This site often seems like a brag-fest to me.
Many of the posts are about how I did this well or did that well.
Of course, I have had my successes and they are worth learning from.
But as we’ve seen now and then, I’ve also made a lot of mistakes.
Fortunately these have been limited in number and not that large. But they do happen and are just as worthwhile to learn from as the successes.
In addition, I think it’s useful for people to see that even those who accumulate a good amount of wealth have had some pretty big doozies.
This is why I’ve started asking millionaires that I interview what their biggest money mistakes are — so we all can see that they aren’t perfect and still ended up wealthy.
So today I’ll have the story of an investment mistake I made many years ago which came back to haunt me recently.
The Five Closest People to You
You’ve probably heard the following quote:
You are the average of the five people you spend the most time with.
This is an accepted fact in many self-help circles and quoted quite often.
I’m not saying it’s 100% true but I do believe that you become like/learn from those around you. Whether it’s two people or ten, I don’t know.
Anyway, whatever the number and whatever the impact, I wanted to be more like my boss and his wife.
They are an awesome couple and quite successful in business. Forgetting about the money-side, if I was simply more like them in my personality I would be a much better person.
Of course they are quite wealthy as well (three homes — two in the U.S. and one overseas) so who wouldn’t want to be like them in that way too?
So when the opportunity came to invest with them in an LLC, I jumped at the chance.
We’re Going to Make a Fortune!
Here’s the situation:
- In early 2005, my boss found a piece of property near our office that was a “goldmine”.
- It was a corner lot in what was potentially a growing retail area off a highway.
- There were also rumors that Walmart was coming to the area and was going to be setting up a distribution center nearby. Can you say $$$$$$$$????
- My boss was setting up an LLC to buy the property, hold if for a couple years, then sell it for a ga-zillion dollars.
- The group was my boss and his wife, a local real estate with 30 years’ experience (you would think he would know a good deal when he saw it!), and another local businessman.
- Being the kind, inclusive sort of people they are (and knowing I was looking to invest money since we’d discussed it), they asked me if I wanted a piece of the pie.
Of course I did! Who wouldn’t want to make a ga-zillion dollars?
So we broke the LLC up into the following: 50% for my boss, 20% for each of the two other guys, and 10% for me.
We bought the property for $100k in cash and took out a mortgage for the rest.
I thought this was a great way to make some good money, become an insider on what my boss was doing here and in other places, and only risk $10k. Even if the thing was a total dog, losing $10k wasn’t going to kill me.
Cash Hog
Since we had a mortgage, we had cash calls every six months or so.
My portion of this was just over $1,000, so it was easily manageable from my income.
Besides, we were only going to hold it for a couple years and then sell it for a fortune, so there was no problem at all.
If only…
It’s the Economy, Stupid
It didn’t sell within the first couple of years.
The Walmart rumor died down (it was probably started by the guy who sold us the parcel), so we kept holding it.
Then the economy went to pot in 2008 and no one was buying anything for a couple years. (Thankfully I had gotten smarter about real estate during this time and bought some stuff on my own.)
Then the commercial area that was supposed to develop near the highway moved one exit down.
And there were absolutely no buyers. None. At any price.
And the cash calls continued. $1,000 here and $1,000 there. And time rolled on.
We all wanted to sell but couldn’t find anyone to buy. It was a major drag.
Finally It Sells…For Less than a Ga-Zillion
I had long left that job but kept in touch with my former boss due to this deal as well as the fact that he was a good friend.
He called me once late last year and asked what my thoughts were on the property. I told him I was only 10% of the deal and would go with whatever he decided.
Eventually, the property sold this past summer.
I don’t know the price but was notified by his assistant that a check would be coming my way.
By this time, the $10,000 I had invested had grown to a total investment of $31,285. All those cash calls had added up over 12 years.
My guess was that I would see $20k or so of that back. I wish that was the case.
In July I got a check for my portion of the sale. It was for $12,750.87.
Ugh.
Investor Extraordinaire
So needless to say, this was not my most brilliant investment.
It wasn’t a death-blow either, but I hate seeing $20k go up in smoke.
So here we have it: another money mistake to add to the list.
Making Lemonade
I did send a note to my CPA to see if I could make some use of this loss. Here’s what my note said (I’ve changed some of the names to protect the innocent):
Hi, Betty. I hope this message finds you doing well.
I have a tax question that will impact 2017 and wanted to ask you about it in enough time to make some other moves this year.
Back in 2005 I invested in an LLC which invested in real estate. It’s No Lose LLC and we’ve dealt with the K-1’s every year on my taxes.
