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A Big Lesson from Scott's Hard TradeBy
Wednesday, January 20, 2010
I've done well since March 2009... A few of my accounts are up by triple digits in percentage terms.
But my returns are nothing compared to what my friend Scott did in the last two years... Earlier this week, my wife and I met up with Scott and his wife for drinks. My wife and I made a point to tell Scott how impressive the trade he made was. Let me tell you Scott's story... In 2007, during the heyday of real estate, Scott was a big-shot mortgage broker for a major bank. He was the boss... He had a team of mortgage brokers under him. Scott probably made a whole lot of money. He built a stunning custom home right on the water and had a deepwater dock for his fancy boat. Everybody was flying high at the time... On the northeast coast of Florida, nearly everyone who got "rich" made their money from real estate somehow. They were investors, developers, builders, lenders... something. In the wealth race, even the doctors and lawyers got left behind by the guys in real estate. But right around the peak in Florida real estate, Scott ended up losing his job. What happened to the rest of the real estate guys when the music stopped? For just about all of them, they acted like the music was still playing. What else were they going to do? Accept reality? No way... Reality would mean taking a loss... So they held on and hoped. Just about none of the developers or builders were smart enough to get out at the top. Small paper losses turned into huge paper losses. They still hung on. They preferred to sink with the ship, hoping these once-in-a-lifetime days would return. Not Scott... He was not "fooled by randomness." He didn't assume the once-in-a-lifetime real estate boom days would return. He didn't confuse genius with a bull market. Through either humility or brilliance (or both), Scott made a dramatic change in his life... Scott made the hard trade. When he lost his job, he immediately put his new fancy home up for sale. At a time when everyone around him was living extremely high on the hog, Scott downsized dramatically, buying a significantly smaller inland home – all in cash. Scott hit the reset button. He hit the button early. He didn't let his ego or his old high status get in the way. Instead, he started over, regardless of what the "country club" crowd thought. Scott is now back at work, doing what he knows well... He's a mortgage broker again for a major bank. "How's business?" I asked him when we met for drinks. "Well, I'm not making any money. But I don't have a mortgage anymore either." I complimented him on his bold life decision to downsize dramatically at the height of the boom. He said: "Well, we just got back to what was important... We decided that STUFF wasn't that important. And stressing over STUFF is wasted energy. Our family is what's important. We made the big change, and life is much different. But it's good. Now, for the first time in my career, I'm able to see my kids at night when I get home from work." Scott seemed just fine with the whole thing. He's not lying awake at night, wondering how he's going to pay the mortgage. Scott made the hard trade. He cut his losses early. The worst thing you can do is hold and hope yesterday will return. Are you holding and hoping in real estate? Are you lying awake at night stressing about STUFF? You can get out of it. You can follow in Scott's footsteps. You can hit the reset button and start over at a much lower level of spending. You can sell the fancy house and rent instead. You can sell the fancy car, or boat, or whatever is keeping you up at night. It's all just stuff. Sure, I had a decent year in my trades. But my trades pale in comparison to Scott's bold trade... Scott traded stuff for happiness. In his case, the bolder the downsizing, the greater the happiness. If you're unhappy, if you're stuck holding and hoping, follow Scott's lead. Trade your stuff for peace of mind and happiness. Good investing, Steve
Further Reading:
What the Government Should Do to Save America Market NotesAN EXTRAORDINARY THREE-YEAR CHART Another "survivor" stock for you... Yesterday, we introduced Royal Gold as one of the few companies in the world that weathered the 2008 credit crisis... and managed to reach a new high soon after. It takes an extraordinary company in an extraordinary situation to survive that historic selloff and then thrive. Today's survivor easily qualifies as extraordinary. It's one of the most successful businesses of all time, and bank blowups won't dent demand for its products. It's McDonald's (MCD). Kudos to Tom Dyson for his insight on McDonald's back in June 2008. Tom pegged the company as one of the best stocks to own during tough economic times. McDonald's sells some of the cheapest food you can find anywhere... which comes in high demand during a recession. As Tom predicted, McDonald's profits and share price held steady during the crisis... and the stock now sits at its all-time high. The crisis selloff couldn't even take McDonald's down to a 2008 low. Tom's 12% Letter readers are up 64% on this dividend and compounding machine. 
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