Share our mistakes

[joshuat]

One of Charlie Munger's sayings is "Invert, always invert."

I suggest we invert here. The rest of the board is taken up with thread on identifying value, stock picks, etc. How about we treat this as a companion thread to npg's excellent "The Value Trail". What have you done wrong in the last year or two? Wrong can mean permanent loss of capital, but it can also mean making money the wrong way - getting lucky. I challenge us all to share our mistakes, try to explain how we came about making it, and then how we plan to avoid making that mistake in the future. Or, if you don't know how to avoid the mistake, ask for advise. We should all learn a lot.

Some of my recent mistakes.

I was buying and selling BLG on price bounces. Dumb, very dumb. Ya, I made money for awhile. But, there were two fundamental mistakes here. First, BLG is not a first rate company. It is a decent company with some problems. I think those problems can be solved, and while I won't argue my thesis, I think it can be an investment possibility, though i wouldn't bet the bank on it. What on earth did I think I was doing buying bounces? That's a swift path to permanent loss of capital. If you look at their current price, you can probably guess I'm sitting on some significant paper loses. If you guessed that you would be right. I was dumb.

Plan to avoid this in the future: stop trying to buy/sell on short term fluctuations. Yes, buy a company selling at a significant discount, but only when you have a solid understanding for why it is selling at that discount, and how they will eventually be fairly valued. It can be very rewarding to get that bounce up, and why not take it if you can, but do not do this with a company you would not be willing to own outright - 100%. I would not want to own 100% of BLG, so why am I sitting on some of their shares? Just dumb.

Recently I sold a few shares of MCF. I want to own the entire company. So how on earth did this come about?

Well, I had my portfolio down to 5-6 stocks, and came across a very compelling opportunity (not MCF). I sold everything I had (except BLG, read above for that mistake, and MCF), put it all into this opportunity, and even bought on margin, something I normally don't do.

None of this was a mistake in my view. My margin position was small, the expected rewards were very high, and I was following Mungers advise to bet big when you get your chance. I bet 50% of my liquid assets before you account for the margin buy.

Recently I felt that I didn't like paying my margin interest - so impulsively sold some MCF (which was up a lot) to pay off the margin. However, the margin thesis was still correct in my view. My returns are substantially higher than the margin interest, there is very strong support for continued returns of the same order, and I did not want to sell any of the stock I bought on margin. I would own the entire company at these prices if I could.

I honestly don't know how to avoid this one again. I sold a great company because it's price was higher than in the past, just to reduce a loan payment that was honestly painless. And now I will have to pay taxes on the gains from the sale. Makes no sense.

Anyway, I put a buy order in at a price that will negate the taxes I will have to pay on the sale - hopefully the share prices will dip to that level. If they don't, it an opportunity lost.

ETA: My Biggest mistake? Not buying a bigger stake in MCF. I've posted my arguments for the stock elsewhere, I won't repeat them. In short, I place a liquidation value on it around $55-$60, which happens to be the current stock price. I got in at the mid $30s. My mistake was not going all in when I recognized the value. I was following the Pabrai model of 10 stocks, each 10% of the portfolio, to offset the chance of losses. But what losses, when you own assets worth twice the price of the stock? Ignore the fact that I regard the CEO to be the equal of Buffett; I had no business hedging my bets like that when there was no loss to hedge against. Perhaps at today's value the hedge would be warrented. If I had used the Kelly formula I would have bet far, far bigger. The worst possible scenerio - if the company had gone out of business that day - I would have doubled my money.



Okay, your mistakes?

[Stockowner]

Timing. Got into some stocks in the homebuilding sectors apparently either a little too early in some, or a little later than the optimum in another. But it's not something I worry about, since I will make a decent profit when the market returns.

[Stockowner]

I think I did a mistake today.

I saw my Toll Brothers position has risen something like 20 percent. A quick glance on Yahoo business section claimed it was due to the Bear Stearns news. So I figured, as I have seen many times my homebuilding stocks rally and then only go even lower than my initial purchase price, I decided to sell, planning to buy if the stocks go back to the same purchase price, or lower.

So I now got a 20 percent return on a position I have only held a few months (which I think is quite decent), but then just as I had done that, I turned my head to the television and I saw home sales for the sector has increased. An updated Yahoo then had articles regarding the same. Apparently I should have checked out the reason for the rally more closely.

[tombrown1]

Great thread.

Big mistakes:

1. Getting involved with Panera.

Looks like a great company, but I underestimated the importance of cash flow. Phil almost blows off cash flow in the book, calling it the least important number. But I find it to be a very important number.

Panera was/is making tons of money and growing at a great clip, but they can't seem to increase their bottom line.

From a technical perspective, I traded based on a 50-day moving average which was foolish. Looking at that company from any technical perspective is enough to make you vomit. Only recently have they started to show some support.


2. Cognizant

From a valuation standpoint I still like them, but I think in the beginning I did overvalue them. Even after lowering my expectations drastically I am still happy with their valuation.

The big mistake was not getting out in the mid $80s (currently mid-$40s after the split) when it was obvious the insiders were all bailing in a big way.

Currently in a buy-and-hold for the long haul on this one.

[joshuat]

Dumb mistake. Sold a great company, Innophos, chasing a technically broken stock, MF Global, when the wheat scandel broke. Ya, I made a bit of cash on the deal, until you consider capital gains taxes. And ya, I got very lucky.

That's my biggest problem - I always want skin on the game. I have a half dozen stocks I am salivating over, but do not have the capital to purchase them. Every day I look at my portfolio, trying to decide if there is a weak position there that I should sell in order to finance my new acquisition. I can find intellectual reasons for various buy/sells, but every time you do a transaction you increase your chances of being wrong.

[Roger Jones]

My biggest mistake.......Getting out of Potash way too early. Had I stayed and not been seduced by the market, I would be sitting on some cash.

[tombrown1]

Originally Posted by joshuat

I can find intellectual reasons for various buy/sells, but every time you do a transaction you increase your chances of being wrong.

Wow! That's pessimism. Couldn't you also go with the half-full on that one?

[bovverd]

Buying Bear Stearns on the Friday at $33, right before it plunged to $2

Any time you stray away from conventional investment methods for nothing much more than a punt the market seems to bite you!

[joshuat]

Originally Posted by tombrown1

Wow! That's pessimism. Couldn't you also go with the half-full on that one?

No. If I own a great company, selling it to get into another company is a risky proposition. I'm just parroting Buffett here - it's not my original thought by any means. If Buffett thinks his best strategy is not to trade too much because it increases his chances of being wrong, I gotta figure my chances are even higher than his.

[Stockowner]

Just out of pure curiosity.

Buying Bear Stearns on the Friday at $33, right before it plunged to $2

What in your investment thesis in regards to Bear Stearns where you wrong? Where was the glitch? Any clues you could have picked up?