Monday, February 12, 2007

Red Flags, Green Flags Follow-up: Woulda, Coulda, Shoulda

Yesterday, I wrote an article about how dealing with publicly traded companies as a consumer can sometimes send up red flags [negatives] or green flags [positives], which can be an indicator of what may happen to the stock price. I described the green flags I saw over twenty years ago, relating to Franklin Resources (BEN), the management company of the Franklin mutual funds. The green flags I saw were such strong indicators, that I invested about $1500 during the early 1980’s in the stock; it was all I had available to invest at the time. At the time, the stock was trading at about $7 per share, or 21 cents on a split adjusted basis. The stock now trades above $120 per share.

I did make a very good return on my investment in a relatively short period of time. However, several months after buying the stock, I decided to invest in real estate by buying a rental house. I was enamored with the tax benefits and the leverage of real estate. And needed to sell Franklin along with a few other stocks in order to cover the closing costs. When I sold the Franklin stock, I did make a nice profit. However, if I hadn’t sold the stock, I would now have almost $900,000 in just that one stock.

Oh well, at least I had the pleasure of dealing with one broken window repair, one and a half evictions, two pump-outs of a septic tank, three sets of paint jobs, numerous calls to plumbers, scrambling to pay off a large balloon payment, and much, much more. I did sell the property a couple years ago at the top of the real estate market, but even then, the price I got for it wasn’t anywhere near the $900,000 I could have had from holding on to the Franklin stock.

The moral to the story is don’t just go into an investment for the tax benefits, and don’t go into an investment just for the leverage. Woulda, coulda, shoulda.

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