My Dumbest Trade

[ubuy2wron]

It seems that one of the common attributes of great investors is learning from their mistakes. One of the common mistakes that value investors generally make is buy just because something is cheap and to sell often too soon just because it is not cheap any more. In the early 90's I was fortunate to purchase shares in a hot new IPO, JDS Fitel a Cdn co. which made lasers ,pumps etc which allowed users of their products to send more and more signals over a fibre optic cable. I understood something about the internet even though I did not own a computer and had never logged on directly to anything.  To make a long story short after holding the stock for a period of approximately 18 months I sold and made a 300% profit.  My selling rational was simply valuation JDS mkt price had appreciated so much in such as short period of time. I made a 30,000 profit on my 15000 investment.  JDS later merged with a company called Univase Tech now called JDS Univase and at peak bubble pricing the investment I sold was worth approximately 6,000,000. So there is my candidate for worst trade ever ....I can be quite proud of being best at being worst.

[twacowfca]

Not so dumb from a value perspective.  I nearly pulled the trigger on AOL in the early to mid 90's.  Regretably, I passed because I didn't like the way they recognized revenue.  Then saw it rise 20 fold.  In retrospect that was the better choice for one who calls himself a value investor, regardless of Mr Market's manic phase.  :)

[Smazz]

I was going to buy Apple in the later part of the 90s.

 

Even if I had I would not have owned it to this day - thats just me.

[biaggio]

You guys are too hard on yourself. Those examples don t sound like mistakes to me. Hindsight is always 20/20.

 

I would be too embarassed + there would be too many to describe. My mistakes usually

involve either buying before I have  done my full work up (I am going to try a check list, as described in other posts to prevent this) and/or buying something that I think I understand but really don t.

 

They are dumb trades(the ones I have done, not yours) because I know better, but I did it anyways.(probably because I let the emotion of greed or fear get the better of me)

 

 

 

 

[ragnarisapirate]

Buying W Holding Company at close to the peak of the real estate bubble. Just about completely impaired that capital allocation by not understanding the bank, Puerto Rico, or the significance of the housing crisis.

 

Is still kick myself over that.

[Guest broxburnboy]

I can contribute 2 dumbest trades... in which I was a real chemist.. I turned money into sh*t...both cases went to zero.

1. Bought Global Crossing at the midpoint of the tech bust on the way down.. on the belief that CIBC, who had recently sunk hundreds of millions of bucks into it, couldn't be wrong.

Lesson: due your own due diligence and don't piggy back someone else. Don't buy any stock for any reason whatever if you don't want to end up

holding it forever. Don't be a greedhead smart alec..the streets are lined with their corpses.

2. Did it again 2 years ago with Nortel preferred shares on the belief that canadian gov't wouldn't let it go down. Same lessons.. didn't take the first time.

[Guest valueInv]

It seems that one of the common attributes of great investors is learning from their mistakes. One of the common mistakes that value investors generally make is buy just because something is cheap and to sell often too soon just because it is not cheap any more. In the early 90's I was fortunate to purchase shares in a hot new IPO, JDS Fitel a Cdn co. which made lasers ,pumps etc which allowed users of their products to send more and more signals over a fibre optic cable. I understood something about the internet even though I did not own a computer and had never logged on directly to anything.  To make a long story short after holding the stock for a period of approximately 18 months I sold and made a 300% profit.  My selling rational was simply valuation JDS mkt price had appreciated so much in such as short period of time. I made a 30,000 profit on my 15000 investment.  JDS later merged with a company called Univase Tech now called JDS Univase and at peak bubble pricing the investment I sold was worth approximately 6,000,000. So there is my candidate for worst trade ever ....I can be quite proud of being best at being worst.

Well. consider yourself lucky you don't still own it. I do.  :'(

[ubuy2wron]

As a foot note I did re buy JDSU, after the tech bubble burst it traded down to the point where it was close to a net net and I bought it for the second time and sold it 6 months later for a decent profit.

[smw397]

I passed on FLIR in 2003 and 2004 - even though I was impressed enough with the company that I bought one of their products.  Their numbers looked great but I made the assumption that too much of their revenue was dependent on Homeland Security and military orders and that those would not be sustainable.  Oops.

[stahleyp]

I bought Sears around $140. From the calculations, I figured the real estate was worth about $150. Add in their brands and the capital allocations skills of Lampert...and I thought there was some opportunity. I was wrong. I now follow Buffett's quote of "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

 

I also sold Marvel around $9...then it shot up to $30+. I still made a decent profit on that one.

