The Mistakes Made in Value Investing By The BigWigs and Ourselves

[AzCactus]

Over the past couple of weekends I have decided to try to think and learn through the mistakes that some highly regarded value investors have made.  I began with Sears where you had Lampert and Berkowitz who have held onto this declining business for years.  I then moved onto Zinc where you had Guy and Mohnish speak of how this business was going to do ok even if the price of Zinc dropped.  Moving along we saw Mecham get into Outerwall amid a change in consumers' preference for streaming rather than going to Redbox.  Lastly, we have Valeant which took with it a host of well renowned value investors (Brave Warrior, Sequoia, Pershing, Valueact, etc) who bought into this roll up than got into a host of issues. 

 

The point I am making here is what can we learn and how can we prevent the mistake from happening.  My thought regarding retail is that generally it is not a good business.  You have exceptions but I would imagine its pretty tough to have a moat in that space.  Secondly, if you get involved in a business that is commodity related its better to look for a business that is under (or not) leveraged, well managed and can ride out the roller coaster.  Thirdly, when you see an obvious change happening its better to not go with the has been.  In terms of Outerwall it may turn out not to be a total loss and certainly is not down 90% from highs like the other names but between Netflix and other streaming services---it falls into Buffett's an ounce of prevention is worth a point of cure.  With Valeant my takeaway is the importance of looking for managers who are both humble in how they communicate and conservative in what they communicate.  I don't know Pearson at all; my hunch though is that he wanted to grow too much too fast.

 

Any and all additional thoughts appreciated. 

 

David

[muscleman]

Thank you for starting this thread.

The mistakes I made:

1. Foray into the Oil and gas industry. I lost money on SD and ATPG. It is really hard to value this sector. Better to avoid.

2. SHLD. I bought merely because Lampert and Berkowitz bought. Later I realized well if the EBITDA is negative, then the situation is really serious. Then I sold in a short squeeze and fortunately didn't lose money.

3. Chinese reverse merger frauds in 2011. I lost quite a bit of money there. I didn't listen when there were so many obvious signs of wrong doing.

4. BBRY. I didn't lose money here but I felt like this is a serious mistake to buy. Could still be controversial to members here. I bought early last year and then thought, well, the business is declining faster than I expected. I thought their passport phone and a few others will be a killer but that didn't happen. I shouldn't have bought in the first place.

5. Municipal bonds in Puerto Rico. I bought a medium sized position of Highway bonds in 2014 summer at 36-39 cents. I significantly underestimated the will to protect pensions. I might come out without losing money but I got my capital stuck in this illiquid situation for over a year now.

 

I think the biggest mistakes I made are blindly following super investors into various situations. It is obvious that even the best and brightest sometimes make mistakes that's so obvious.

 

Nowadays I only stick to one type of investment: Asset light companies with fundamentals vastly improving. This principal applies to both growth stocks and turnaround stocks.

Screw deep value. Screw bargains based on asset valuation.  :(

 

 

I think it will also be helpful to talk about traps that I avoided. I apologize if the following made anyone here feel offensed.

1. VRX. Financials made no sense to me. When the stock was $150, EV/EBITDA = 20x. Why would I buy something so expensive?

2. MBI. I compared MBI with AGO in 2011-2013. AGO is obviously better. At least it is making money. Most people on the board weren't interested in AGO but a lot of them interested in MBI. Why? Merely because Berkowitz and a few other supers own MBI. That's not rational.

3. Eurobank. A few people got burned on this name last year. When I compare Eurobank with Bank of Cyprus. BoC is clearly the winner. Vastly improving Macro in Cyprus vs Hell in Greece. Similar valuations. Why did people buy Eurobank? Merely because Prem Watsa + Wilbur Ross were into it.

 

 

I think herd behaviors can be observed on the value investing community as well. Momo "investors" herd into FANG stocks while value investors herd into BBRY, MBI, Eurobank and VRX. It is very important to avoid herd like behaviors. 

[mcliu]

I invested in Valeant after the Philidor scandal and my big take away is to do your own research and not blindly copy other investors, no matter how good of a track record they have.

[Palantir]

I think one big mistake is this tendency to invest in poorly returning stocks. Good example is BRK.B. Even the bulls on BRK say they expect a 8-9% return, which is a really anemic bull case IMO. Could say the same things about IBM or KO. I think to actively invest, you really need to be setting your sights a lot higher.

