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I admit I made a mistake.


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For some lessons, we have to learn them the hard way like learning riding a bicycle. We can't learn to ride a bicycle by listening to others. We have to actually ride it and fall a couple times to learn how to ride it.

 

During the last two years, I made many covered calls trades in 2013, and 2014 aided by margin loan. The returns were very good at 40% and 30% respectively.(Mainly because of bull market phase) I thought that's the way to get really rich in a short time. I got over confidence and lost control of position sizing and became too overweight in some positions.  At the peak, Michael KORS made up 60% of my current asset and 26% of my net worth.. It started to cause some pain in May, 2015. Taking out emotions and greed, Michale Kors is not the highest quality stock in my portfolio. I know it. It's not a buy and forget stock. but I wanted to recover the lost so I averaged down too much. It's not a predictable stock although it has a very good chance of bouncing back. I am just not sure. So I sold all remaining positions today. I decided to get rid of Michael Kors also because I have a ethical investing rule. I don't invest in stocks directly involve in weapons, alcoholics, tobaccos, animal products etc.  Michael Kors's main product is leather goods which I should avoid if I follow my logic but greed and emotion come in play. I was lured by Michael Kors' strong balance sheet, fat profit margin and ROE.  I rarely sell low and this is a rare time I admit I made a mistake. It cost me around 10% loss of portfolio this year.  There are some other big positions which I sold in July which prevent more losses.

 

Retrospectively, covered call is not worth doing. The small premium it produced and lots of paperwork it involves are not worth it.  Often times, the stock rises far above the strike price and I ended up earning less. In the face of severe market drop like in recent months, the call premium becomes worthless and a much lower strike price have to sell to earn a couple %  premium then there's a chance of selling below cost!  The small premium gives a false sense of safety which encourage over sized positions. I rather buy dividend paying quality stocks and nibble a little bit at a time and  ride out the wave.

 

The catalyst of my awakening is interesting.

 

On July 18, and 19th, I participated a Buddhist repentance service called "Compassionate Samadhi Water Repentance" which we repent bad actions we did in the past originated from mind, words and actions.. At one point of the service, there's the mention of repenting our greed, I realized how greedy I became in investing and starting losing my sight.  I realized I don't have to get rich quick and I don't have to use margin loan.And I can still do well financially that I can still drive a car, have a nice house to live in and retire early.  So I dramatically reduced margin borrowing in July, sold half of Michael Kors  in July.  I kept 50%  thinking there's a good chance it'll rebound because of the ridiculously low valuation. The Michael Kors mistake cost me 1 year of time of increasing my net worth delaying 1 year for me to pay off my mortgage. Similar to what Lululemon experienced, I still think Kors has a good chance of rebounding in a few years but I don't want to own it anymore.  The reason of my gotting rid of it is not because of its future prospect but because of my positions exposture, removing margin loan, refocusing on dividend stocks, and also ethical investing. Also my parents' health is deteriorating. I have responsibilities to take care of them.

 

From now on, I'll focus on paying down mortgage, dividend paying stocks, dividend growth, a bit of REIT and a large position in short term bond.  Most of my holdings are already dividend paying stocks. I just need to control their position sizing. I'll keep 50% stock and 50% bond until I reduce my mortgage to about $30000, 5 years from now while still keeping some stock positions.  Right now it's at $90000.  I was planning to move to a bigger house in xyz years. Now I am content to live at the same 160k house(Now worth 180k) for a long time! The mortgage is small. Heating cost, property tax is low. It's easy to keep it clean.  I am trying my best to practice minimalism.  That's why I don't need to use margin.. I can do well without leverage at all.  I can still achieve 10% to 15% return on the stock positions.  I know what quality stocks are but sometimes I lose focus and have to refocus. They are the stocks that can be bought and forget. Also I know should avoid resources stocks but sometimes I forget this rule.

 

 

I don't like working for someone else. I don't like annual performance review and being asked what goals I have for the job next year when the company didn't even change much after 35 years that it still didn't diversify and still rely on government orders. (P.S. any one watched:"Office Space"? Office job is killing my soul.)  I don't like having a mortgage. I don't like it at renewal time when they ask you: do you still work at this company full time etc.  I hope at next renewal time, I'll say: yes but part time.  Working part time without a mortgage a great way to have more time to live a more meaningful life.

