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My dumbest investment was ----


cheapguy
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I liked similar thread on TMF.

 

We can learn a lot from our own mistakes and sometimes others mistakes.

 

Let us learn from each other's mistakes and collectively become better investors.

 

So here I go:

1. Buy the company stock where I am working, and making it a huge portion of the portfolio and not diversifying.

    (of course not understanding the moat of the company).

 

    Familiarity or working at the place, makes you beleive you know what is going on.

    Falling in love with the company's culture, or work environment and extra polating that to a good investment.

 

2. Not selling when some stocks are ridiculously valued, because of the tax angle.

    The unwillingness to pay Uncle sam, was so great that i went to  the extent of keeping riduculously valued stocks by doing some stupid mind games.

 

    After the bust, i did not need to worry about paying taxes as there are no gains anyway.

    (now i got tax losses on paper, so it helps my taxes..perverse logic for my mind to justify my stupidity)

 

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My biggest investment mistake is not firing a broker who had no understanding of value investing...

 

I second the tax avoidance mistake (vs. letting the merits of the underlying investment characteristics drive my decision making).

 

 

 

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My greatest mistake was not reading the Intelligent Investor that was in my dad's study at 19.  Buffett read it I didn't and our results showed.  Now if I had read it and the introduction by you know who, my family might, just might have invested in BRK way back when.

 

This however is more bad luck than a mistake per se.

 

The following is not my greatest mistake, but one that I will remember all too well:

 

Whoops bonds, were bonds issued by a nuclear utility, Washington Public Power System(WPPS).  As I remember there were 5 types of bonds  1,2,3,4,5.  Each bond was associated with a specific group of projects/power plants. The riskiest, with the greatest upside were #4 and 5.  So that is where I bought.  Of course Buffett,being wiser and smarter bought the safer bonds, I think the 1's  which I think doubled. From memory the 1,2, and 3's were probable trading at 25 on the dollar the 4, and 5 were at .12 or so.

WEB's safer bonds had Bonneville backing and one of the power plants was built.  Mine had neither. I exited the position, licking my wounds and I think the ultimate recovery was .10 on the 4's.

 

I learned the lesson: Remember to only shoot fish in a drained barrel.

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When I was younger, I'd have a tendency to rush through tests in school for no other reason other than to see how quickly I could finish.  More often than not I would get the test back and there would be some really, really dumb mistake on it - and it obviously cost me on my grade.  Finally when I got to college, it dawned on me that I should take all of the allotted time to go through the test, and review all answers, before turning in my test.  Unsurprisingly, my results improved.

 

My biggest mistake in investing has been not adopting this philosophy of waiting until I am ready, waiting until I've reviewed my answers sufficiently and develop a trust in them, before taking action.  Plus, unlike a high school math test, with investing you have the benefit of never being timed!

 

When I first became aware of the idea of buying a security for less than intrinsic value, it was very appealing.  But what I needed to learn was the patience to develop an understanding of intrinsic value for a security, and then to recheck my evaluation.

 

Still working on it...

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More experience would have given me better insight into the nature of the bust-boom cycle, even if every situation only "rhymes" with the ones before. On the individual stock front, not realizing that every new investment should be carefully compared against every other investment owned or possibly considered with an eye not only for maximum gain but also for optimal safety in protecting *existing* wealth, not only in creating new wealth.

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My dumbest investment was ... blowing it all on my first relationship with my ex-gf.

Moved out together, put a down payment for a house, bought a car, furniture ... the lot ... and then it didn't work out and we broke up.

 

Could have bought stocks.

Glad I didn't get married.

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Related to Cheap Guy

Long time ago I moved from a competitor to a 'darling' company, & bought its stock. Peer pressure, knew the company, etc. - but unlike everyone else I also held puts on its major competitor. Every time my coy did a new issue & drove up the market, I rolled the puts up & out.

Reality caught up & many of my co-workers became either deep underwater, or near bankruptcy in some cases. After curious questioning, & in sympathy, I quietly let it emerge that I had the puts & they were deep in the money. In hind sight it was about the worst mistake that I could have ever made, & eventually I had to leave the company.

