Pride After the Fall: An Investing Parable

Yes, that's really my picture. It was taken in 1957, when Icelebrated my bar mitzvah. Don't worry, The Post isn't turning intomy personal photo album. It's just that this is a once-in-a-lifetimeopportunity for me to tell a story that ties together Enron, my 13thbirthday and last week's news: the biggest telecom bankruptcy ever.And have it all make sense. As an added bonus, there's an investmentlesson here.

So bear with me as I take you way, way back to when my parentsinvested $500 of my bar mitzvah money in a nice, safe company calledRochester Telephone. The stock was my security blanket. It sent medividends four times a year. In 1979 I sold the stock for a $765profit to get money for a down payment on a house. But I hadforgotten about $200 of Rochester Telephone stock that had built upin a dividend-reinvestment account. Flash forward 20 years. By 1999 Ihad reinvested $1,200 of dividends, the world had changed and my $200stake in Rochester Telephone had morphed into $5,000 of FrontierCorp. stock. Then fortune smiled: Global Crossing, a hot company atthe time, bought Frontier. I found myself with 257 Global Crossingshares, worth about $6,000. Lucky me.

Now let's be clear. I'm a conservative investor. I would neverhave written a $6,000 check to buy Global Crossing stock. It was a go-go company with a ton of debt. Its bookkeeping was opaque. Insiders,including founder Gary Winnick, were selling lots of stock. Notencouraging signs. So what did I do? Nothing. To my surprise, Globalstock caught fire. My stake rose and rose, topping $15,000 in early2000. I felt as if God had smiled on my bar mitzvah remnant. I tookto fantasizing about what my Global stake would have been worth had Ikept my original Rochester Telephone stock. (Answer: about $125,000.)

I should have known. In the spring of 2000, Global Crossingstarted to deflate as the Internet-telecom stock bubble burst.Global's financial statements started looking like body parts thatMike Tyson had gnawed on. The company was (apparently legally)inflating revenue and understating expenses. Did I sell then? No. Iadvised other people to sell, but I didn't sell. Why did I freeze?Because back when my stock was worth $15,000, I deluded myself intothinking it would go higher. And then when it fell back to $6,000, Ifelt like an idiot. Clearly, I was emotional about this symbol of myyouth. I didn't really lose $15,000 -- my actual investment was only$1,400 -- but I feel as if I've lost $15,000. The current value of my257 shares: zero.

So in my own way I feel Enron investors' pain. Especiallyemployees' pain. I can imagine how hard it must have been for loyalemployees to even think of selling the Enron stock in their 401(k)plans. Despite what you've heard, people who had most or all of theirEnron 401(k) in company stock could have sold most of it at any time.The company wouldn't let employees sell the stock it contributed totheir accounts until they were 50 years old. (It waived that rulewith the stock at 26 cents. Thanks, guys.) But employees could havealways sold the stock they had bought with their own contributions.Employees complain about not being able to sell for a few weeksduring the fall. But by the time that "lockout" started, the stockwas at $12, down 85 percent for the year. It was at $9 when thelockout ended. Now, it's about zero. The lockout's not the problem.Human nature's the problem. It's natural to think that what had beena great stock would be great again. Besides, you want to show faithin your employer.

Terrance Odean, a financial-behavior specialist at the Universityof California at Berkeley, tells me that the Enronites and I haveplenty of company. He explains that it's hard to bring yourself tosell a stock that's fallen sharply, and especially difficult whenit's your employer's stock. "When you sell stock at a loss, you don'twant to have to look at it again," Odean says. "If you're working atthe company, you have to look at it every day." He adds: "People arein denial that something that was worth 80 is now worth 15. You don'twant to believe it. You want to have faith in your company, and inyour co-workers."

Since we started with religion, let's tie this all up with abiblical reference. Let's turn to Leviticus 19:14, which discussesbusiness morality: "Thou shalt not curse the deaf, nor put astumbling block before the blind, but shalt fear thy God." Therabbis' interpretation: Don't help people mislead themselves. Maybeyou can blame employees for not selling -- but Enron and ChairmanKenneth L. Lay tempted them. In September, Lay told employees thatEnron was "an incredible buy" without telling them that in Augusthe'd been selling. You don't need a religious ceremony to know that'sa sin.

Sloan is Newsweek's Wall Street editor. His e-mail address issloan@panix.com.