 

Today, I sold second 50% of Michael Kors positions and nibbled some Canadian REIT ,banks and Alaris Royalty Corp. . From now on, I try my best to control myself not to buy early so my cure is to nibble positions. Positions sizing is important.Being wrong on big positions is very painful.

 

 

 

 

 

 

 

 

 

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Thanks Cloud,

 

Oh, the mistakes I have made investing.  I wouldn't even know where to start.  A few:

 

1) Selling puts - on anything

2) Buying calls on the Montreal exchange

3) buying blackberry days before it started to crash, and buying it on the way down - got out just below the price FFh started buying.  Selling puts on RIM as well, and having to buy them out.

4) SFK/fbk

5) Buying Caribou Natural resources because it looked cheap and the CEO bought it up to the day in bankrupted - nothing to do with oil prices. 

6) Income trusts

7) probably two dozen others. 

 

Fortunately my successes outweigh my goofups by a large margin, somehow.

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+1

 

I have made so many and some so embarrassing, I wouldn't want to be sharing them here. :). To top it off it was during the 2008-09 downturn.

 

It affected me so much, I couldn't take advantage of the bargains. I questioned my investment philosophy ( turns out it wasn't much), read a lot of books and slowly stumbled my way to value investing framework. I am just getting started as each day I find there is so much more to investing intelligently.

 

 

So don't be too hard on yourself. As long as you learn... Mission accomplished

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Thanks Cloud,

 

Oh, the mistakes I have made investing.  I wouldn't even know where to start.  A few:

 

1) Selling puts - on anything

2) Buying calls on the Montreal exchange

3) buying blackberry days before it started to crash, and buying it on the way down - got out just below the price FFh started buying.  Selling puts on RIM as well, and having to buy them out.

4) SFK/fbk

5) Buying Caribou Natural resources because it looked cheap and the CEO bought it up to the day in bankrupted - nothing to do with oil prices. 

6) Income trusts

7) probably two dozen others. 

 

Fortunately my successes outweigh my goofups by a large margin, somehow.

 

Cash secured put I hope? Better wait for price to come down. They come down more often than we thought. Today is just a beginning. I have a feeling a recession/huge bear market is coming.(china slowdown+Greece debt+market correction causing wealth effect) I find the best way to park cash while waiting for bargain is to buy laddered bond ETF.  I split between CLF.TO (Laddered government) and CBO.TO ( Laddered corporate). Right now, I don't mind parking lots of cash. I can always use it to pay down the mortgage as I feel like it. Prepayment is capped at 17k per year.

 

To me, buying calls is like gambling.  The loss is 100% if wrong. Professional option traders say otherwise.

 

Blackberry:  I was being patriotic and bought a Playbook as a support. They failed me.  My thought was that their only hope was to switch the OS to android. Or they'll be squeezed to a corner.

 

You never know how low resources price can come down and when they'll go back up.  Predictability is the number 1 thing in investing.

 

That's the good thing about mistakes.  As long as we don't make huge one, minor mistakes are good for us to improve in the long term.

I always remember Charlie's saying: I don't want to go back to GO.  Even I took unnecessary risk, it's calculated risk and I paid the price for it: lost 10% of portfolio. It's little bit painful because my portfolio got a lot bigger in recent years.  No more... Equal weight portfolio is the way to go.  My DIY RBC equal weight CAD portfolio is only down -6.5% YTD as of Aug 24,2015 (100% stock).

 

 

 

 

 

 

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+1

 

I have made so many and some so embarrassing, I wouldn't want to be sharing them here. :). To top it off it was during the 2008-09 downturn.

 

It affected me so much, I couldn't take advantage of the bargains. I questioned my investment philosophy ( turns out it wasn't much), read a lot of books and slowly stumbled my way to value investing framework. I am just getting started as each day I find there is so much more to investing intelligently.

 

 

So don't be too hard on yourself. As long as you learn... Mission accomplished

Just keep learning and thinking, we can get better and better as time goes on.

If I am not hard on myself, I am afraid I'll repeat the same mistake next time.  ;D

 

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Position sizing and not stretching for profits via either lesser quality or leverage are two really useful money  management skills. These two almost wiped me out 3 times in my life. Or the proper combination of assets. I.e. leverage and unstable, volatile small-mid caps don't mix! At least I learned to time the financing to the type of asset better.

