written by reader Paradise Gained, Paradise Lost – Part Two

THE BLIND SQUIRREL DIARIES

By theblindsquirrel, January 27, 2014

[Ed. note: Here is the next exciting installment from Jim Skelton, the Blind Squirrel, who is sharing his experiences as a financial advisor with us. As with all of our contributors, the opinions he expresses are his own, and we haven’t reviewed, approved or screened his ideas. His previous articles can be seen here.

Greetings once again to all citizens of the Gumshoe Nation, far and wide. You may recall that a couple weeks back I wrote Part One – Paradise Gained – of this story of my involvement as a financial advisor (FA) with a young man that had big dreams of becoming a successful investment manager. If you missed that you can go here to get yourself up to speed. Now, let’s get on with the story.

When we last left Kurt, he was riding pretty high on the successes he had achieved in his model portfolio. The dozen or so picks he had made were all doing fine – well, maybe not all, but most were – and the super-sized return he got from Telephonos de Mexico had really propelled his average annual return calculations for the portfolio into the stratosphere. But TFONY was now behind us and Kurt was seeking the next big winner. And in addition, he had decided to put the portfolio on margin so he could leverage his returns using that method. Margin trading can be fine when all things work. But it will be a real bear if they don’t.

Kurt was unconcerned about the possibilities of anything going wrong it seemed. As 1987 progressed, the market kept its general uptrend intact, a trend that had held sway since mid-1984. And as you know, a rising tide lifts all boats. In those circumstances, a lot of people get fooled into thinking the gains they are getting are a direct result of their own stock picking prowess and not just that of the market trend. Kurt’s boat was no exception, and it was hard to tell if that was due to his powers of equity analysis or just a friendly market environment. Whatever the real reason, he was growing the account.

Then in early spring of that year he called me, quite excited. He had been researching and following a new company that was totally on fire. A new concept that was taking the nation by storm with revenues and profits anticipated to soar. And the stock price was zooming up along with all the news and hype. Kurt wanted in. Now, before the price got any further out of reach, as he was certain it was bound to do.

The company that had caught his attention was a revolutionary concept company that really was sweeping the nation by storm. It traded under the symbol HSN. Yep, Home Shopping Network, the precursor to what we know of today as purchasing on the Internet. Except, of course, there was no Internet back then, no real private ownership of personal computers as of yet.  Michael Dell and Bill Gates were still kids tinkering with an idea that was in its infancy. But HSN didn’t need any of that. It ran programming all day and night long on secondary TV channels offering people anywhere the opportunity to buy all manner of gizmos and gee-gaws if they had a phone with which to call an order in. And brother, the calls were flooding in! Especially from more rural areas where people didn’t have much access to the brick and mortar stores where they could easily shop. The primary driver of this movement came from stay-at-home housewives who were starved for the ability to shop for and buy the things they wanted or needed – or at least they felt they wanted or needed. The marketers for the programming were genius in creating a sense of urgency to buy. Buy most anything. Especially pretty and sparkly things. Women became transfixed with this new opportunity and sat and watched all day and night long to be sure they didn’t miss out on something they might see a neighbor wearing or using the very next week. It was a stampede to call and buy. And this soaring enthusiasm drove the idea that this company simply had discovered a true gold mine. But never mind that the stock price was trading without any yet reported earnings and that it was near impossible to do any sort of actual financial analysis. Everything was based on perception and belief in the future. And Kurt perceived much greater things to come.

Problem was, he had used most of the margin money he could access. I was a little worried about the possibility of a margin call if we hit a rough patch in the market. Kurt had indicate