 

Lesson?

We're all going to learn new/clever techniques that will save our financial ass, but which most of the general population will not know. Hopefully we'll get rich relative to everyone else because of it. Stay humble & don't tell anyone about it!

 

SD

 

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Currently is believing equity (economic power of holding equity) will have a reasonably high rate of return over the next few years.  Over the past 25 yrs the changes have been very friendly to shareholder (privatization (including less gov't competition in markets), the marginal buyer of equity (the "new" rich with incomes between $200k and $1M per year) had declining tax burdens thus more $ to invest, less centrally planned economic intervention (allowing capital to move from certain overvalued sectors to undervalued ones without interference, stopping subsidies of uneconomic activities and removing of dependicia policies), steady labor costs (the majority of gains of productivity going to equity versus labor) and a declining interest rate/inflation environment).  Almost all of these actions are now in reverse compounded with higher gov't spending.  There will be pocket of value as there always has been.  However, once gov'ts start mucking with the real market (versus the highly regulated finance markets - banks, brokers, etc.) to make things fair, capital runs for the hills.  This happened in the 1930's and did not return until the 1950's.  I think we are a critical milestone at which we need to decide whether capital friendly measures will prevail or will gov't determined fairness will carry the day.  If the former holds true the market will recover if the later we may be in for 10 - 20 yrs of flat to no growth for the market as whole as the capital strike intensifies.

 

Packer   

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Listening to a broker, when I made my first Keogh payment and told him to buy 10 shares of BRK (no a's or b's at that time) and he convinced me that I didn't know what I was doing and 600+ was too much for any stock.  Since that time I listen to brokers, but only for a contrarian indicator.

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Lehman brothers in the month of Sept. and refusing to sell as it went down from 14 to 7 to 5 to 3 to 50 cents.

My rational was that Soros put money in there.  Conclusion: he lost $900 million

 

I actually made money on GM before that.

 

At that time, I was in the mindset that if I had a little bit of money, there was no money to be made in great companies b/c they were so expensive.

I ended up waiting. Luckily enough, I was able to get into to US Bank at 8.62. I missed the boat on GE though.

 

Guys, does Berkshire still own Bank of America?

 

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W Holding Company...

 

I didn't understand the economics of the bank, and looked at the 'cash' they had on hand, and their p/b 'value'... despite reading their reports, I rationalized that their bad loans (which they talked about before the restatement) were not that bad.

 

Basically, I talked myself into thinking that they were a decent company, when they weren't.

 

I wouldn't change it for the world though. I learned more from that experience than just about anything else. I just sucks that it was so costly!

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A terrific question that I like to be asked here from time to time.

 

1- Krispy Kreme Doughnuts

 

Like the product, like the growth, don't like managers, so so price. Poor decisions and bad capital allocation can kill a company. What I've learned: if I don't like and don't trust the jockey, I'll try to call a hotline before investing in the company. I've avoided investing in a lot of companies since because of this lesson.

 

2- First Marblehead

 

Mistake number 1: lower your own criteria because X and Y and Z (good value investors) have bought it. Mistake number 2: have strong doubt about what the perfect storm could bring on. In July 2007, I've asked the investors relationship department what would be the impact of a credit crunch would have on the demand of their mortgages. Seriously, I should print the answer, put it on a frame and put that frame on my wall. I've also avoided investing in some companies since because of these lessons.

 

 

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"2- First Marblehead

 

Mistake number 1: lower your own criteria because X and Y and Z (good value investors) have bought it. Mistake number 2: have strong doubt about what the perfect storm could bring on. In July 2007, I've asked the investors relationship department what would be the impact of a credit crunch would have on the demand of their mortgages. Seriously, I should print the answer, put it on a frame and put that frame on my wall. I've also avoided investing in some companies since because of these lessons."

 

Could you discuss this more? Esp. the companies you've avoided investing in after the First Marblehead lesson.

 

 

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I say "No" faster than before and I resist more to the temptation of investing in cheap businesses that may have good prospects, but where I especially don't like the bad case scenario. 

