Saturday, February 11, 2006

My worst money mistake: I lost $4450 to a Farmers' Cooperative

I saw a post over at MyMoneyBlog that asked the following question: What's your worst financial mistake? (How does this tie into boardgames? Read on and find out...)

Growing up in a small farming community in Iowa, I was taught the basics of economics, farm style:

1. Buy used to save money.
2. Buy local to help your community.
3. Multi-level marketing is a pipe dream and only drives friends away.
4. If you borrow too much, there'll be a farm crisis someday, and you'll lose everything.
5. Ronald Reagan is the devil.

I still believe those things, more or less.

It was #2 that got me in trouble. Almost every year, I'd lead cattle around the ring at the county fair, and the proceeds from the sales of those cattle would be put in an account at the local Creston Farmers' Cooperative. The Creston Co-op paid a few percent, a little higher than the local bank. I had a few thousand dollars there, earning a paltry bit of interest. My dad and I went to their offices a few times to pick up seed. There were other small co-ops around the county that bought seed and fertilizer and vet supplies, and we stopped at those, too.

(I also saw a poster about investing that I might write about separately; it was the most insightful thing about human nature that I've ever read.)

I went off to college at the University of Houston in 1993, met my wife-to-be in 1994, began dating her in 1995, and married her in 1997. Every quarter, I'd get a statement showing my interest earned, and didn't think much of it. Due to my scholarship, most of the money I got from my part-time jobs was spent on my car, food, and used books. I didn't ever think much about the money, figuring that I would leave it there in case of true emergency. Plus, I was diversified, right? I had money in banks AND a Co-op.

At that point, the dot-com boom started. The Creston Co-op leaders got ambitious, and raised funds to buy up some of those neighboring co-ops. Of course, the paltry 4% interest paid into that on-demand account seemed small for most of the depositors. The Co-op also bought up some hog farms (!!) and began running a couple of other businesses.

I wasn't very up on these diverse, complicated, non-traditional investments, but hey, I could get my money ANY TIME, out of the on-demand account. Besides, dot com boom, can you say hallelujah? Our small stack of tech stocks were skyrocketing, so most of my/our mental energy was devoted to figuring out how long until I could retire if all our stocks went up 20-40% per quarter.

Anyway, I got a nice letter from a nice girl named Brandi who used to go to high school with me. She worked in the Co-op office, and sent out all the correspondence. I had been getting quarterly newsletters and statements since 1994, and felt like I knew all about the co-op's business in a state I visited once a year. The nice letter offered me a chance to buy some preferred stock in the co-op. Once a year, I'd get a massive dividend of 10%. My investment would be locked in for 10 years, but still, a nice dividend check every August after the harvest.

So, I ended up investing $1,900, leaving about 2 grand in the on-demand account. I don't remember why it was an odd number, but that's what I invested.

I got the first check for $190 a year later, and that was sweet. I also invested $1,000 with a company called ABFI, at about 8.5% interest, responding to an ad in the Wall Street Journal. I got a lot of letters from ABFI, offering me lots of high interest rates. ABFI had tried to sell STRIPS (basically, they bought cut-rate mortgages, sold the interest that they thought they would get, and kept the mortgages. Oops, then everyone refinanced and they owed all the interest on the now-gone mortgages. D'oh!) and messed up. I got a bad feeling about ABFI, and right around the time I got my second $190 from the nice, trustworthy Co-op, I took my money out of ABFI. Sure enough, ABFI went bankrupt not long after. My, how clever I was, and so handsome, too!

I don't remember whether I got the 3rd dividend check or not. Somewhere along the way, the high-finance schemes of the Co-op didn't work. I know the Co-op got stuck with a big bin full of mixed genetically-modified and regular soybeans, which most of the big agri-businesses stopped wanting to buy. I heard rumors that the hog farm was a loser from the get-go, and that when the price of hogs dropped like a rock, that was a strain. I also heard vague rumors that some of the other businesses, like the hardware supplies store, had a lot of supplies never be sold, only to reappear later at various locations in the county. I also never considered: how many people were going to buy in on the Preferred Stock deal, and how much would the Co-op need to pay out every August?

The result: I got a letter telling me that the Co-op had gone bankrupt. Preferred stock in
a bankrupt company is worthless, so I took a $1900 hit on the preferred stock.

For a while, I got regular updates from the bankruptcy court, on my remaining $2400-odd of on-demand cash. It's been a few years since the whole fiasco started. I got a lot of mailings for a while, and haven't gotten one in some time. I presume they're still wrangling about what to do with the dwindling pile of cash, which periodically has attorneys' fees, copying charges, stamps to mail out notices about the case, etc., deducted out of that pile of cash.

My biggest shock in the whole bankruptcy was looking over the notes and seeing that some MORON put about $500,000 into preferred stock. I was asking the Co-op to come up with $190 every August. Some country bumpkin thought the Co-op was going to keep their HALF MILLION SMACKEROOS safe as brick houses, and give them fifty grand come hell or high water every August, to boot. Yeah, I didn't trust them that much.

My sisters, my cousins, and my parents all lost varying amounts of money. If I had to put a number on it, I'd make a wild guess and say somewhere between 50 and 70 grand, spread out across quite a few of us.

So, that's my worst money mistake: I lost $4450 or so by trusting the wrong people, not understanding an investment, locking money into a contract that was too long for the overall market cycle, mis-judging the risk of lost principal, and diversifying in the wrong direction. If I had put that money into tech-heavy stocks, I'd still have half or more of it today. I'm not going to cry about the tech stocks here; I knew the risks, and again, I had every chance to put that money elsewhere.

To bring this back to gaming, my game collection represents about $1100 worth of games. Had I not lost that money by investing in the Creston Co-op, I could have FIVE TIMES AS MANY games today, or a bigger house in which to play bigger games, or be $4450 closer to having my current house paid off, so I can buy more games.

To reiterate the lessons here: Diversify not only for return, but for safety. Never invest in anything you don't understand. Keep your eye on your money or you will lose it.


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