[mmiller]

This is a bit long but i think it is an interesting case study.  As a note... At that time the stock was about $14.  It made its way to over $24 at one point this year!

 

A Fastball Down the Middle

 

Mr. Buffett is famous for the phrase, “The stock market is a no-called-strike game.  You don’t have to swing at everything – you can wait for your pitch.”  As you probably know, this is a philosophy to which we wholeheartedly subscribe.  Though we’ve never tracked the statistic, a very small percentage of the companies we look at actually make it into the portfolio.  Our ratio of swings to no-swings is quite low.  And yet, those circumstances in which we fail to swing at a fastball down the middle hold tremendous value.  A strike might not have been called, but sometimes a better, money-making decision could have been made.  Mr. Buffett refers to these occasions as errors of omission.  In this letter we will examine one such case.

 

In the fall of last year we began to examine the story of Kirkland’s, Inc., a home decor retailer with mall and off-mall stores mainly in the South and Southeast.  We were introduced to the company in a write-up on valueinvestorsclub.com in late October.  The overall retail environment, especially for home goods, was at the time very challenging and while we were under no illusions that the retailing of home goods was or is a great business, there were several signals that something was wrong with the price at which Kirkland’s traded in the market. 

 

The items of note which attracted us to the thesis were:

 

 

 Valuation

 Recent significant insider purchases

 Strong same-store sales

 Improving margins

 Strong upcoming cash flows

 

 

Valuation is what gets us most interested in an idea, and there were reasons to believe the market price of Kirkland’s stock did not accurately represent the value of the company.  At $2 per share, the market cap of the company was approximately $40 million.  Given that the end of the fourth quarter represents the peak in cash flow generation, we believed that there was going to be significant amounts of net cash on the balance sheet, well over $20 million, at the end of their fiscal year.  It might not have been appropriate to subtract all the cash to arrive at an enterprise value, as the company historically used equity to support part of its peak working capital needs, but suffice it to say there was going to be excess cash on the company’s balance sheet at the end of the year.  Having demonstrated its ability to cut costs, deliver better margins and grow same-store sales, we believed there was a reasonable probability that the company would generate perhaps $10 million in operating income for the year ended in January 2009.  We further believed that the company would continue to demonstrate strong year-over-year increases in income going into calendar year 2009.  For all those prospects we could have paid something less than three times current-year estimated operating income.

 

Ultimately, the decision we made was that the difficulty in the home goods retailing market and nature of the business overshadowed the likely low valuation and any of the other positive factors listed above.  The improper weighting of those variables led to a poor decision.  We did not swing.  The business has progressed nicely, even a bit better than we had initially contemplated.  The company ended its fiscal year with over $35 million in cash, having generated more than $11 million in operating income and the strong performance has continued as the company generated approximately $25 million in operating income in the twelve months ended August 1st, 2009.  At the time of this writing the stock is quoted at nearly $14 per share, or approximately seven times its price of less than a year ago when we first became interested.  Not swinging at Kirkland’s, a fastball down the middle, was clearly an error of omission.

 

There were two crucial mistakes made.  The first was not putting enough weight on two key variables: the significant insider purchases and the same-store sales.  In early September 2008, members of senior management and the board purchased nearly 20% of the company’s shares from a private equity group, Advent International.  Included in the purchasing group was one of the company’s founders, Carl Kirkland, who purchased 3.5 million shares at just under $2 per share.  To not grasp the overriding importance of these purchases was a crucial mistake.  We also did not put a high enough weight on the fact that the company was delivering strong same-store sales in a very difficult environment.  In each of the three quarters ended on November 1, 2008, same-store sales were positive.  In the retail climate that existed at the time, that was quite unique.  Our second mistake was not contemplating a reduced level of portfolio allocation to compensate for the difficult climate and nature of the business.  Little thought was given to making Kirkland’s a 5% position in the portfolio instead of our more typical 10%.

 

No umpire called a strike when we decided not to make an investment in Kirkland’s last fall, though if there had been such an imaginary figure sitting over our shoulders, he would have done just that.  And so given that there are no real umpires, we must play the role of the imaginary umpire ourselves.  We must examine those pitches that we let go by, as we do those pitches at which we swing.  For though we firmly believe that errors of commission are significantly more detrimental to our progress—and significantly more difficult to recover from given the math involved—than errors of omission, we analyze with equal vigor both types of mistakes in our quest to improve our decision-making process. 

 

One additional note: Kirkland’s serves as a rather remarkable example of an error of omission, but the truth is that mistakes will not always be revealed when reviewing past at bats which resulted in a pass.  That is true even if the stock subsequently rises as significantly as did Kirkland’s.  The key for us is to understand our decision-making process and improve it when needed, not to naively look to the market to tell us where we went wrong.

