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Don't Make This Fatal Investing Mistake

InvestorEducation / Learning to Invest Feb 02, 2015 - 01:33 PM GMT

By: Money_Morning

InvestorEducation

William Patalon III writes: As I wrote this for you folks last week, my part of the country was bracing for Winter Storm Juno, a blizzard that could bring wind gusts of 65 miles per hour while dumping as much as three feet of snow on some of the biggest cities in the Northeast. (We were spared its brunt, but New England could claim no such good fortune).

With the early warning systems we have today – giving us the ability to prepare – the human toll from Juno was held to a minimum.


But the proliferation of headlines made me think of another winter storm – one that took place 169 years ago…

And as an investor, it's one that clearly teaches a valuable lesson.

An American Legend and an Important Example

Unlike Juno, this storm had no name.

But it does have an identity – an infamy – because of a deadly aftermath that's made it an Old West legend.

I'm talking about the Donner Party tragedy of 1846-1847.

And I'm telling you about it today because the sort of mistakes that led to the deaths of 39 settlers – and even induced some snowbound party members to resort to cannibalism – can be just as deadly to your investments.

Let me show you what I mean. And let's start with a look at the Donner Party tragedy.

The core of the 87-member Donner Party (sometimes called the Donner-Reed Party) came from three fairly well-to-do families from Springfield, Ill. There was George Donner, his brother Jacob, and James F. Reed. Each man brought along his wife, children, and employees. And each had three Conestoga-style wagons.

Some of their neighbors were surprised by the Donner and Reed families' decisions to venture west. After all, as I said, these families were all very well off. Reed owned a mill and a furniture-making business. For his wife, Margaret, Reed had constructed and outfitted a luxurious (for the time) wagon known as the "Pioneer Palace Car." The interior was reportedly akin to a standard living room of the era.

As good as things were in Springfield, however, the Donners and Reeds wanted more, author Marian Calabro wrote in her superb 1999 book, The Perilous Journey of the Donner Party.

The ambitious and adventurous James Reed wanted to handle all U.S. government dealings with Native Americans west of the Rocky Mountains and believed that his fellow ex-soldier Abraham Lincoln (soon to become a U.S. congressman) could help with that goal.

And Reed, having tasted success from his Springfield ventures, had a sense of "now or never" in his pursuit of massive wealth.

Of course, everyone knew there was land for the taking out West – meaning the odds of becoming a land baron were exceptionally high.

The Early Pioneers Were Investors

Indeed, when you read Calabro's account, you quickly realize that, as settlers, the members of the Donner-Reed Party were actually "investors" just like you and me. In essence, they were willing to sacrifice current "consumption" in return for a bigger future payoff – and they were willing to take a calculated risk to do so.

And they really did believe their risk was a reasonable one.

U.S. Westward Expansion really took off around 1830, meaning that by the time the Donner Party embarked in 1846 the settlers' movement had been underway for nearly two decades. At the same time, however, plenty of opportunity remained. The California Gold Rush wouldn't start in earnest for another three years (in 1849, after the "strike" at Sutter's Mill the year prior).

The bottom line: There was a formula for success, of sorts, for the settlers of that time – just as there's a formula for investing success today.

That "formula" consisted of routes to travel, times to start, provisions to take, strategies to cut down the Indian threat, timetable "milestones" or checkpoints to hit, and resources to use along the way.

After two decades of westward traveling, it was the kind of "formula" that substantially boosted the odds of success.

But the Donners just didn't follow it.

Donner Miscue No. 1: Beware of the "Experts"

Hindsight, the old adage tells us, is always 20/20. And with the benefit of hindsight, the mistakes the Donner Party made are easy to spot.

And when you look at them carefully, you quickly realize that the mistakes that killed 39 members of the Donner-Reed Party are the same mistakes that kill the financial futures of so many investors.

And the Donner Party's mistakes started early.

Right at the start, in fact.

When George and Jacob Donner and James Reed started planning their westward sojourn, they consulted a brand-new book, The Emigrants' Guide to Oregon and California, which seemed to cover just about everything a settler needed to know. The book was written by a man named Lansford W. Hastings. And Hastings had an agenda. He was hoping that, by promoting a large-scale emigration of Americans to California, he could engineer a "bloodless takeover" of the state and capitalize on the opportunities that would follow. He even promoted an "alternate route," known as the "Hastings Cutoff," that would slash 350 miles from the journey.

What Hastings didn't tell folks was that he'd made a grand total of one westward journey himself.

And he'd never traveled the "shortcut" that he had outlined.

Just before the Donner-Reed Party broke off from the big wagon train they were traveling with, they came across a man named James Clyman who was traveling east. Clyman had just attempted the shortcut himself and found it to be near suicide. Clyman knew Reed – the two men and Lincoln had served together in the Black Hawk War – and warned him to stick with the charted course.