My initial investment was $10,000 on 8-4-05. Subsequently through the years I invested another $21,285 as we had cash calls to pay the mortgage. So my total investment was $31,285.
Unfortunately, the investment didn’t go well.
Fortunately we did sell it, but the check I got back as my portion was $12,750.87.
I’m wondering how this is treated for tax purposes. Specifically, can I use the loss of $18,534.13 to offset capital gains on mutual funds I sell? If so, I want to sell a bunch while the market is so high.
I’d appreciate any direction you can give me.
FYI, I’m selling some of the funds in my taxable Vanguard account to build up a cash stockpile. If (when) the market drops, I’ll either 1) reinvest in funds at a lower cost or 2) buy some more real estate. As long as I keep my income below a certain threshold, my capital gains won’t be taxed.
She responded with the following:
Hello ESI,
Yes, you are able to use the loss on your No Lose investment to offset other capital gains on mutual funds or stocks that you own.
I looked back at the previous years we have on file and see that some losses were used in 2014 ($1,819), 2015 ($2,409) and 2016 ($172).
These losses for No Lose were taken against gains from your rental properties (all considered passive income/loss).
According to the 2016 K-1 issued by No Lose your ending capital account is $26,447. This is lower than your figure due to the losses that were taken in previous years.
After accounting for the money you received from the sale of the property, you would recognize a loss of $13,696 which can be used to offset other gains.
That’s what I was looking for — some way to make this mistake worth at least something.
I went to Vanguard that day and sold $35k of mutual funds, $13.6k of which were capital gains.
So there you have it! The story of how I lost a bundle instead of making a ga-zillion.
Learn from my mistake, Grasshopper.
Paul says
September 27, 2017 at 5:28 amStories like these are certainly worth sharing. I’ve had a few “too good to be true” insider super lucrative sure-to-win deals pitched to me by friends, and they all ended up dogs (thankfully I didn’t invest).
One thing worth highlighting about your investment, though – if you view it as part of your total portfolio, it doesn’t sound as bad. You can certainly afford some ultra-high-risk punts at the extreme edge of your portfolio, and this one, as most such investments should be expected, just didn’t pan out.
The best thing is that you maintained your friendship – I’ve known too many deals similar to this that have broken others. Great story!
ESI says
September 27, 2017 at 7:48 pmThat’s true! It was a very small portion of my net worth.
Jim Wang says
September 27, 2017 at 5:34 amAlso, if you didn’t want to offset the losses now, you can claim $3,000 against ordinary income and the rest will flow through to the following year (and the next and the next). It’s just like any other capital loss – a silver lining on a storm cloud. 馃檪
Coopersmith says
September 27, 2017 at 6:06 amSounds like the “investment club” we formed at work. Decisions were based on throwing good money at dropping stocks during the Great Recession speculating that the price would come back. It didn’t work. We walked away with profits that were about what you would get in a money market account.
If I have the time I just might write it up as it was a 10 year fiasco.
saberdance says
September 27, 2017 at 6:20 amEncouraging us grasshoppers to learn from your mistake is a kind thing to do. It is said that a smart man learns from his mistakes, but a genius learns from the mistakes of others.
Hrant says
September 27, 2017 at 6:25 amThank you for sharing your true story with all.
Believe you might want to interview millionaires, with similar stories, failures, etc…so others may learn from each other’s experiences. Would be interesting to see the pitfalls of all different kinds of investments, and failures, big and small, hopefully to learn from.
Keep up the great job as always am looking forward to receive e mails from you:)
ESI says
September 27, 2017 at 7:49 pmOne of the questions I ask millionaires is what they did wrong — for the exact reasons you list here.
JWS says
September 27, 2017 at 6:40 amTotally agree with Paul. It’s ok to swing for the fences with small stakes that you can afford to lose. On the bright side of things, you’re still friends with your old boss. I’ve seen the horror story that can play out between business partners, so I generally avoid business deals with people that I prefer to remain friends with.
Church says
September 27, 2017 at 6:41 amIf I had a dollar, for every dollar I lost over stupid investment decisions….well…I’d have all my money back, but life sucks and doesn’t always work out.
So the point is, you were smart enough to know there was something else there. Maybe you didn’t know the exact tax code or if you did, the rules to apply the loss against the gain, but your financial competency kicked in.
Many lessons in this great post, but the one I enjoyed most is the fact that you were not too proud to reach out and ask for help.
Well done.
