In April 2010, I put in the rest of my cash (CHF4000) in the DJ-Euro Stoxx 50 ETF at CHF39 (it has yet to come above that price). Sadly, this was the peak and the market started falling because of the European Sovereign Debt Crisis. The market acted crazy during that time and this was my first time seeing a plunge. Stocks I did not think will go so low, went lower and I had no money to buy because I had just made a very importune investment 10 days earlier. Novartis (NVS) dropped from CHF60 to CHF50 in a few days, and I sat there watching the market crash with no cash in hand to invest.
But fear not. My stupidity did not end there. Instead of learning the lesson that I should always keep cash, I did something else. I took some of my best investments (in particular Holcim and Roche) and sold them at a very small profit. Holcim I sold totally, but in Roche I halved my investment. This provided me with some cash and I proceeded to buy some stocks on the Frankfurt stock exchange. In particular, I bought Kloeckner & Co (XETR:KCO), which I immediately sold at a very small profit. This time I did look at the balance sheet although not very carefully. Then I bought Micron (NASDAQ:MU) and Lloyds Banking Group (LLOY). Then there was the BP oil spill and the market headed yet lower and both my MU and LLOY positions were under water for a long time. But I stuck with my decision and did not sell. But I did not have money to average out my position. Again, the 2% brokerage commission has foiled my attempts to average out my position by buying small.
People say that when someone else’s house is in fire, you should learn your lessons from them. You don’t need to put your own house on fire. My investment life has been of the second sort.
By this time and especially the significant drops in my holdings, I realized that there is something wrong with my investment idea and I took a break from the market and started reading. One of my strong points is that when I really want to learn something, I stick with it. This helped me cover a bit of ground quite fast. In the next few months I read the following books.
- The excellent book by Thomas R. Ittelson on reading Balance Sheets, “Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports”. The book goes through the founding of an imaginary jam business and shows you where every expense and income is put in.
- Then I read Howard Schilit’s “Financial Shenanigans” about how to detect fraud. This book has not been quite as useful. Mainly because I generally trust the balance sheets and I do not have enough time to be as minute as needed to detect a fraud.
- I read the David Dreman’s “Contrarian Investment Strategies” and then Jeremy Siegel’s “Stock for the long run”. Both although good books are necessarily about the past and offer no ways to value a stock and actually find a good investment.
- The next on my list were two excellent books by Peter Lynch. “Beating the street” and “One up on wall street” gave me some ideas on how to actually find good investments.
- And then I picked up the “Intelligent investor” which I am still constantly learning from. Truth be told, I still have not finished some parts of the book though.
I want to say that after all this reading, investment has been a smooth sailing for me, but this is untrue. But I did get some understanding of how a business works and how to actually evaluate a company a bit better. If I had read these books to begin with, I would not have made some of the stock picks I talked about earlier.
My next lesson was hedging. As I described earlier, I bought MU on the frankfurt stock exchange by buying EUR at 1.4CHF and then 1.3CHF (EUR had fallen from 1.5CHF). I mistakenly thought that this drop is an over-reaction and it will reward me handsomely when the market settles down after the European debt crisis has abated. EUR did not recover and all my gains on MU, after I sold it at a 38% gain in Jan 2011 were to be gobbled up by the drop in the EURCHF rate. In a last minute decision I converted my Euros to USD because the USD had also gone down and tried my hands on the new value analysis that I had just recently learned. If my memory serves me right, HP (NYSE:HPQ) suffered a big loss in market cap due to the CEO’s sexual harassment charges. Mark Hurd was in the spotlight and the stock dropped like a stone from $50 to $40. There was nothing wrong with the company itself. And so I bought at $40. This investment has also cratered and at its worst was trading for $20 (in Oct 2011).
I remember reading somewhere that the best thing that can happen to you in the stock market is that your first investment craters. Because then you will learn about what can go wrong. No one told me that you need to make so many mistakes to learn about every little thing.
It was hard to predict that HP is going to be a bad investment. The new CEO Leo Apothekar and his destruction of shareholder value of the order of $10 billion by acquiring Autonomy at a very high price was hard to predict. Although If I had done my due diligence and saw the goodwill of HP and the fact that it has negative tangible book value because of these overpriced acquisitions, I would have stayed away when the price was $40. I might have been interested when it dropped below $30.
The lessons to be learned
- When keeping portfolio in multiple currencies, either hedge the currency risk or make sure that you understand the implications of currency movements.
- Read about other people’s investing mistakes before making your own. Maybe you will be innovative enough to make mistakes which other people have not made so far.
- When valuing a company it is very important to value the management. Read the proxies, see if you agree with the compensation practices. Look at the stock dilution due to compensation. The way the management treats the stock is the way they treat the shareholders. Look at the goodwill and the intangibles. If the company has good cash flow and a lot of cash, the management is prone to make stupid decision with the cash.