By Kim Iskyan, founder, Truewealth Publishing

Friday, June 24, 2016

I was 22 and fresh out of college when my father gave me $5,000.

It was left over from a college savings account. The one condition was that I invest it.

Back then, newspapers (or if you worked on a trading floor, a Quotron) were the way to check stock quotes. And to buy a stock through a "discount" broker (they weren't cheap by today's standards), you had to call in and place the order.

Armed with a liberal arts education that was heavy on writing, politics, and history – and with a few months' worth of scanning the Wall Street Journal under my belt – I figured I was ready to invest.

At the time, shares of personal-computer companies (which today are about as exciting as auto stocks) were the tech darlings of the market. With this money burning a hole in my pocket, I thought I'd get in on them.

During a chat with my college buddy Simon, a technology whiz who ingested computer magazines like air, I learned about these companies.

One was Dell, which is still one of the industry heavyweights (it went private in 2013 and the stock is no longer traded). Back then, it was emerging as the industry leader. But it was big (at least that's what it seemed then) and boring. At the time, I thought it was "done" – and being an early stage contrarian, I wanted a stock that was a bit less obvious.

The other PC maker I was looking at, Zeos International, was a lot more exciting. The company made its first PC in 1987, and four years later, Fortune named Zeos the fastest-growing public company in the U.S. It beat Dell to the punch by rolling out laptops using the latest chip. Zeos even had a palmtop pocket PC on the market.

The clincher? Simon told me that Zeos was a huge advertiser in the computer magazines that he read. Everywhere he looked, there was another page blaring the benefits of Zeos laptops and desktops. Even better, it was the first computer company to offer round-the-clock customer service – exhibiting clear commitment to the customer. To my money-fevered brain, that could mean only one thing: an easy path to easy street once I multiplied my $5,000 through smart stock picking.

So what happened? In late 1991, Dell shares were trading at a (split-adjusted) $0.25 per share. By the end of the decade, they were changing hands at $50. Had I just invested in the obvious stock, my initial investment would have been worth $1 million by the end of the decade.

Things didn't go as well with Zeos.

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.

"Analysts said it was not clear how Micron [the buyer of Zeos]... would resurrect Zeos, which has high costs in a low-margin business," the New York Times reported at the time. Less than a year and a half later, Micron stopped making Zeos computers.

Zeos' underlying problem was that it made terrible computers. According to a February 1996 article, a computer-magazine survey had "named Zeos as one of the worst in overall quality and service and among the poorest in reliability... Among the survey's findings were that only a little more than half of Zeos customers responding to the survey said they would buy another Zeos computer... Zeos owners also said that, on average, it took more than 40 hours to get technical assistance via a telephone help line when they had trouble with their PCs." So much for 24/7 customer service being a good thing.

Months into my misadventure with Zeos – but before my $5,000 was turned into a much, much smaller number – Simon clarified his part of the investment thesis. The quality of the newsprint of the Zeos ads was inferior to the newsprint that other advertisers used in the industry magazines. So Zeos was advertising a lot – but taking the cheap way out.

I've learned a lot of expensive lessons in my life... And at the time, my Zeos loss was a huge blow. But I did learn a few things that I still have to remind myself of occasionally:

•	Sometimes, being a contrarian isn't worth the trouble. The opportunity cost of investing in Zeos rather than Dell was enormous. I thought I'd win by not doing the obvious thing. Sometimes, the obvious thing is the best thing to do.

•	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.

•	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.

•	Right-in-front-of-your-eyes indicators can be misleading. Just because 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.

•	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 many more mistakes since Zeos. But I hope I haven't repeated these.

And I hope you don't, either.

Regards,

Kim Iskyan

Further Reading:

"Sometimes the best move in the market is the one you don't make," Dan Ferris said earlier this month. It can be hard to do nothing. But it's worse to throw money away on losing stocks. To learn how to make the right decisions, read Dan's essay: The Five Types of Stocks You Must Avoid.

As Mike Barrett explained recently, "When you read about a business that might be a promising investment idea, your No. 1 job is to develop an understanding of what it does and how it makes money." Get the details on exactly what to look for right here.

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Cigarettes also fit that bill. And today, we're looking at one of the biggest companies in that market, Altria (MO). The $130 billion tobacco giant's products include Marlboro, the No. 1 cigarette brand in the world, as well as Virginia Slims, and smokeless tobacco brands Copenhagen and Skoal.

Altria shares recently broke out to a multiyear high. Shares have jumped nearly 15% so far this year and are in one of the most impressive long-term uptrends in the market. It's another example of why you don't need to buy flashy stocks to be successful.

Two rules that every income investor needs to know...

"It seems simple. But it's the first thing investors forget," Dave Eifrig writes in a recent issue of the Stansberry Digest.

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