But, as Calabro relates in her historical account, "Hastings had published a book on the subject, while Clyman was a rough-and-ready mountain man." Reed trusted Hastings, a man he'd never met.

Instead of cutting 350 miles as planned, the roadbuilding and "work-arounds" added 150 miles and delayed the already-tardy party by at least an additional month. They reached the Donner Pass just as an early winter storm closed it – leaving them snowbound in the Sierra Nevada mountains during one of the worst winters on record.

The Investing Lesson: Beware of "experts," especially those you don't know. They most likely have agendas that don't jibe with your personal goals. This reminds me so much of the Wall Street crowd whose agenda is to separate you from your hard-earned money. But because they write best-selling books and appear on CNBC, investors take their word as gospel – and usually end up as the victims.

Donner Miscue No. 2: Make Time an Ally – Not an Enemy

If you read accounts of the Donner-Reed Party journey, one thing quickly becomes clear.

There was no sense of urgency.

Even in the Hastings book that the Donner group put so much faith in, the author warned that late starts and dallying along the way could be fatal.

Wrote Hastings: "Unless you pass over the mountains early in the fall, you are very liable to be detained, by impassable mountains of snow, until the next spring – or, perhaps, forever."

In spite of this ominous warning, the Donners and Reeds left late – and were, in fact, the last wagon train to leave Independence, Mo., in the spring of 1846. And even after that, they demonstrated a maddening propensity for lollygagging – stopping frequently for extended rests.

Wrote author Calabro: "If only they had stayed one less day at Truckee Meadows… or at the edge of the Humboldt Sink… or at Fort Bridger… or Weber Canyon," the tragedy could have been averted.

This lesson, too, was an eerie reminder of the errors so many investors make.

The Investing Lesson: As investors, we're told time and again that an early start is crucial. Invest early, and the benefit of compounding can turn even a modest stake into a pool of meaningful wealth. Delay, however – for the many excuses investors so easily find – and you'll never catch up. And like the Donners, you'll have to resort to a form a cannibalism – financial cannibalism – as you quickly consume the "nest egg" that would otherwise have delivered you to your destination: your retirement years.

Donner Miscue No. 3: Don't Be Indecisive

With all the mistakes the Donner/Reed group made – and we've only touched on them all here – the settlers had one final chance to escape doom at the last possible moment.

They just needed to be decisive.

The group had started its trek in mid-April 1846. As October came to a close, the party had broken up into three groups, the final two of which were trailing the first.

But escape was still possible.

As Calabro tells us, "as night fell on Oct. 31, the first group finally reached Truckee Lake, a mere quarter mile below the crucial pass that was their doorway to California. There was [already] five feet of snow on the ground, and the mountain summit was shrouded in thick clouds. Was more snow falling behind the veil of those clouds?"

Plans called for a departure at dawn. The second group had arrived. But the third group was lagging far behind, the victim of a broken wagon and a bad gash injury to George Donner.

Nov. 1 passed. So did Nov. 2. Nov. 3 brought snow – and a "wait-and-see" stance from the group's leaders.

At least one member of the party, a bachelor named Charles Stanton, advocated forced march. And the two Miwok Indians present warned that the ring around the moon was a sign of heavy snows to come.

But once again – this time with safety within sight – the team members could not "pull the trigger" and make a decision. Instead, they argued that they were worn out and needed to recuperate before resuming their trek.

It was a fateful – and fatal – decision. The night delivered a foot of new snow, making the pass impassable – and sealing the Donner-Reed Party in that mountainous cell for the rest of the long winter.

The Investing Lesson: So often, as investors, we face a decision point. Perhaps it's the need to cut loose a loser. Perhaps it's a contrarian opportunity to pick up an out-of-favor stock. Perhaps it's just the need to make a decision as simple as embarking on an actual investment program. The fact is, being decisive pays dividends – big dividends. And those who snooze… well, they lose.

The Donner Tragedy: A Final Note

Because of mishaps and bad decisions, the Donner Party spent the winter of 1846-1847 snowbound in the Sierra Nevadas. The journey usually took five to six months. But the Donner group left in April and became snowbound about seven months after it set out. Sickness, injury, and starvation took many. And cannibalism was a reality.

Relief folks from California tried several times to reach the settlers. But the first rescuers didn't actually reach the group until mid-February 1847 – about four months after they were trapped by early snows.

Take some time to heed the lessons that are clear here.

Those lessons will make you money, will help you avoid miscues – and will keep you and your money safe.

Accomplish that last point, and the odds are strong that you'll also build wealth.

Source :http://moneymorning.com/2015/02/02/dont-make-this-fatal-investment-mistake/

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