Good luck on your future career, looks like you got things figured out. I'd also add that writing a plan on paper or keeping a journal are really useful and then to review it each month or quarter to see if you violated the plan or rules.

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I don't think selling covered calls or puts is a bad idea, but I think it's like anything else: wait for the price to come to you.

 

I generally wait until there's been some market volatility (like today) to sell options. If the stock pops 8-9% in a day for seemingly no real change in underlying fundamentals, I sell a 1-2 month option on it to capture the inflated volatility premium and to have quick theta decomp. I normally do this at strike prices 10-20% above the current price with the intent of making 1+% of contract notional per month of exposure.

 

I do the same thing with puts, but demand juicier premiums to earn a higher return on my cash and to compensate for the downside risk.

 

You don't have rolling options positions, but you'll be selling options when it is most advantageous for you to do so. Sure, I've missed upside on some individual positions by doing this, but I've also managed to increase the yield on my entire energy portfolio by about 6% annualized by selling select options on select positions at select times. It's actually quite lucrative in volatile times like this.

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My biggest mistake is on position sizing. I've frequently gone over 20% in a single stock and although I haven't lost money because of it I now think it's far too risky, given how many companies I've invested in didn't turn out exactly as I expected. Luckily these were smaller positions, but I realised I don't know enough to have that much confidence in a stock so I diversify far more now.

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I don't think selling covered calls or puts is a bad idea, but I think it's like anything else: wait for the price to come to you.

 

I generally wait until there's been some market volatility (like today) to sell options. If the stock pops 8-9% in a day for seemingly no real change in underlying fundamentals, I sell a 1-2 month option on it to capture the inflated volatility premium and to have quick theta decomp. I normally do this at strike prices 10-20% above the current price with the intent of making 1+% of contract notional per month of exposure.

 

I do the same thing with puts, but demand juicier premiums to earn a higher return on my cash and to compensate for the downside risk.

 

You don't have rolling options positions, but you'll be selling options when it is most advantageous for you to do so. Sure, I've missed upside on some individual positions by doing this, but I've also managed to increase the yield on my entire energy portfolio by about 6% annualized by selling select options on select positions at select times. It's actually quite lucrative in volatile times like this.

 

I also utilize options similarly with the same experience. Early yesterday morning I wrote puts  that expire Aug 28. A 1.5% return for 5 days, if I don't buy them back today.

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This thread mostly looks like a case study in hindsight bias.

 

How would you distinguish a real mistake from a hindsight bias? :)

When I see a lot of risky stuff that didn't work out I'm going for the bias option. Perhaps it was still a mistake, but probably for a different reason than "it didn't work out". SpecOps only post that is the exception IMHO.

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So to summarize: you had a leveraged account, averaged KORS down until it was 60% of your portfolio and sold your stake after seeing the light thanks to Buddha. Now you open a topic at the worst market day since 2008 stating that you sold all your position because:

 

Today is just a beginning. I have a feeling a recession/huge bear market is coming.(china slowdown+Greece debt+market correction causing wealth effect)

 

Value investing at its best .. Based on this topic you are probably best off moving your assets to a savings account.

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This thread mostly looks like a case study in hindsight bias.

 

How would you distinguish a real mistake from a hindsight bias? :)

When I see a lot of risky stuff that didn't work out I'm going for the bias option. Perhaps it was still a mistake, but probably for a different reason than "it didn't work out". SpecOps only post that is the exception IMHO.

 

Who are you to assess what a person considers to be a mistake?  Why dont you share something of your own rather than being an ongoing critic. 

 

I dont write puts any longer because they have never worked out, so writing puts for me would be and was a mistake.  My bad bet on RIM was a mistake caused by hometown bias... I didn't realize how much Apple or Android had infiltrated the world. 

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Hmm, OK. :)

 

I'd look at it the following way.

There are 3 different issues that may happen with investment:

1. Your process is flawed.

2. Your process is OK, but you deviate from it.

3. Your process is OK, but there's never 100% success rate and you get one of the failures.

 

When I see someone saying "hindsight bias" about this thread, it seems that they are implying that #3 occurred but people think #1 happened (or vice versa?)

 

In general, #2 should be easy to detect and avoid - but it isn't because of below.

 

Distinguishing #3 and #1 is difficult for various reasons. People are not sure about their process. People don't have a precise definition about their process.

Because of the same reasons, people deviate from the process without noticing it (#2) or notice it and rationalize it (still #2).