[argonaut]

I invested in CHK in mid-2012 as a turn around on my own research...figuring it was worth a min of $35/share + ...saw is get to $31 and was holding for a few more $ :(...should have sold most... got out of a chunk as the oil prices dropped but still held onto rest...

 

Probably should have taken a cue from Buffet when they existed the oil stocks e.g XOM and gotten completely out of CHK then...somehow also learn to recognize that a major trend is in place and not just a temp drop.

[CalvinL]

biggest mistakes I made are blindly following super investors into various situations. It is obvious that even the best and brightest sometimes make mistakes that's so obvious.

 

I made the same mistake as well - following a few famous value investors into XCO and torstar without fully understanding the risk behind it all. I also observed a herd like tendency within the value investing community.

 

I used to jump on 13F, especially when I saw other value investors buying into the companies I am familiar with. That's a terrible bias as I later learned.

 

Lesson - do my own homework, think hard, and listen to myself.

[Graham Osborn]

My biggest mistakes for 2015-2016 were:

 

1. Buying oil stocks when Brent was well extended off support during summer, then initially averaging down.

 

2. Buying <10M microcaps when I already felt we were going into a recession and liquidity would dry up.  In other words, buying without a 10-20 year holding period and then having to liquidate at a discount.  Major misunderstanding of my own personal goals/ tolerances as an investor.

 

3. Buying a 2x leveraged position in BNO this year.  Some people are great active traders but I am not one of them.

 

4. Buying put options on various levered stocks that are both OTM and with 2017 expiries.  I should have bought mostly 2018s from the start.

 

I don't think I've made any mistakes specifically from copying someone else's exact trade.  But there were general principles I used totally out of context.  Warren's "50% a year easy in microcaps." Burry's bets on the last recession.  PTJ's active trading approach.  I don't think the mistakes were so much copying bad strategies as copying strategies that didn't fit the times or my personality.

 

Good luck.

[plato1976]

I think for most of the ppl (95%+), the best way to do investment is to indexing (DCA)

 

My biggest mistakes for 2015-2016 were:

 

1. Buying oil stocks when Brent was well extended off support during summer, then initially averaging down.

 

2. Buying <10M microcaps when I already felt we were going into a recession and liquidity would dry up.  In other words, buying without a 10-20 year holding period and then having to liquidate at a discount.  Major misunderstanding of my own personal goals/ tolerances as an investor.

 

3. Buying a 2x leveraged position in BNO this year.  Some people are great active traders but I am not one of them.

 

4. Buying put options on various levered stocks that are both OTM and with 2017 expiries.  I should have bought mostly 2018s from the start.

 

I don't think I've made any mistakes specifically from copying someone else's exact trade.  But there were general principles I used totally out of context.  Warren's "50% a year easy in microcaps." Burry's bets on the last recession.  PTJ's active trading approach.  I don't think the mistakes were so much copying bad strategies as copying strategies that didn't fit the times or my personality.

 

Good luck.

[StevieV]

I think one big mistake is this tendency to invest in poorly returning stocks. Good example is BRK.B. Even the bulls on BRK say they expect a 8-9% return, which is a really anemic bull case IMO. Could say the same things about IBM or KO. I think to actively invest, you really need to be setting your sights a lot higher.

 

(1) Because 8-9% is too low for the effort; OR (2) 8-9% is too low to compensate for mistakes?  That is, the 9% bull case can't compensate for a mistake elsewhere so you'll end up lower?

[rpadebet]

Wow, where do I begin...

 

I will probably wait until everyone is done and just summarize... I think I have committed most of the above sins.

 

I just was lucky to avoid the oil and gas names because I felt lazy to study up and try to bring that industry into my "circle of competence".

 

I keep telling myself not to invest in anything but a simple layup, but keep getting attracted to complex(intelligent sounding?) situations. Need to keep working on this.

[Jurgis]

Biggest past mistake: not buying-and-holding BRK 20 years ago and playing golf since then instead of sitting on investment boards.  8)

Biggest current mistake: not switching to index and playing golf... To be determined though. ;)

 

Random list from memory:

- Oil & gas recently. Still to be determined, but likely to be a mistake. One of the reasons: great returns on oil & gas when I bought 2008-2009. So assuming that 2014-2015 will be like 2008-2009 was "fighting the last war" mistake.