Mike H says
September 27, 2017 at 6:56 amThe cash calls over the years and all the K-1 paperwork seems more painful to me than the $20K loss. It sounds like a good learning experience and you ended up doing far better with your real estate purchases made after 2010.
I’ve certainly made my share of dumb investments and I suspect there will be more to come in my investing life. I’ll try and keep the damage to a minimum as best I can by playing some strong defense in addition to the offense.
-Mike
Josh M says
September 27, 2017 at 8:31 amThanks for letting us know about one of your failures. It’s always interesting to hear about failures from people who are successful. Let’s everyone see that you can make mistakes and still get to the top of the mountain.
One point – I’d be careful with timing the market (your comment about selling while the market is high). Everything I’ve seen shows that no one can time the market right every time. Also, I’ve seen so many people say the market is high right now and that only makes me think it’s going to go higher (at least in the near future). I understand if you have a better place to put it (ie real estate – I look forward to hear about your real estate purchases if that is where you put this money), but trying to time the market sounds like another money mistake. 馃槈
ESI says
September 27, 2017 at 7:50 pmDon’t worry. If I was timing the market I would sell it all — not a fraction of what I own. 馃槈
FullTimeFinance says
September 27, 2017 at 8:41 amThey’ve been talking about emminent domain and putting in a freeway offramp through my father’s place since I was 12. At one point or other there was also talk of a mobile phone tower. Neither ever materialized (I’m 36). Unless you control it the rumors of future growth in an area could always go up in smoke.
Jeff B. says
September 27, 2017 at 9:29 amWe invested in a friends restaurant and it lasted about two years. We ened up losing $27,000. I also lost $2,500 to a a friends neighbor that supposed to get us Super Bowl tickets in Houston. he is a sports agent, albeit not a very good one, and the tickets never showed. Still waiting for our money to be given back.
WealthyDoc says
September 27, 2017 at 10:48 amThanks for sharing.
I think we can learn more from our failures than from our successes!
ESI says
September 27, 2017 at 7:51 pmThat’s an interesting statement from a doctor… 馃檪
Carlos says
September 27, 2017 at 10:57 amThank you for sharing the story ESI. I think it’s part of the landscape of investing. You expect every investment will be a winner but some just give you losses.
I still remember it well when I lost about $50k investing in Currency trading. Ouch … (by far my biggest mistake)
However, don’t feel bad for me, I have more money than ever right now.
– Carlos
Paper Tiger says
September 27, 2017 at 3:53 pmInvesting is about risk and none of us bat a thousand. The longer you invest the more mistakes you are likely to make. I will say the “alternative investments” that go beyond my usual equity indexing in mutual funds tend to be where most of my mistakes have come. That is why you really have to watch how much of your portfolio you allow to take on more risk for a perceived higher return.
The other one has been purchasing my own company’s stock and hanging on to it for too long. It seems every “emotional” investment runs into trouble which is why it is best to remain “unemotional” when making investment decisions 馃槈
Glen says
September 27, 2017 at 4:05 pmGreat post. We all learn from money mistakes and we all have made them. Key is not to repeat them. ESI – do try to keep your 2017 Taxable Income below $75900 so have have 0 capital gains tax on your $13.6k gain plus other dividends and cap gains in your other accounts.
ESI says
September 27, 2017 at 7:52 pmWorking hard at it!!!!
Jeff B. says
September 28, 2017 at 8:54 amJust give a bunch of money to charity. 馃檪
Alex C says
September 27, 2017 at 6:31 pmHi ESI,
I wouldn’t call this a loosing investment. It’s obviously not a money maker but falls within the spectrum of real estate returns.
Your experience is pretty normal for a real estate transaction and my takeaway is diversifying.
My 2 bob.
Debbie says
September 28, 2017 at 4:02 amThanks for sharing your investment mistake. I do not have the talent for Real Estate so I stay away. Your investment appeared like a good sound opportunity that I probably would have gone for since it involved seasoned people that knew what they were doing in Real Estate. But I really like how you worked to make the loss a positive one for your financial future. I want to learn as much as I can from other’s mistakes to make less of my own for mine have been costly enough.
Dave says
September 28, 2017 at 12:54 pmThanks for sharing this story. Even though you had losses in the real estate deal, it is nice that they can be written off. I have never had the guts to go beyond passive investing. Big money can be made, but Walmart can also never show up.
Money Beagle says
September 29, 2017 at 8:15 amKinda reminds me of the time that I bought a bunch of stock in EToys, because there was nowhere for that to go but up, right?