Don’t Fall in Love

Andrew Small

MY FATHER WAS BORN in 1936 in Brooklyn. He attended Erasmus High School, earned a degree in chemical engineering from Brooklyn Polytechnic High School and then went on to study dentistry at New York University. He was a strong bridge player and loved tennis, golf and—most of all—downhill skiing. Just about everything my father wanted to do, he did well. But he wasn’t without flaws.

In the late 1960s and early 1970s, my father had a stockbroker friend through whom he bought shares, mostly in blue-chip drug companies that he admired. At various times, he owned Bristol Myers, Glaxo, Pfizer and Schering-Plough. But he always held an outsized position in his beloved stock, Merck.

After 30 years of dentistry and before turning age 60, he gave up fulltime practice to move to Vermont, where he had a second home. Around this time—in the mid-1990s—my father told me that, to his shock, his brokerage account had just hit the magic $1 million number. He never dreamed he’d see that figure, which—to him—meant security for the rest of his life.

I don’t take joy in killing a party mood. But the CPA in me had to ask him if he was prudently diversified. He said about 75% or more of his assets were in Merck shares. Even if he wanted to diversify, he said, he couldn’t sell because he didn’t know his cost basis. Besides, he had no interest in paying capital gains taxes.

My father rode Merck’s precipitous stock rise to glory. He retired earlier than all of his friends, and enjoyed his newfound freedom in the hills of Vermont. But he wasn’t alone in his good fortune.

One of my dad’s best friends, Bob, was a successful attorney. His portfolio also was heavily skewed to one blue-chip favorite, General Electric. I’ll never forget one warm summer day when the three of us were chatting. The drinks were flowing, we were all glowing from a day of boating and the stock market was ripping.

Dad and Bob—a.k.a. Merck and GE—started talking about the stock market. I was a newly minted CPA. I was married with two small kids and had just taken on the role of CFO of an investment advisory firm. When they asked me what I liked to invest in, you should have seen their faces when I told them I loved broad-based index funds.

I was a John Bogle disciple and had read his book Common Sense on Mutual Funds. I’d also read William Bernstein’s The Four Pillars of Investing, another book that waves the flag for index investing. I can only imagine what went through their heads when they heard me talk. I’m sure they chalked it up to being young and clueless. I definitely recall being told that I was on a path to average, which they insisted was a life of mediocrity.

I had many conversations with my father about his use of margin and his love of options trading. I’d talk about diversification and warn him that a single stock is fraught with risks. I tried to explain that the risk he was running was greater than its potential reward.

I explained that the capitalization-weighted index funds I favored were heavily invested in exceptional winners. Meanwhile, most publicly traded stocks don’t perform as well as Treasurys over the long haul, and so get little or no weighting. I also noted that the Nifty Fifty growth stocks from the 1960s—such as Eastman Kodak, Digital Equipment, JC Penney, Polaroid and Sears—later often went bankrupt, defunct or were merged out of existence.

What happened to Merck and GE, and to Dad and Bob? Between 1985 and 2000, Merck stock soared more than 3,500%. In the following decade, however, while Dad was retired, Merck’s price collapsed. One of its top-selling drugs lost patent exclusivity in 2000 and 2001. Even worse, Merck had to withdraw its blockbuster arthritis drug Vioxx from the market in 2001 after studies found that the drug doubled the risk of heart attacks and strokes in long-term users.

Merck stock fell 27% on the day of the Vioxx announcement. It eventually bounced back after acquiring Schering-Plough, but it took years. By that time, my father had been forced to sell shares to keep food on the table. His portfolio was crushed and, in many ways, so was he.

This dark period for him was marked by increased drinking and thoughts of suicide. He eventually became financially dependent on me, his son, in his 70s. I’d call that a parent’s worst nightmare.

What about Bob and GE? When Bob was all-in on GE, it was run by legendary CEO Jack Welch. Welch, a former chemical engineer, orchestrated the acquisition of RCA, NBC and expanded GE into financial services. The stock price rose 40-fold under his tenure. During the dot-com crash of 2000, however, GE shares nosedived. Welch retired on Sept. 7, 2001.

Under his successor, Jeff Immelt, GE’s stock price stabilized somewhat. But then, in 2008, the financial crisis hit GE hard. Shares fell 42% that year when it became clear that GE was overstretched. Warren Buffett stepped in with funds to stabilize GE’s operations, and the company also received $139 billion in government loan guarantees. But its troubles didn’t end with the financial crisis.

After years of decline, GE was removed from the Dow Jones Industrial Average in June 2018. I heard bits and pieces about Dad’s friend Bob. I know his retirement didn’t happen as planned, and that he worked well into his 70s. He was forced to sell real estate holdings that he otherwise would have kept.

I write not to brag about my foresight but to offer a lesson. Investing is strange. The smartest people don’t necessarily make the best investors. The best investors may not be the ones who pore over the financials and understand the minutiae of complex drugs, complex systems or complex corporations. Human behaviors—like overconfidence in your judgment or confusing skill with luck—play an outsized role. That’s why behavioral finance has become such a popular field of study.

Warren Buffett’s edge is that he never has to sell. His favorite holding period is forever. We can’t all be like Buffett, but we can learn from the mistakes that far too many investors make.

As for myself, I’ve never deviated in my ways. My portfolio of several decades consists largely of broad-based stock index funds. Like my father, I don’t want to sell because my cost basis is so low. But unlike my father, I don’t have to.

Andrew Small was the CFO of Archstone Partnerships from 1994 to 2019. Archstone returned its capital to its investors, leaving Andrew with more time to spend road cycling, learning to draw and paint, traveling and spending time with his family. His pet portraits and other paintings can be found at

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