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Righting the ship

Chandan Dubey

Chandan Dubey

99 followers
One of the biggest and most costly mistakes I made during my investing life was investing in Credit Suisse Group (CS). Here is a bit on my investment summary on this stock.

  • August 3, 2009: I had recently opened a brokerage account in UBS AG (UBS). They charged SFr 40 for buys of up to SFr 4,000 and then they charged SFr 80 up to SFr 80,000 and so on. As I did not want to pay too much brokerage, I bought SFr 4,000 worth of CS at a price of SFr 52 per share. I bought CS because it had paid a dividend on SFr 2 in 2009, was arguably the best bank in Switzerland in terms of amount of risk they were facing when the crisis came. At the worst of the crisis in terms of price, CS traded at SFr 24, while the book value of SFr 30. My reasoning was that being a good bank it will at some point go back up to SFr 95 (the price it was trading at in 2008) and the dividend yield which is 4%, will be paying me to wait.
  • I made no effort to look at the business CS was in. I ignored comments from my colleagues who said that the stock is quite overvalued because it is going to face major legal challenges from the US and the customers will run from Swiss banks. This will reduce the amount of deposits they have and they will be earning much less.
  • I also ignored the exorbitant pay received by the CEO Brady Dougan in 2009. He was paid SFr 19.2 million in salary and SFr 70 million from a 2004 share plan which he immediately sold on the open market.
  • After briefly peaking at SFr 60, CS troughed at SFr 44 and I bought some again. I was steadfast in my belief that it was a good company and I was ignoring the crowd and buying more. I bought again SFr 4,000 worth of shares.
  • After peaking at SFr 54, CS plunged and I bought another SFr 4,000 worth of shares at SFr 30. I was holding 296 shares with an average price of SFr 41 now. Meanwhile CS started trading around SFr 19 in Oct 2011.


Meanwhile, I started looking at my investments in more detail. Researching stocks, buying only when the stock offered a margin of safety and passing on things I could not value. I also kept reading books, blogs, stock pitches and reading/listening to the famous investors. Some of the quotes which deeply affected me were

If you understand the business, you don’t need to own very many of them. If you have a harem of 40 women, you never get to know any of them very well.

Everybody’s got a different circle of competence. The important thing is not how big the circle is. The important thing is staying inside the circle.

If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.

- Warren Buffet


I more or less made all the investing mistakes one can make in a very short period of time (they are covered here in detail: 2009, 2010, 2011). Thankfully, I did not lose a lot of money, which is my only consolation. And I am trying to do what Charlie Munger said some time back

Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.


Trying to right the ship

The big money is not in the buying and selling, but in the waiting.

- Jesse Livermore


When the market tanked in July-Oct 2011, I was sorely under-prepared. I was worse than all in. I had used the cheap financing by Interactive Brokers and was on margin of SFr 6,000 on a portfolio of size SFr 50,000. My portfolio lost 50% of the value and was standing at SFr 25,000 at one point and I could not get any new money into the market when stocks were selling so cheap. My largest holdings from the time I was stupider were Bank Of America ($6000@$12.5/share - bought on expert speak), HPQ ($5000@$40/share - bought being a contrarian after Hurd fiasco), and BBY ($4000@$30/share - bought being a contrarian after finding it cheap on DCF valuation, ignoring the problems with the business). All these were down more than 50% at one point (except BBY which was down 30%).

Owning these stocks as a large percentage of portfolio already, I in good sense did not want to buy more because of the risk. This decision was also helped by the fact that I was in debt/margin. I used my saving during this time to repay the debt but by that time the market had already recovered and I missed the chance of owning Novarits (NVS) at SFr 40, Holcim (HCMLF) at SFr 44, Roche (RHHBY) at SFr 125 and many many more such deals. The opportunity cost was tremendous.

After the market recovered I started selling securities which I did not understand or was not comfortable with. This meant sometimes selling at big losses. Some of the businesses like Posco (PKX), Ternium (TX), Ampco-Pittsburgh (AP) and Tower Group (TWGP), I sold because I got them at a price which did not give me sufficient margin of safety. The positions were too small to have an effect on my portfolio overall and it would have been tiring to keep track of so many picks.