- Chinese reverse mergers. I think I got out at a wash mostly but I had some big losses - and some big gains - which is one of the reasons for big losses.

- I mostly did not "blindly follow super investors into various situations". Most of the recent "follow super investors " ideas on CoBF made no sense to me, so I did not buy. However, instead I bought a bunch of overvalued super investor companies: PSH, FRMO. Might still work out, but looks pretty bad so far.

- General issue with a lot of my investments: not enough DD and not enough second level insight. (See comment about switching to index). Part of the excuse for these: yeah, things were way easier in 1990's/2000's. Or at least it seemed that way. ;)

- BTW, mistakes of omission always seem to be great companies that I bought and sold way too early. But I guess that's also a bias of selective memory: you don't remember much so-so companies where you sold and missed maybe 20-30% of gain - even though if you miss these couple times a year, your return is 20-30% lower. But you always remember that you bought GOOG, AAPL in 200Y and missed on the X-bagger. Even though both might be equally bad to your long term returns.

- To emphasize the above: unless you are very concentrated and/or hold-forever, your returns may die not from big mistakes (i.e. you expect company to do well and it BKs), but from paper cuts where you miss the 20-30% extra in so so positions. This is especially the case for Graham/net-net investors - possibly not many people on this board, but I see it elsewhere where people still do shorter term mediocre company investing.

- It's tough to remember those so-so company shorter-term investment 20-30% mistakes... Even looking at past trades it's tough to evaluate if you really missed those extra returns or if you sold at the right price/moment...

- OK, apart from GOOG, AAPL, BRK, the big mistake of both omission and commission: bought GILD, then GILD acquired HepC startup for X billion - I decided that this was a waste of shareholders' money and promptly sold GILD. Result: missing that 4x-5x bagger.

 

 

[Palantir]

I think one big mistake is this tendency to invest in poorly returning stocks. Good example is BRK.B. Even the bulls on BRK say they expect a 8-9% return, which is a really anemic bull case IMO. Could say the same things about IBM or KO. I think to actively invest, you really need to be setting your sights a lot higher.

 

(1) Because 8-9% is too low for the effort; OR (2) 8-9% is too low to compensate for mistakes?  That is, the 9% bull case can't compensate for a mistake elsewhere so you'll end up lower?

 

I was thinking the former, but I think you bring up a good point with the latter.

[Guest longinvestor]

I think one big mistake is this tendency to invest in poorly returning stocks. Good example is BRK.B. Even the bulls on BRK say they expect a 8-9% return, which is a really anemic bull case IMO. Could say the same things about IBM or KO. I think to actively invest, you really need to be setting your sights a lot higher.

 

(1) Because 8-9% is too low for the effort; OR (2) 8-9% is too low to compensate for mistakes?  That is, the 9% bull case can't compensate for a mistake elsewhere so you'll end up lower?

 

What's the effort?

[woltac]

My biggest mistake of 2015 was failing to follow Ericopoly's advice to hedge my long position in BAC calls.  I was lulled by past success into thinking that hedging the position was unnecessary and would only reduce my returns.  To add to my blunder, I also did not heed his advice to exchange my 2016 calls into 2017 calls when they became available.  This one was just pure laziness on my part as I fully intended to do so.  Following either recommendation would have saved me from a loss.   

[Mephistopheles]

I think one big mistake is this tendency to invest in poorly returning stocks. Good example is BRK.B. Even the bulls on BRK say they expect a 8-9% return, which is a really anemic bull case IMO. Could say the same things about IBM or KO. I think to actively invest, you really need to be setting your sights a lot higher.

 

(1) Because 8-9% is too low for the effort; OR (2) 8-9% is too low to compensate for mistakes?  That is, the 9% bull case can't compensate for a mistake elsewhere so you'll end up lower?

 

What's the effort?

 

+1

 

The only research I do on Berkshire is read the annual letter, watch Buffett's interviews, and read the transcript of the annual meeting. A lot can be learned from that for investing outside of Berkshire, so it's almost zero effort made to invest in the stock for me. And it's also very pleasurable effort, the little that there is.

