Estella : Business and Finance

I have been very fortunate in my investment career to the point I only work part time now.  I originally invested in The Gap (GPS) way back in the late 1970’s.  I have had numerous other home runs since including IBM (first invested in 1993), Dollar General (prior to the time it went private) and within the last couple of years The Buckle, ZAGG and 8×8(EGHT) to name a few.  I have taken my share of risk and had well more than my share of rewards.  But Advanced Battery Technologies became a lesson in what not to do when investing.   Whether true or not a number of anonymous articles were written that destroyed shareholder value.    The facts are management at Advanced Battery Technologies decided to defend its position in a court of law as a defendant instead of the one that has decided its fate….the court of public opinion. 

There are two facts that I am certain of when it comes to Advanced Battery Technologies.  One is that it is a real company.  Two is that now I’m not sure how much of Advanced Battery’s financials are fabricated and how much is real.   Common sense suggests that if someone accuses me of committing a securities crime, if I’m innocent, I would vigorously dispute those allegations by filing a lawsuit or filing a complaint with the S.E.C.  against those who spewed those malicious lies.   Silence, other than one rebuttal by Advanced Battery Technologies and their press release stating the truth will come up in court, was not golden.

I am a victim of my own naiveté.  This was not the first time either.   Throughout my life I have always wanted to see the best in everyone.  I have trusted and verified to the best of my ability, but my emotions have sometimes gotten the better of me.    The lesson I learned unfortunately again in Advanced Battery Technologies was similar to one I thought I learned back in the 1990’s.  I had a friend that had started a business with no capital, going thru a bankruptcy and divorce at the same time and was a recovering alcoholic in a 12-step program.   He asked if he could borrow some money needed to buy furniture for his new office and office equipment.  I lent him the money at 5% above prime.  He came back and asked for more that was lent at exactly at my cost.    For the first 1 ½ years I worked gratis part time for this individual keeping his accounting records.    I also took out a credit card for him to use where he charged thousands of dollars monthly to fund the business and purchase necessary inventory.    The credit card was always paid in full.   In my mind my friend had a history of being a successful sales person, but was seriously lacking on the business side…my strong suit.   The majority of my decision to help my friend was based on this was someone I really liked and wanted to help in anyway.  Additionally, if the business succeeded I would come on full time working with one of my best friends.    Clearly my business sense was dominated by my emotions for this friend as it made no sense for me to risk so much without having a major equity position in the business.    Additionally, there were 2 audits after the first 3 years of my friend starting his business that could have shut it down.  One involved sales tax (California Board of Equalization) with the other whether his contracted sales personnel were employees or independent contractors (California Employment Development Department).  For the sales tax audit this individual could have gone to jail as he pulled numbers out of thin air in filing the returns.   I at least had enough common sense to not put my name on the quarterly filings as there was no paper trail backing up sales.   The sales tax audit was finally resolved and no criminal charges filed.  My friend then made the mistake of hiring an individual through an employment agency.    The individual was fired and filed suit with the labor board.  The judge ruled the fired individual was an employee and entitled to unemployment benefits.     Simultaneously and not coincidentally, the EDD was performing an audit of three years showing over $5 million dollars paid to contractors.   I wrote the EDD office in Sacramento and was able to overturn the hearing judge’s initial ruling.  In either of the two cases, my friend could have gone to jail and/or paid a couple hundred thousand in employment taxes when the capital did not exist for the payback.   The business went on to become very profitable.   In 1998 this individual netted $2 million bottom line.  In 2000, with the internet bubble, my friend’s business started losing $60,000 per month as 50% of the business, prior to the implosion, was internet startups.   At that point my friend had a childhood friend buy 50% of the company for $1 million.  Later in 2000 we had a falling out and I was literally ‘shown the door’ by my so-called friend.    I knew that the problems affecting this business were not going to go away in the short term and my position was expendable.   But the one thing that gnawed at me was despite everything I did for this individual, during our conversations after I was terminated, he never thanked me for everything when he was down on his luck.   Not too many people would have done what I did for this individual when he had so many serious problems.   The potential financial loss I subjected myself to, plus all the time I put in gratis and then at a minimal hourly wage, in my mind at least deserved a thank you especially after it was clear we were parting ways.   Because of this lack of gratitude, a year later I made a small financial investment in a competitor’s business.  The key management decision maker at this company failed to listen to any of the business advice I gave him based on my prior experience.  This among other things led to the business eventually going under.   The point of this long dissertation is that emotions sometimes rule our common sense and that bad financial decisions are made when we choose to see people as we want them to be instead of how they really are.    My true friends were with me after this parting with this so called friend and to this day.    Two lessons I learned in this case should have prevented me from making them with Advanced Battery Technologies.    One lesson is that there are people out there who could care less about anyone other than themselves and will say or doing anything to put more money in their pockets.   The second one is it serves no point trying to get back at those people.  You just need to move on.

The first mistake I made in Advanced Battery Technologies was not questioning financials that looked too good to be true (i.e. if it’s too good to be true…it usually is).   Knowing the history of Chinese accounting practices and the potential for fraud, I thought I found a great growth story with numbers to back it up.  The second lesson was compounding my first mistake by acquiring a few more shares after the anonymous cyber attacks.   I still refused to question the honesty of management at Advanced Battery Technologies.    I’m thankful though that I had enough sense to invest only a minimal amount of money in ABAT.     I’m down to 1,000 shares that I will keep as a reminder that for this one investment where I had the wool pulled over my eyes….by myself.      

My name is Steven Borovay.  I’m a CFP® with over 32 years experience.  Hopefully this time I learn from my mistake and prevent you from making a similar one.

March 19th, 2011 | Posted in Business Online

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March 18th, 2011 | Posted in Business Online

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