the papers.  When I was ready to make my first investment, I contacted his broker to make the arrangements.

At that time, the advisors and experts were all very pessimistic.  They recommended only conservative investments.  They also recommended taking profits whenever this was possible.  One of the advisors described a convertable preferred that was new on the market.  It was just about the most conservative investment possible.  I liked the high dividend.  I could also make money from capital gains if the underlying common stock went up.  I decided to buy that one.

I watched it every day in the papers.  It went up a little one day.  It went down a little the next day.  After a month, though, it was up 10% from where I had purchased it.  The advisors said always to consider the annual profit.  That was 120%.  They said that if it was higher than the interest rate, I should sell it and take my profit.  That’s what I did.  The advisors and experts are always right, aren’t they?

Years later, I was astounded to realize that I had bought that convertable preferred at the very bottom of the longest sustained rise in stock market history.  It would have increased ten times if I’d kept it.  I could have bought practically any stock at that time.  They all went up the same way.  Of course, nobody knew that at the time.

Throughout the entire history of that long rise in the market, it went up a little one day and went down a little the next day.  Investors and advisors were blind to what was to come.  They only saw the day to day changes.  They were always pessimistic.  They could not predict the future.  If they can’t predict the future, how can a little guy like me do it?

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