 

So, no brain damage. I'll gladly take the 9%

[JBTC]

Great thread, thanks.

 

My mistakes are too numerous and tedious to list.

 

One kind of mistake is when I make analytical errors. I think something will happen, but the opposite happens. To me these are honest mistakes. To be able to not make them tomorrow, I have to make them today, so I can reflect and learn. I will be forever making them, but hopefully less.

 

Another kind of mistake is I pretend to know something when I don't. This is where the gurus sometimes come in and trap me. I look at a potential investment, which looks appealing although I am not sure. But I will invest anyway because some gurus have it. Of course it's never the gurus' fault. It's 100% my own.

 

To ensure I only invest in something I think I understand, increasingly I feel my job is not to expand my circle of competence, but to narrow it. To know everything is just impossible.

 

[rpadebet]

Great thread, thanks.

 

My mistakes are too numerous and tedious to list.

 

One kind of mistake is when I make analytical errors. I think something will happen, but the opposite happens. To me these are honest mistakes. To be able to not make them tomorrow, I have to make them today, so I can reflect and learn. I will be forever making them, but hopefully less.

 

Another kind of mistake is I pretend to know something when I don't. This is where the gurus sometimes come in and trap me. I look at a potential investment, which looks appealing although I am not sure. But I will invest anyway because some gurus have it. Of course it's never the gurus' fault. It's 100% my own.

 

To ensure I only invest in something I think I understand, increasingly I feel my job is not to expand my circle of competence, but to narrow it. To know everything is just impossible.

 

+1

 

But it is enjoyable to try and expand the circle no?

[Palantir]

I think one big mistake is this tendency to invest in poorly returning stocks. Good example is BRK.B. Even the bulls on BRK say they expect a 8-9% return, which is a really anemic bull case IMO. Could say the same things about IBM or KO. I think to actively invest, you really need to be setting your sights a lot higher.

 

(1) Because 8-9% is too low for the effort; OR (2) 8-9% is too low to compensate for mistakes?  That is, the 9% bull case can't compensate for a mistake elsewhere so you'll end up lower?

 

What's the effort?

 

I don't know what StevieV means regarding effort, (he could mean the effort of actively managing money), but the point is that 8-9% is a mediocre rate of return to target for an investment.

 

[JBTC]

Great thread, thanks.

 

My mistakes are too numerous and tedious to list.

 

One kind of mistake is when I make analytical errors. I think something will happen, but the opposite happens. To me these are honest mistakes. To be able to not make them tomorrow, I have to make them today, so I can reflect and learn. I will be forever making them, but hopefully less.

 

Another kind of mistake is I pretend to know something when I don't. This is where the gurus sometimes come in and trap me. I look at a potential investment, which looks appealing although I am not sure. But I will invest anyway because some gurus have it. Of course it's never the gurus' fault. It's 100% my own.

 

To ensure I only invest in something I think I understand, increasingly I feel my job is not to expand my circle of competence, but to narrow it. To know everything is just impossible.

 

+1

 

But it is enjoyable to try and expand the circle no?

 

It is. But I feel I have to do it in a very methodical way, to build on what I am already familiar with. Because knowing a little can be as dangerous as helpful.

 

Enjoyment is important. So is progress. For me at least progress requires me to slow down and focus.

 

So when I read about a manager who asserts his advantage is to invest globally looking over 10,000 stocks and questions why restricting yourself to large cap or developed markets or certain sectors, I can only say "wow".

 

[thefatbaboon]

It's probably worth saying that a mistake is not the same as an investment that ends up losing money. Just as we all agree that a venture that made money doesn't automatically mean it was a good investment. 

 

Furthermore, don't  we need to be careful not to create a hindsight-based certainty around our analysis of mistakes? For example, even in the case of the much loved Berkshire Hathaway. Couldn't we all make an amazing "what a mistake" analysis if for some reason it plummeted tomorrow?  Buffets getting old. The PCP buy was a bad sign. I knew nothing about their black box reinsurance. I had a far too big position. Almost none of his common stock investments of the last two decades have done well. Etc etc.

 

So what is a mistake?  It's not simply losing money. I have lost money in situations that I don't think were or are mistakes. I have even profited from what I think are mistakes where I've just gotten lucky. It's not merely lists of various risks and shortcomings. All investments have risks and shortcomings. And I do think it completely possible for a non-mistake investment to be a right off.

