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3 Years of Mistakes and One Bit of Advice
Posted by: Geoff Gannon (IP Logged)
Date: March 13, 2012 12:30PM
Someone who reads my articles told me about the biggest investing mistake he makes:
I recently realized a defect in my decision-making. I was too aggressive in buying stocks of a company I really like. I used to think if I don't buy now, I'll probably never have a chance to buy at such a price. I think part of the problem is that I'm inexperienced… and there are not many companies I really like ("scarcity" misjudgment tendency). I set a rule to never buy a great company at higher than 15 times owner earning. I think this is feasible because I just need to study and have a list of great companies and wait for three to five opportunities.
Now, let me share the biggest investing mistake I make.
I buy too many things. But maybe our problem is not exactly the same. I am unlikely to be too aggressive in buying shares of a company I really like if by too aggressive you mean paying too high a price.
What I am likely to do is buy into too many different situations. And sell one thing to buy another way too often.
A small number of your decisions will always account for a great deal of your success. I've said this before, but if you look at just the decisions I've made since the 2008 crash — we can talk about the (bad) decisions I made in 2008 another day — I think only a handful were actually important:
Being 100% in stocks in early 2009 was critical. Buying the highest quality companies I could find was less so. If I had bought net-nets, I would guess my return in 2009 year might be twice as high (80% vs. 40%). But that is only a guess (the closest thing to a net-net “index” is at Jon Heller’s blog). In retrospect, buying the best companies instead of the cheapest companies in 2009 was a mistake.
So, I think you can break that first bullet point into two decisions:
So, again we can break the IMS Health decision into two parts:
And I waited until after the SEC matter was over. So, I'm not sure we can say it was a mistake to be so slow in buying Bancinsurance. It's quite possible I was wrong not to offer a bit more than the CEO's offer. What I actually did was bid almost exactly what the CEO was offering.
This might have been a mistake. But it was probably only a small one without much final importance. My average cost was $5.82 a share and the offer the board finally agreed to was $8.50 a share. I did make one odd mistake here which was offering to sell my Bancinsurance stock when there was a still a spread between the price the buyout would happen at and the market price. As it turned out, any spread was big enough to justify me keeping the stock — because I went on to do nothing but silly things with the cash I got for the rest of 2010.
The only good thing I did was buy George Risk. And actually I could've just kept Bancinsurance, added George Risk, and owned no other stocks for a few months (tops). This would've been the best decision in retrospect. Instead I made a series of very stupid investments for much of the second half of 2010 — luckily (again) not losing money. But losing a lot of time. And taking unnecessary risks.
So we can break this one down into two decisions:
And it's certainly better than I've done since the back half of 2010. So, I consider buying George Risk a correct decision. I put 25% of my portfolio in George Risk.
Should I have bought more? I'm not sure. I considered 50%. I've considered going to 50% of my portfolio in one stock three times in the last three years: IMS Health, Bancinsurance and George Risk. IMS Health never happened because the prices of all stocks were falling so fast (this was early 2009) that I started buying things like Omnicom and Berkshire and even sold IMS down to 12% of my portfolio before bringing it back up to 25%.
Overall, not my proudest moment. Far too much trading. And sheer stupidity cutting the IMS Health position in half (you should never sell shares in a company like that at a price like that) but early 2009 was an unusual time. It is not a valid excuse. But it is an explanation.
With Bancinsurance – this was 2010 – ideas were much scarcer than in 2009. And I tried valiantly to get Bancinsurance up to 50% of my portfolio. In fact, I was at the point where whatever shares were offered at my price I was going to take. So, that was the one time where I did blow by the 25% of my portfolio in one stock rule and raced toward 50%.
So, out of three times when I seriously considered letting myself buy up to 50% in one stock: IMS Health, Bancinsurance, and George Risk – I only gave myself the green light once. Not sure if that was a mistake. IMS Health clearly was in retrospect - the company was bought out. But Berkshire and Omnicom (OMC) were very cheap in early 2009. So I think that not buying more IMS Health is only an obvious mistake in hindsight.
It's unclear if I should've gone to 50% in George Risk. It would've saved me from doing some dumb things – with positions that I bought and sold disturbingly quickly in stocks like: Gyrodyne (GYRO), CCA Industries (CAW) and Craftmade (CRFT) — but it also might have prevented me from buying Japanese net-nets in 2011. The real answer is that the mistake was not having the extra cash. The mistake was doing silly things like darting in and out of Gyrodyne, CCA Industries and Craftmade within a matter of months. That was insane. And it was only because I had cash and no great ideas.
Now, we come to another mistake: Barnes & Noble (BKS). You can read about what my mistake was here:
Barnes & Noble (BKS): Anatomy of a Screw Up
So, buying twice as much George Risk would've saved me from that terrible mistake.
Anyway, let's score that...
Since I didn't lose a lot of money in Barnes & Noble — I sold the stock at a 4% loss and got some dividends — why do I consider it an important decision?