 

Probably only #2 is a "mistake". #1 is a poor choice of process - although it perhaps could be called mistake with a stretch.

#3 is not a mistake - it's an inevitable result of investing in unpredictable world.

 

Going back to cloud (not picking on him personally, but just for illustration) - here's my analysis. Others might see it differently though, I don't claim I see the truth.

He had a process. He deviated from the process by bad position sizing (#2). Then #3 occurred - KORS started dropping. He deviated from the process even more (#2 again). Now he thinks that his process was bad (#1) and he abandoned it. In reality his process may have been good (although I cannot say for sure), but he got sucked in by #2 and #3.

 

Looking at myself (so we don't pick just on cloud ;)), I usually succumb to #2 (deviation from process), because I am not sure if my process is good (i.e. I am not sure if I'm in #1) and because some opportunities look very attractive even though they don't conform to the process (that's still #2!).

 

Take care

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Everyone makes mistakes. I've made tons myself. Its all good if Its just a learning experience.

 

Some of my mistakes were

1. Buying Kmart in bankruptcy because I thought the assets were valuable. (This was when I first started investing)

2. Selling Naspers early

3. Selling WMB early (bought it when Buffett bought the bonds)

4. Selling Costco early

5. Not selling CHK when it skyrocketed (got out a little higher than I bought it).

6. Diworsification. I used to hold 15-20 stocks. Now I have maybe 3-7.

7. Following Buffett into USG blindly because I got it 40% lower than him without understanding the company.

8. Not buying Google at the IPO (I thought Microsoft adding search into the OS could mess up GOOG's stranglehold on search).

9. Not selling LUK at $50 when they used stock to get a stake in JEF.

10. I suck at options I've tried and its obvious to me that I am terrible with them.

 

I think ill stop.

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Hmm, OK. :)

 

I'd look at it the following way.

There are 3 different issues that may happen with investment:

1. Your process is flawed.

2. Your process is OK, but you deviate from it.

3. Your process is OK, but there's never 100% success rate and you get one of the failures.

 

When I see someone saying "hindsight bias" about this thread, it seems that they are implying that #3 occurred but people think #1 happened (or vice versa?)

 

In general, #2 should be easy to detect and avoid - but it isn't because of below.

 

Distinguishing #3 and #1 is difficult for various reasons. People are not sure about their process. People don't have a precise definition about their process.

Because of the same reasons, people deviate from the process without noticing it (#2) or notice it and rationalize it (still #2).

 

Probably only #2 is a "mistake". #1 is a poor choice of process - although it perhaps could be called mistake with a stretch.

#3 is not a mistake - it's an inevitable result of investing in unpredictable world.

 

Going back to cloud (not picking on him personally, but just for illustration) - here's my analysis. Others might see it differently though, I don't claim I see the truth.

He had a process. He deviated from the process by bad position sizing (#2). Then #3 occurred - KORS started dropping. He deviated from the process even more (#2 again). Now he thinks that his process was bad (#1) and he abandoned it. In reality his process may have been good (although I cannot say for sure), but he got sucked in by #2 and #3.

 

Looking at myself (so we don't pick just on cloud ;)), I usually succumb to #2 (deviation from process), because I am not sure if my process is good (i.e. I am not sure if I'm in #1) and because some opportunities look very attractive even though they don't conform to the process (that's still #2!).

 

Take care

 

Interesting.. and complicated analysis. and pretty accurate. Yep. My NEW process is bad in some way.  In this case, it probably has 70% chance of working out in the end but I want to sleep better at night and have less worries.  It's extremely mentally painful to see half year's saving evaporates in just 1 month with some uncertainty of recovering it and the time it takes. so I am going back to the old one.  :)

 

 

I take mistakes as something bad that we can avoided in the first place but were not mindful enough to avoid them.

 

It's partly due to deviation from what I was doing and partly due to trying out new ideas.

I started investing with carefully weighted positions. I avoided having positions more than 10% of portfolio.  One day, I learned about options and learned how to sell covered calls. I got much bolder thinking now I have covered call as protection. And I can have bigger positions. I said in first post that little premium can not protect a 30% or 40% drop if the position is so big that not enough new funding can add to the positions to bring down average cost. 