 

So, I try harder to "kill" the company before investing in it.

 

I'll don't give specific names, but suffice to say that some of them are still doing just fine, but some of them have deeper problems than people tought a year or two ago (especially in the financial industry).

 

Cheers!

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This thread is yielding some great insights. I'll add a few more...

 

- Focusing on sales growth rather than profitability (A company I owned kept discussing sales growth and analysts worried constantly about it, despite healthy FCF and good valuation. Flash forward to an overpriced acquisition to drive growth, then high expenses integrating and finally a weakening FCF as the company aggressively chased sales. The "false god of sales growth"--a hard lesson to learn.)

- Buying a full position too fast (Not letting Mr. Market fully work for me. Hence getting shaken out of position when I should have been buying more.)

- Falling in love with a stock (If I ever have the desire to brag about a stock's performance, I should sell the stock and move on.)

 

I'd say my most important lessons fall in into two categories--"Price matters most" and a focus on ROIC/company culture. Old hat but always worth keeping in mind.

"Investing is largely a conceptual exercise with some factual support. Company analysis typically has more facts and fewer concepts. Perhaps it should be the other way around.” (Michael Goldstein, Empirical Research)

 

 

 

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  • 2 years later...

A terrific question that I like to be asked here from time to time.

 

1- Krispy Kreme Doughnuts

 

Like the product, like the growth, don't like managers, so so price. Poor decisions and bad capital allocation can kill a company. What I've learned: if I don't like and don't trust the jockey, I'll try to call a hotline before investing in the company. I've avoided investing in a lot of companies since because of this lesson.

 

2- First Marblehead

 

Mistake number 1: lower your own criteria because X and Y and Z (good value investors) have bought it. Mistake number 2: have strong doubt about what the perfect storm could bring on. In July 2007, I've asked the investors relationship department what would be the impact of a credit crunch would have on the demand of their mortgages. Seriously, I should print the answer, put it on a frame and put that frame on my wall. I've also avoided investing in some companies since because of these lessons.

 

First Marblehead MAY (I emphasize MAY) be turning it around.

 

Here is an interesting write-up on FMD:

 

http://www.sumzero.com/postings/4304/guest_view

 

Current Balance Sheet and Downside Protection

It’s one thing to find a cheap option in the market; it’s rare to find a marriage between a net-net and a cheap option. Most net-net’s are just liquidations where the upside is very limited. The downside protection for FMD comes from two points (note there are 100M shares so the math is easy):

1) The actual balance sheet that the shareholders own has a cash liquidation value between $1.60/share (ultraconservative) and $2.48/share. The range comes from :

a. $49M: The valuation on TMS that they just recently acquired for $49M: $1.60/sh assumes it’s worth $0 and $2.48 assumes it’s worth $49M.

b. $40M: There is a tax dispute in the state of MA: FMD is fully reserved that they will have to pay $40M in back taxes. Based on their recent losses, I am guessing they probably won’t have to pay this so reduce their “other liabilities” line by $40M if they win. If they do pay then you have only 1 year of “free” option instead of 2 years.

2) The cash burn rate has been $10-11M per quarter for the last 2 years which is HR and general overhead (utilities, rent, etc.).

If you use the more reasonable liquidation value of $2.48/share vs today’s stock price of $1.45/share you are getting a free option that they will be able to turnaround the business in the next 2 years. I view this as being highly probable given that the founder has done this before and is highly incentivized to do so, which I will get into later.

More details on their balance sheet:

$278M cash

-$57M deposits (at bank sub)

=$221M net cash.

-$62M other liabilities (incl tax dispute reserve with MA)

=$159M most conservative net cash liquidation value.

+$49M TMS (Just bought for $49M)

+$40M tax dispute (fully reserved in 62M other liabilities)

=$248M = $2.48/share. (100M shares)

 

...and they just published their ABS presentation material:

 

http://edg1.vcall.com/irwebsites/firstmarblehead/ABSEastInvestorPresentationFINAL.pdf

 

Take a look if you have some time. :)

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