He may be a professor of management at Notre Dame, but that didn’t keep Khalil F. Matta ’80M.S., ’82Ph.D. from making what he calls “boneheaded investment decisions.” Although filled with humor, his Thou Shalt Not Invest Foolishly: Confessions of a Business Professor (1st Books) can be almost painful to read, as Matta again and again watches his investments go sour. But out of lemons, he had made lemonade — and investors may profit from a sip.
ND: Why go public with your mistakes?
Matta: First and foremost I’m an educator and I thought there was a need for getting people educated on what can go wrong in the stock market. I always thought of myself as fairly smart, and I was really surprised that I could do such “primitive” mistakes. Then I saw that a lot of my friends and my colleagues shared my ignorance about investing. I though the general public might learn from the mistakes, and not experience the pain and suffering that I have.
ND: What is the first thing you would advise investors?
Matta: The main theme of the book is that one should view investing as a means to build a long-term nest egg. I think most people confuse investing and speculating. You should think long term rather that short term.
ND: What should investors avoid?
Matta: One thing that you should never do is leverage your investments — never borrow money to invest.
ND: The book was written before the bear market took hold. How do you view the current economic climate?
Matta: I think the lessons in the book apply anytime. Bear markets are a fact of life. They basically punish speculators more so than investors, because speculators have a short-term horizon. Investors should have a long-term plan.
Excerpt from Thou Shall Not Invest Foolishly: Confessions of a Business Professor
From chapter 5:
I became obsessed with a small company called Worlds of Wonder (WOW as it was known on Wall Street). This company excelled in designing toys that used technology innovatively. Around the time Cabbage Patch kids were popular, this company came to the market with a doll that had in it an embedded computer chip. Today, these toys are prevalent, but at the time it was the only one of its kind. The toy could respond to a child’s voice, sing and cry, and carry a simple conversation with a child. It was programmed to recognize key words and respond accordingly.
When introduced, I bought one for my daughter, who was 5 years old at the time. She is now in college and still has this doll. Simply put, this was one of the best gifts I had ever given her. This doll never left her side. It was literally indestructible and it gave my daughter many years of pleasure and entertainment. I was so impressed with this doll that I eventually bought shares in the company. I was so convinced that this doll would be a big winner that I did not even bother to check the company’s finances. After all, this company had successfully introduced a best seller a year earlier and there was no reason to believe that this doll would not be a repeat best seller. I suspected by the extent to which my daughter loved this doll that all the other young girls her age would be equally infatuated. If this happened, the impact on this little company’s earnings would be phenomenal. This could be the home run I was looking for.
However, at over a hundred dollars, the doll was very expensive even by today’s standards, let alone the late 80s. The company was small and as such could not afford to market it aggressively. So, sadly, despite its appeal, the doll failed to capture the imagination of young girls and the pocket books of their parents (myself excluded). I should have known better given that I was initially more excited about this doll than my daughter was. It was not one of those dolls for what she had pleaded and begged when we went Christmas shopping; rather it was I who was adamant on buying this doll for her as a Christmas present. It took training the doll to respond to my daughter’s commands for her to get attached and infatuated by it. It was, therefore, not my daughter (the natural consumer) who wanted to buy it, but me.
Needless to say, I was part of a very small minority of parents who were willing to do so that year. Despite having a great product, the company was not able to generate enough sales that year to meet its financial obligations. It did not take long for its creditors to move in and force the company into liquidation. The stock that I had bought only a few months earlier had become worthless. I wish I had kept the toy in its original mint condition, for it might now be a collector’s item and I would be able to recoup some of my losses on it. Instead, my daughter got years of enjoyment from it. I guess it was worth the price I paid after all.
(Copyright Kahlil F. Matta)