 

Personally I'm not sure exactly what is a mistake.  I have certain notions and emotions that surface to indicate one. But I'm not sure I can give a sound objective definition.

 

My best guess at defining a mistake is: ending up in a position that one doesn't want to be in as a result of my acting of data where I either knew better or should have known better.

 

There is never so much conviction and confidence On this board than  in postmorteming an idea. But I'm not sure it's merited.

 

Take two examples currently doing the rounds: outerwall and valeant. I think everyone knew a lot of what are now being held up as "signs of the mistake". We knew that valeant was aggressive (hyper acquisitive), immoral (ackman/allerga front running & price gouging), expensive, leveraged, speculative (addyi). We knew what meecham is now talking about that outerwall had very questionable capital allocation (Eco anyone???). So what do we gain trotting these platitudes out now as if they categorically make these investments mistakes?  I mean every non-idiot investor knew all this very well. None of it was secret.  So is the board implying that a mistake is when one acts contrary to facts that were obvious?

 

I shall give my personal view here for what it is worth.

Valeant

I don't like investing in healthcare becaus I don't like reading about fungus and those bizarre unpronounceable names. Also I don't like high priced roll ups unless I have some love for the operator and some basic feeling for the industry.  Valeant failed on both these so I never bothered. But the reasons I did not go in are quite idiosyncratic. for someone else maybe valeant is an opportunity that has just gotten much cheaper?

 

Outerwall

I am long and  somewhat down in outerwall. Furhermore I added recently. I'm really not at all sure I agree that this is a mistake just because it is down NOR because the decline dvd rate unfolded faster than I expected NOR because I have had to reduce my estimate of IV.  I mean life and investing are uncertain.  I have done analysis at all stages and remain of the view that I bought at substantial margins of safety. I just don't know the future perfectly and I have had to make various reductions to my estimates of IV.  I don't think outerwall is/was a mistake.

 

Sandridge

I was long a small position and i think it is a total loss. I regretted it almost immediately. And instead of selling at a loss I kept holding out for a slightly better price. I have disliked every moment of owning it. But I think that again my reasons are idiosyncratic. I don't enjoy owning assets that live in holes in the ground and are valued by commodity markets. But every now and again, thankfully very rarely, I succumb to a small stupidity where I forget this. But perhaps for someone else these holes in the ground are opportunities?  Of course they must size and act accepting their inability to predict energy prices. But with that said there must be some guys happy to write off their old equity as the facts change and take positions in secured or unsecured or in a better company or whatever.  But for me I definitely think sandridge was a clear mistake.

 

 

 

[TheAiGuy]

So, I'm pretty conservative with my stock picks and haven't been doing this that long (few years), so I don't have any big blowups. My biggest mistakes are:

 

1) Bond funds -- I'll try to be conservative, keep some money in a nice, safe diversified instrument but I always %$@^ing loose money I'm investing in something I don't understand and buy/sell at the wrong time.

 

2) Not going longer in late 2012 / early 2013 after it was clear there was not going to be another recession.

 

and the little things 3) rushing into a stock too quickly relative to its price, and then not being able to increase in size (sufficiently) if it goes down 4) not selling a stock that has risen to a price that I think is rich 5) buying something b/c I've done a lot of work on it

[KCLarkin]

the point is that 8-9% is a mediocre rate of return to target for an investment.

 

BRK and KO are "equity bonds" and should be compared to bonds. Not speculative stocks.

 

Most investors should not expect returns higher than 9% with current interest rates.

[Palantir]

the point is that 8-9% is a mediocre rate of return to target for an investment.

 

BRK and KO are "equity bonds" and should be compared to bonds. Not speculative stocks.

 

Most investors should not expect returns higher than 9% with current interest rates.

 

Are you/other investors here running insurance firms?

[Jurgis]

Are you/other investors here running insurance firms?

 

Are you guaranteeing a return over 8-9% with your picks?

 

Edit: this discussion should be moved to BRK section though.

[Graham Osborn]

I think for most of the ppl (95%+), the best way to do investment is to indexing (DCA)

 

I won't argue with that.  I think DCA is a great way to diversify across different states of mind - it's a good "emotion repellant."