 

[Uccmal]

Good topic;

My 'Learning experiences' are too numerous to mention.  A couple of the doozies where I repeated the mistake involved taking 'buy and hold' too literally.  I have learned to exit positions when things deteriorate or show no improvement.  In my first few years of investing I held some dogs way too long just hoping.  Now, I keep an eye on each holding and if things get worse at the company or show no signs of improving I take my tax loss and move on.  A few times I have bought back later - there is no harm in that since I already know something about the situation.  

 

When something I buy goes up in value quickly and significantly, for no tangible reason I will get rid of it too.  Experience has shown me that they will round trip more often than not.  If I have strong reason to believe that the story is improving I will stay in it - i.e. fbk.  

 

Nowadays, I only buy companies that have been around awhile and have a history that is promising.  I got stung on numerous alt energy plays a few years ago, and regular energy plays, and have a dead technology horse in my RRSP that has a share value of less than 0.01.  To sell it would cost me the brokerage fee with no tax break.  

 

One of my bigger weaknesses is buying too soon, before I know the full story.  Counteracting this I have learned to get rid of things before too much damage is done.  In the process my circle of competence is constantly growing and the choice of stocks is constantly declining.

 

 

[beerbaron]

Before, I knew anything about Value Investing I bought some Nortel stocks because it went from 120$ to 65$... I tough it was cheap if it lost 50% of the previous high. This lesson was painfull, it took me 8 years to spike my interest for investing again, this time I learned the valuation tools first. Why didn't anybody tell me to do this 18 years ago when I started investing!

 

Another painful mistake was Miranda Technology, a small Video Equipment manufacturer. I looked at the past results and the year before they made 20M in net income and was trading around 56M. Stock shot up without any reasons and I did not sell... anchored to the buy and hold strategy. Did not lose any money on this one but learnt 2 things. You can't only look at the rear view mirror (20M previous profit) and take your profits if you don't understand why a stock went up.

 

BeerBaron

[DCG]

Probably the worst 'trade' I ever made was buying AMD several years back at around $45. I sold it a few years later at under $5. I obviously held it way longer than I should have, hoping it would come back.

 

I bought a pretty big (for me) position in GE at around $30. Scaled out of it on the way down and sold completely out of it at around $16.40.

 

The third really bad trade I made was buying ABK (Ambac) a few years ago. Started a relatively large position in it, and woke up the next morning to find it down 30%. That trade really changed my investment style. I remember worrying that night about the stock, and it kept me up that night. I now only buy shares of companies that won't keep me up at night.

 

I've fortunately made enough good investments to more than make up for these mistakes. Other than these, probably the things I feel were the biggest mistakes were stocks I was close to buying that I didn't buy, only to see them increase by several hundred percent.

[Mikenhe]

Lehman Bros.

 

That was a painful lesson in a few ways – firstly I bought it because it was a broker recommendation. I figured that they knew more about the market than I did – well as a collective they probably do but on individual stocks I can do my own value judgment.

 

However I did look into it and thought that regardless of the market the banks and brokers always make money and I figured that worse case would be a small loss.

 

 

Then I discovered that my own tendencies for procrastination cost me dearly. The shares went up and I was up in that position for quite a while and failed to sell because the increase in price proved that the broker, and my limited research and thoughts, were correct. I failed to take a profit in a business I didn’t fully believe in.

 

When things turned sour I also thought that there was no way that a company that size and of that importance would be allowed to go under (dumb in the extreme as I have worked for a large company in the past that wasn’t able to get the backing that it should have and it too went under).

 

Finally – and to rub salt in the wounds – I bought Lehmans when FFH was trading at just over $100 a share. The money I used to purchase Lehmans was money I was going to put into FFH. I did buy FFH but not as much as I should have.

 

Lessons learned.

Be aware of your failings – mine is procrastination.

Do your research and re do it. Act on it (or not as the case may be)

Don’t rely on the advice of your mass market broker.

 

The good news was that I took the lessons on board (mostly) and began directing my a large part of my 401K just after Lehmans went under and so far its worked out pretty good. I haven’t made huge amounts of money but I have tended to avoid my funds falling in value when the market has gone down and have generally matched the increase in line with the market rising.

