For those investors who’ve been living under a rock for the past 13 months, please welcome your new neighbours: Slater & Gordon Limited (ASX: SGH) and Shine Corporate Ltd (ASX: SHJ).

Source: Google Finance

Source: Google Finance

Over the past 12 months, shares of both law firms have hit rock bottom.

For Slater & Gordon, once Australia’s largest law firm and the world’s first ever to list on a stock exchange, it’s been a case (pun intended) of questionable accounting, a disastrous acquisition and an ASIC probe.

Shine, on the other hand, was brought down by similar accounting issues and acquisitions.

Both companies appear to have some similarities. Their corporate culture, incentives and growth models seem to have culminated in burgeoning ‘Work In Progress’ ‘assets’ on their balance sheets which may — or may not — ever stand a reasonable chance of being realised. You can read more on that here.

Lessons learned

I was once a Slater & Gordon and Shine Corporate shareholder. In fact, I did pretty well from my holdings. My family weren’t so lucky, mind you. I still hold a tiny amount of Slater & Gordon shares as a memento.

I was lucky because I bought my law firm shares in their early ASX days before shareholders were forced to pay the Work-in-Progress Pied Piper. My family, however, bought their Slater & Gordon shares much later, on February 27 2015, at $7.48. By dollar value, it’s been the worst investment I’ve made bar none.

So what have I learned from this very costly mistake? Here are perhaps four of my most valuable lessons learned from the Shine and Slater & Gordon fiascos:

  1. Avoid low-value-adding business models. I’ve discussed this before, but it’s always important to step back and ask, “Is this business really adding value by using its current growth strategy?” Retrospectively, at a higher level, both law firms employed growth models which were fraught with risk and would appear to be built on balance sheets made of glass.
  2. Take accounting policies with a pinch of salt. An auditor can only assess financial statements with respect to the laws and accounting policies that govern their presentation. I naively believed the estimates of the law firm’s work in progress accounts to be a fair representation of their potential billings. With shareholders in both law firms being burnt by the accounting policies, it may be time for a review from regulators.
  3. Heed the advice of others. I was told to be critical of companies carrying ‘work in progress’ as assets on their balance sheets by an investor who is of superior skill to myself, Tony Hansen. I should have heeded his advice.

Foolish takeaway

In my opinion, successfully investing in the sharemarket requires continuous learning, against a set of sound long-term investment principles. Fortunately, while it was certainly a costly mistake, both my family’s and my personal portfolio fared well over the past 13 months in spite of the Shine and Slater & Gordon investments.

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Motley Fool writer/analyst Owen Raszkiewicz owns shares of Slater & Gordon. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.