Remember the Potentiometer!

During college, my friends and I figured out how to get rich. We were going to purchase assets at 50 cents on the dollar and then sell them for $1. We attended auctions to bid on items like office furniture and filing cabinets at discounted prices. The challenge, however, was everybody else in the room was doing the same thing.

At our first, and last, auction we bought potentiometers, a product I had never heard of before in my life. What is a potentiometer? It’s an instrument for measuring electromotive forces also known as a voltage divider.[1] In addition to not knowing what they were no one else was bidding on them – a bad sign for sure. We bought something no one wanted, and we had no idea what it did.  The boxes and packaging did look cool, though. To be fair to my partners, it was my idea to make the purchase.

We visited several electronic shops, but we couldn’t find any takers. It was clear we were going to lose money on our new venture. The investment was minimal but the knowledge I gained from the ordeal was invaluable.

I learned several business and life lessons from the potentiometer. “Remember the potentiometer” became a rallying cry.

The first thing I learned was to only buy things I understood. If I couldn’t explain it to others, then I had no business in buying it for myself.  A simple solution often works best.

Don’t try to get rich quick. We were looking to make a quick hit, with minimal work. The fastest way to lose money is to try to make it quickly. Get rich quick scams are built on hype and weak foundations. Rather, it’s better to build your wealth slowly, over time, based on solid investment principles.

Price and value are two different things. As Warren Buffett said, “Price is what you pay, value is what you get.” Price is relative, of course, but it shouldn’t be the primary focus when making investment decisions. Value is a better indicator. For example, the price of Berkshire Hathaway is $282,724 per share. On the surface it appears expensive, but it offers a better value than a company like Coffee Holding priced at $4.27. At the auction, we passed on higher priced items because we thought we could make more money from the lower priced ones. The rolling tool cabinets were priced high, but they were selling well.

Cut your losses quickly. We invested cash and then tried to recoup our cost by selling them at higher prices. We spent hours driving around San Diego visiting stores to try and sell our goods. After a few meetings I realized they weren’t going to sell, but we forged on any way. We should’ve thrown them a way and then focused our efforts to make better purchases. Instead, we channeled our energy on more ways to sell our losing inventory.

Learn from your mistakes. If you’re stuck in a losing investment, cut your losses and move on. It would be nice to make money on every trade, but this isn’t possible. If you invest in several securities, you’ll experience losses. Once sold, spend time on reviewing your trade to try and find clues as to why it didn’t work out and then try not to repeat the same mistake again.

As my career progressed, I’ve often thought about the potentiometer purchase. You probably have your own losing investment story so rather than worry about the money lost focus on the knowledge gained.

“It’s pretty easy to get well-to-do slowly. But it’s not easy to get rich quick.” ~ Warren Buffett

June 7, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk.

[1] Merriam-Webster Dictionary