 

I learned about concentrate investing from other famous investors like Charlie Munger which he went through lots of pain in partnership years by concentrate investing. There  are others like John Keynes  who practiced concentrate investing. To what degree, I don't know.  Then there's another mad man George Soros. He said famously: It's not whether you are right or wrong but how much you win when you are right and how much you lose when you are wrong. I averaged down Kors too quickly. I wasn't patient enough. My average cost with Kors is $52. If I stick with it, I have a good chance of breaking even or earn a satisfactory return few years from now but I decided to get rid of it. I am giving up the new idea about options and going back to equal weight as best as I can.  So in Kors case, I was wrong in the timing and positions size and I lost a lot.  When I used equal weight and nibbled positions, I made good profit while still able to sleep at night. I nibbled XRE.TO REIT little bite at a time during the scary time in 2009.(At that time I had no debt, no mortgage. )  I bought all the way to its bottom and had no sweat.  I sold slowly all the way up and made good profit.

I had mortgage since 2010, it makes me hesitate when I make investment decisions, so I want to get it out of the equation and there's one less thing to worry about. I'll aggressively cut down its size in the next 5 years.

 

Kor's mistake is not devastating. It cuts 75% out of my 2014 return. So my 2014 return is 7% instead of 30%.  Overall compounded annual return since started as a newbie in 2007 is ~10%/year.  I did not go back to GO. I am happy so far.

 

 

 

 

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So to summarize: you had a leveraged account, averaged KORS down until it was 60% of your portfolio and sold your stake after seeing the light thanks to Buddha. Now you open a topic at the worst market day since 2008 stating that you sold all your position because:

 

Today is just a beginning. I have a feeling a recession/huge bear market is coming.(china slowdown+Greece debt+market correction causing wealth effect)

 

Value investing at its best .. Based on this topic you are probably best off moving your assets to a savings account.

 

Among other reasons, the main reason of raising cash is to pay down the mortgage. I have 50% bond currently, prepared for paying down mortgage over the next 5 years. I'll prepay 17k this year. The result is that I'll pay off the mortgage in only 10 years.

Right now I have 20 stocks of  high quality. If I have extra cash laying around plus the dividend received once a while,  I still nibble existing positions if they go down more than 10% from last price paid.

KORS is at good valuation and it has strong competitive advantage. i started a thread last month to encourage others to buy.  I got rid of it for many reasons not because of its fundamental.

 

 

 

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I strongly believe oversizing positions (due to concentrated investing or leverage) is a bad idea for most investors. Few have the emotional requirements and skill needed to succeed at it. You need to have conviction when positions move against you and more importantly you need to be right. If you have the conviction and you're wrong, that's when you lose big. Mistakes will be made, it's inevitable. The important thing is to survive them and learn from them, and putting huge chunks of money in a small number of stocks is a good way to blow up. This was my biggest mistake personally. I got lucky and was able to exit at a profit but it was a harrowing ride with huge unrealized losses in the interim. It could've easily ended with those losses realized. Never doing that again (hopefully).

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It's really tough to admit mistakes, but I appreciate when people share because it always provides some food for thought on how to do better.

 

Big Ones From 2014-2015:

 

-taking a spec risk in an small cap E+P company with significant "asset value" , about 8 months before the bottom fell out of oil, took a 30% loss. My lesson from this one is that estimating commodity prices needs to be in the too hard pile for me, anything where the asset value rests on commodity prices belongs there as well.

 

-overestimating the moat around WTW, took a 20% loss before selling. Seemed compelling from a valuation perspective. But after thinking it through some more, and trying out some of the competing software which is quite good, realized that I made a big mistake about the viability of the business model.

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I'm in the middle of dealing with rookie mistakes as well, and not sleeping as well as I'd like.

Mostly I've overdone the put selling, using margin: I've had some success with it in the past year, selling when volatility was higher (including with stocks that tanked then got back up - so it was not all due to the bull market), so I let it go to my head and I sold too many...

 

I've come very close to a margin call; I've actually had to empty my main savings account and to preemptively sell some stock that I liked. My realized loss is very small at this point ; my unrealized losses are very high (in part due to sold puts rising, in part due to the recent drop ; plus 1 E&P position lost 60% over recent months) but I'm mostly comfortable with them, since my conviction holds (to some degree - I know moments of doubt, of course).

I'll be fine if the market doesn't go much lower, but it'll be painful if it does before some puts expire/I can unwind some of those positions.

Oh well, I also take this as a learning experience.

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