 

[UhuruPeak]

Quote from Broxburnboy on other thread, my response is more applicable to this one

Quote from: broxburnboy on Today at 05:39:31 AM

I made all my rookie market failures when I was young and resilient.. did the churning, the gambling with options, the follow the herd and paid the price early

 

Same here; my initial investment in the stock market (a number of years ago) went to $0.00; yup, I lost it all, over the course of a few months:

- started at the wrong time (Feb/March 2000, please don't laugh)

- invested in the wrong area (small High Tech, please don't laugh)

- didn't listen to my inner beliefs: though trained and wired to do fundamental analysis, I focused on mo-mo and used Technical Analysis but didn't even trust what I read in the charts and invested long anyway. Fwiw, I actually would have been able to make money in TA if only I had used a proper structure and didn't override my understanding of the charts constantly; I remain convinced it is possible to make money w/ TA, I'm just not strong enough to do it consistently

- when I started losing too much, I used options

- when I started losing too much, I used very short-dated options that would swing 30 or 50% a day, trying to both time the market and do quick intra-day round trips (please don't laugh)

- at some point the trading fees finished me off and brought my account to just a few bucks, until I gave up and let the inactivity fees complete the wipe out

- somewhere at some broker, I may still have an account, I don't even bother checking this, lol!

 

Just like many on this board though, I licked my wounds and learned my lessons.  For one, I stopped all "investing" for a few years and read everything I could find instead. My first stock was BRK, I found a couple of good investing boards, kept learning... I am happy to report that I've been doing better since then  Cheesy

[Myth465]

You guys are lucky. I am still making my rookie mistakes  :).

 

I am curious though, and wonder what it was like to be in the market in the late 80s - the 90s. Must have been nice.

[Uccmal]

 

The third really bad trade I made was buying ABK (Ambac) a few years ago. Started a relatively large position in it, and woke up the next morning to find it down 30%. That trade really changed my investment style. I remember worrying that night about the stock, and it kept me up that night. I now only buy shares of companies that won't keep me up at night.

 

That is hilarious... I bought a junior O&G in  Canada about 3 years ago.  The numbers looked alright.  The CEO had been buying shares for weeks to the day I bought.  The day after I bought, the company announced it couldn't pay the bills anymore. I got out losing about 90% in two days.  The company was totally bankrupt in days and the CEO went down with the ship.  Unlike the incompetent CEO I had only a starter position.

 

So I amended Peter Lynch's rule about insider buying to include a few other reasons such as the management is stupid and doesn't actually have any idea what is going on or the management may be drunk, on drugs, or have mental health issues, or be otherwise delusional.

[stahleyp]

You guys are lucky. I am still making my rookie mistakes  :).

 

I am curious though, and wonder what it was like to be in the market in the late 80s - the 90s. Must have been nice.

 

Yeah, man. I can only imagine. I think the market went up almost 19% a year from beginning of 1980 through the end of 1999. Amazing.

[bookie71]

My dumbest trade is one I let a broker talk me out of buying 10 shares of BRK (now A) in my profit sharing plan.  Actually it probably made me more $ over the years as I use stock brokers as contrarian indicators.  It always amazes me that they only recommend at the high and very seldom at the low.

[UhuruPeak]

You guys are lucky. I am still making my rookie mistakes  :).

"rookie" mistakes probably never completely stop. You know, starting at the top is actually a great thing since you get to make your biggest mistakes before you have too much to lose.  I consider that $$ lost 10yrs ago a pretty decent investment overall; learning the same thing now would cost me significantly more.

 

Besides... it looks to me like you're not doing that bad yourself anyway ;)

[Myth465]

Thanks for the comment. This year has been great, I have to keep that Munger quote in mind though.

 

If you’re a duck on a pond, and it’s rising due to a downpour, you start going up in the world. But you think it’s you, not the pond.”

 

Interesting times, it seems that every other day brings some new crisis or piece of great news. Mr. Market is really a manic depressive kinda guy.

[ubuy2wron]

You guys are lucky. I am still making my rookie mistakes  :).

 

I am curious though, and wonder what it was like to be in the market in the late 80s - the 90s. Must have been nice.

 

Its always  been tough, the future was just as opaque  then as it is now. You might want to pull up a stock chart around October 1987 if you think it was all beer and skittles . ;D I try not to repeat the same mistakes but I sure am imaginative in making up new ones and the mistakes I make now cost me more money cuz the pile is higher. Its never easy and remember history is always written by the winners never the losers .

[UhuruPeak]

I try not to repeat the same mistakes but I sure am imaginative in making up new ones

 

Nice!  :D

[Uccmal]

I try not to repeat the same mistakes but I sure am imaginative in making up new ones

 

Nice!  :D

 

That about sizes it up.