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As you see, I have let go of Credit Suisse (CS) at a large loss. But the opportunity cost of that money sitting in this stock and I not knowing what to do with it if it tanks again, was too much for me. I decided that it was much better for me and my portfolio to have the cash and wait until the opportunity presents itself, as Warren Buffet says

The most important thing for a hitter is to wait for the right pitch and thats the exact philosophy I have about investing. Wait for the right deal … and it will come. Its the key to investing.


My goal for the rest of the year is to find good businesses which will get me out of the hole I have dug myself into.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 3.5/5 (20 votes)

Comments

Cornelius Chan
Cornelius Chan - 2 years ago
I once read "A small loss frightens - a large one tames." I have my own losses I could share.

I actually consider losing money a necessary part of the learning curve. It is like tuition for the university of the stock market.

My own 'tuition' was paid two years after beginning my study of the stock market from the point of view of value investing. I was looking at stocks like Toyota and Citigroup at the time and looking for a bargain position. Remember that at the time, C was the world's largest bank by market cap. I remember being impressed with their vision of growth, from my cursory reading of news items; no analysis at all...

So when Citigroup fell by half from mid $50's to $25, I thought to myself "this is the bargain I've been looking for." I went ahead and bought shares at $25 and went to have lunch with my mentor in the stock market. He was surprised I had bought and calmly advised me to sell, never mind taking a small loss as this was my first foray on my own. So I took his advice and sold at $21. He told me "never catch a falling knife". "Always buy stocks on the way up after they have bottomed." So I watched as Citigroup fell to just over $1 per share. My relief was so great, I promised my friend a first-class Thai buffet lunch at the Mandarin Oriental Hotel in Bangkok. (we were going anyways... I bought him a few other things equal to the amount of money he had saved me).

Thanks for being the first to start a series on learning from investor losses. This is invaluable knowledge that should be the starting point to a long and successful investing career.

Cheers!
tonyg34
Tonyg34 - 2 years ago
cdub - you've been one of the more prolific contributors on this site and I have enjoyed your ideas and you're good writer (which is why you are a value contest winner)

but if I may offer one small bit of advice, you have made more trades in 2012 than I have in the last 5 to 10 years and most them are for small $500 positions (and $30 dollar losses). You don't need to run a mutual fund. I risk being presumptuous here, but I think I've been through what you're going through. You have invested a lot of time/effort in learning about markets and researching all of these interesting opportunities and you feel you have to do something to verify all that work. That's what I did in my twenties, but its too much effort for too little reward. My advice: wait for the fat pitch - in the mean time make your regular contributions to a Roth (or whatever your company offers) - but let your personally managed money pile up until you get an easy one, they happen if you keep looking.

Keep up the good work and thanks for sharing/letting me babble
cdubey
Cdubey - 2 years ago
@Tony worse still ... I have made even more trades than the one posted above. These are my losing ones. I also sold some for small profits.

Thankfully, these are sells and I have done this to do exactly what you write. This "mutual fund" was created before I started learning. Most of the pitches were expert recommendations from motleyfool rising star :( I can't blame them for my own stupidity though.

Batbeer2 also told me the same thing. And you are both right. This is the reason behind me selling these "deals" and moving to cash. Wait for the fat pitch is what I am going to do.

Thanks for reading and offering advice.
superguru
Superguru - 2 years ago
"waiting for fat pitch" - Can be a long wait sometimes but it is worth the wait than doing something foolish.

One thing I learned in last 5 years of investing, and thanks a lot to Gurufocus and posters here, Value investing works and works brilliantly. Even when I bought badly, as I bought at discount, those stocks bounced back and I could get out at break even or slight profit. Only stock I lost money on was RHIE (following Seth blindly).

Yes, I could have done much better in last 5 years than the measly 56% cummulative return. But I am not complaining considering 5 years back I did not even know the difference between stock and bond.
BEL-AIR
BEL-AIR - 2 years ago
Waiting for the right pitch, and waiting for undervaluations,is the key as far as I am concerned.

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