There are a few reasons. One, because there was a proxy fight (which Ron Burkle narrowly lost) the investment could've worked out differently. And because the company ended up investing so heavily in the Nook it ended up in much worse financial shape than you want a big portfolio position to be in. Combine this with the declining book business - and there was the possibility for a good (quick) return in the stock and the possibility for a much, much bigger loss than I suffered. It's the second part that makes buying Barnes & Noble an important decision even though the end result was pretty flat. Though I should point out the overall market was up — so on a relative basis my loss in Barnes & Noble is much worse than it first appears.
And the level of risk taken turned out to be quite high.
Overall: huge mistake.
Now we come to my decision to put 50% of my portfolio in Japanese net-nets. Apparently, I was in some sort of contrarian mood from about the middle of 2010 to the middle of 2011. Because I wrote about Barnes & Noble (an investment many readers correctly hated) and Japanese net-nets (an investment many readers incorrectly hated). Actually, reader opinion on my "Buy Japan" post was pretty mixed. It was either very hot or very cold. Nothing I've written has ever gotten that big a response. Luckily, a couple people actually bought net-nets in Japan after reading what I had to say about Japan generally and net-nets specifically. But I also got emails from people warning me about making a big mistake in Japan.
There's not much to tell about my Japanese net-net performance so far. Sanjo Machine Works got a buyout offer from the CEO (I sold following the announcement because I'm not a Japanese citizen). My non-annualized return was 145%. I held the stock for less than a year. So, obviously my annualized return was even better. This one position provided enough profit to justify all 5 of my Japanese net-nets. Which is good since all my other Japanese net-nets have gone nowhere (in dollar terms). Seriously, I'm looking at them right now and I've got six Japanese net-nets in my portfolio and the biggest percentage change (plus or minus) is 8%. All six net-nets are within a few percent of exactly where I bought them (again, in dollar terms).
I'm going to go ahead and score that:
Regardless, I feel my extreme ignorance about Japan makes it a good idea to diversify a bit. I'm still happy with my six Japanese net-nets. They're selling for much less than they are worth. They earn a little. Pay a little in dividends.
It's a pleasure looking for net-nets in Japan compared to the U.S.
Trust me, I have to pick one U.S. net-net a month for the Ben Graham: Net-Net Newsletter. Net-nets in the U.S. are no fun to sort through. They have a lot of serious issues. Net-nets in Japan are fun to sort through. You can find Japanese net-nets that don't lose money, have minimal liabilities, pay dividends, etc.
Ben Graham would love Japan.
So I intend to stay 50% in Japanese net-nets for a while. I'm not even going to look at those positions again for another year. I'll check back in once a year. These are really sleepy companies. And I really know nothing about Japan. More frequent checkups would not fix the basic problem that I already know they are safe and cheap and I'm unlikely to ever know all the other things I'd want to know about these businesses.
Okay. That's it. That's three years and three months of stock investing. A lot of decisions. A handful of important ones. And a couple of really big mistakes.
Notice especially how many times I really, really screwed up. For example, I bought Barnes & Noble. I quickly bought and sold CCA Industries, Gyrodyne and Craftmade — which was equal parts stupid and bizarre — and I didn't just sit on my hands and wait for my Bancinsurance position to get cashed out.
Of course, the biggest mistake I made may have been focusing on big, high quality companies in early 2009 instead of net-nets or other super cheap stocks. The cheapest stocks rose the fastest in 2009. Net-nets did very well. And there were something like 300 or more net-nets to choose from at the market bottom. For perspective, in the five years prior to the 2008 crash the number of net-nets (as I count them) ranged from 40 - 90. So, there were 5 to 10 times as many net-nets in early 2009 as there had been in "normal" times. Yet surprisingly…
… I didn't buy a single one. For me, 2009 was the year of big, high-quality companies. That was a mistake.
But that's the point.
I've made a lot of mistakes over the past three years and three months. None of the mistakes I've discussed here dates back to before January 2009. The mistakes I made in 2008 deserve to be an article all their own.
Anyway, my point is that I did a lot of very dumb things in just three years and three months and yet I've compounded my account at 12 percentage points a year better than the S&P 500 for those three years (the S&P is up 16% a year since January 2009).
Here’s the lesson in all this.
The vast majority of my decisions accomplished little or nothing. There were just a few stocks at a few moments — yes, a whole basket of them in Japan — that I felt certain were trading for less than their conservatively calculated value to a private owner. If I had bought those stocks and done nothing else my results would have been as good or better. I would have traded a lot less. And I would've saved myself a lot of trouble.
I think the smartest thing Warren Buffett has ever said is:
"I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches — representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all. Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better."
My investing has been best when I've stuck closest to that ideal and worst when I've strayed from it.
If there's only one bit of advice you take from Warren Buffett that's the bit to take.
Ask Geoff a Question about his Investment Mistakes
Check out the Buffett/Munger Bargains Newsletter
Check out the Ben Graham: Net-Net Newsletter
Re 3 Years of Mistakes and One Bit of Advice
Posted by: twdiggs (IP Logged)
Date: April 4, 2012 05:31AM
I love the honesty and ultimate conclusion. I think your assessment on whether a decision was correct or dumb may be a little more influenced by the results than you realize. Great stuff though!