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2013 - Mistakes of Commission,Omission & Confusion

January 07, 2014 | About:

"Success is a lousy teacher." - Bill Gates (Trades, Portfolio)

Thanks to the above quote from Gates which makes me feel little better whenever I make a mistake.

This is the first time I am doing this exercise and I am glad, as it has helped me reflect on my decisions that caused these mistakes and also to learn from them.  

I made three kinds of mistakes in 2013.
 
Mistakes of Commission:

These are mistakes in which I've lost money.

Mistake: Investing in J.C. Penney (JCP): This is one company lot of smart investors lost money investig in and me being not so smart is no exception.

My Reasons for Buying JCP:

  •  A CEO with great credentials.

"Mindshare precedes market share." - Ron Johnson

J.C. Penney was hiring Ron Johnson as CEO; Johnson had done a great job at Apple. He was able to turn Apple's line of retail stores into some of the most profitable and foot-trafficked stores in the entire country.
   
   J.C. Penney's press release announcing Johnson's hire: Apple's retail architect explained.

"I've always dreamed of leading a major retail company as CEO, and I am thrilled to have the opportunity to help J. C. Penney re-imagine what I believe to be the single greatest opportunity in American retailing today, the Department Store. I have tremendous confidence in J. C. Penney's future and look forward to working with Mike Ullman, the Executive Board and the Company's 150,000 associates to transform the way America shops."

  Johnson signed on to invest in $50 million of J.C. Penney stock that wasn't redeemable for six years. Now that's putting your money where your mouth is! I addition: 

  • A great value investor was invested in J.C. penney.
  • It is a great American brand owning lot of real estate assets.

What Went Wrong?

  •  Management made missteps in making company-wide changes instead of experimenting the strategy in few stores or few states first and then rolling out across the nation based on the results.
  • It alienated existing customers by removing promotions. The new pricing model confused existing customers.

This Forbes article highlights eight lessons from Ron Johnson's outster.
 

What Are the Lessons Learned?

  • Not to be biased in investment decision towards the potential of a management or a activist investor's ability to turn around the company.
  • Not to invest too early in a turn around, wait to see some positive change happen and then invest. If a CEO is trying to implement a new strategy, wait and see how it works out.
  • Not to invest on borrowed conviction.
  • Turning a retail business around is tough even with a great manager. Even if and when it does happen it will take a long time.

Had I taken the following advice from Warren Buffett seriously I probably could have avoided the above mistake:

"Turn arounds seldom turn around." - Warren Buffett (Trades, Portfolio)

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." - Warren Buffett (Trades, Portfolio)

In J.C. Penny's case it is tough economics rather than bad economics.

One can argue that J.C. Penny can turn out to be a good investment with the old management now back at the company. But for me it is too much of a opportunity, cost and hence I've closed my position.

Mistakes of Omission:

These are mistakes where I missed the opportunity to make money by not investing.

Mistake - Not Investing in YELP (YELP)

Reasons for Not Investing

  • The stock had run up when I looked at it, and I was waiting for a correction to buy.

 I am not saying this is a mistake of omission just because of the stock's performance. I seriously had an edge here and I did not act. After having read the news of John Burbank (Trades, Portfolio)'s investment in YELP, I did enough research about the company to gain conviction.
Apart from me using the YELP app, I had also seen my friends and family regularly use Yelp.

I've been tracking 3D printing companies like 3D Systems and Stratasys way before they went up 80% to 100%, but I don't feel bad as I don't understand these companies well, nor do I have any edge.

But Yelp was a company I understood well and I did not act on.

The Lessons Learned

  • Keep one foot in the door. That is, buy a little and wait to add more if there is a correction or when the earnings catch up with the stock price. 
  • Absolute price appreciation does not mean anything, and it should be looked at in relation to the earnings growth.

'You cannot buy todays stock at yesterdays price.' - Basant Maheshwari

Mistakes of Confusion:

These are the mistakes where I made money but did not bet enough.

Portfolio Imbalance

My portfolio of 10 stocks when arranged in the order of high allocation to lowest allocation of capital has Bidu (BIDU) at the seventh position.

Bidu being the seventh position has given me the highest percentage return. In spite of having enough conviction in Bidu my allocation was skewed.

A challenge I often face is which stock to increase my allocation in: a stock that has less allocation but has run up a lot, or a highly allocated stock that has not appreciated much?

In hindsight I feel maintaining portfolio balance by increasing allocation to a low allocation stock that has already appreciated but whose earnings have also caught up seems to be the right decision. 

 “Too much of a good thing can be wonderful.” - Warren Buffett (Trades, Portfolio)

In my case I did not even have enough of the good thing.

Opportunity Cost of Investing in X Instead of Investing in Y

"Its easier to hold a stock after it drops 10% from your price than to buy a stock after its up 10% from the price you first looked at it!" - Basant Maheshwari

Big opportunity cost for me was being invested in pharma company Idenix Pharmaceuticals (IDIX) instead of investing in Yelp.

This is again a mistake for me because I knew and understood Yelp better than a Idenix. Though I made good returns in Idenix I could have made over 200% had I invested in Yelp.. 

One might say one is a pharma (and a value play) and the other a tech company (and a growth play), but my logic here is simple: I was more comfortable in allocating capital in low-conviction bet Idenix, which had not appreciated much, versus a high-conviction stock, Yelp, which had gone up 30% already when I first looked at it. 

Though my conviction in Yelp was higher, I did not invest in it just because it had already run up.

The lesson here is you always pay up for quality. 

Let me end the article with the following thought:

Let us hope not to make the mistake of repeating our mistakes again.

About the author:

Itzar Juna
A software Engineer in love with the wonderful world of investing.

Visit Itzar Juna's Website


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