On my road to retirement, I’ve made a number of investment mistakes, but none worse (well, maybe Home Depot, but let’s leave that for another day) than my investment in Hewlett-Packard. It was my biggest loss to date and it definitely stung. Let’s review what happened and what can be learned from the experience.
I first bought Hewlett-Packard (HPQ) on Jan. 3, 2011. I was really starting to get into this “value investing” concept and I saw bargains everywhere. I had learned to invest in good businesses that were highly profitable and to pay prices representing low free cash flow multiples. Back then I wasn’t smart enough to document my thoughts about buying investments, but I remember HPQ coming up as very cheap relative to other opportunities in my wide moat spreadsheet. I also remember checking what the “Gurus” were doing with respect to the stock (something which had become part of my “checklist”) and seeing that the buy/sell ratio was favorable. Having learned that running a highly concentrated portfolio was the way to go, I had also bought in rather fearlessly by putting in a good chunk of my portfolio in this opportunity.
As you probably already guessed, I also didn’t worry that I knew very little about the company, how it made money, who its competitors were or what its growth prospects looked like. I was essentially running with the assumption that the company had done well in the past and should continue to do so.
So, how did it all turn out? you probably already know the answer. The stock pretty much began dropping the day after I bought. Before I knew it, I was down nearly 20%. But, my studying had prepared me for this moment, so I did as I was taught and bought even more. By the end of my buying spree, I had averaged in at $41.14 per share and had roughly 10% of my portfolio in this stock. I stubbornly watched the stock continue to fall for more than a year until in August 2012, when the company announced an $8 billion writedown related to its Electronic Data Systems (EDS) acquisition. The stock swiftly dropped 25% to $24 per share.
So, what did I do? Nothing. (Yeah, I know, this guy’s a real genius.) Instead, I waited it out, anchored on price. Next thing I knew, in November 2012, the company announced an additional $8.8 billion writedown on the Autonomy acquisition. YIKES! The stock dropped to $11.94 (I was now down nearly 71%).
I did nothing. (Wow, I know what you’re thinking: This guy is a moron.) Instead, I waited it out. Eventually, the stock climbs to over $25 per share and I take my punishment with a realized loss of 39%. A wild ride, filled with ignorance, laziness, stupidity and overconfidence.
What I learned:
- You need to understand the business, the industry and the growth prospects.
- You need to do the necessary work, including understanding the bear case and whether your reason for buying overrides that argument.
- When companies make significant acquisitions (whether in the past or while you own it), it is important to understand why they made the purchase and whether you agree with it. Can you justify the price they paid?
- You need to estimate the downside risk.
- Past performance is no guarantee of future performance.
- You need to be able to argue why you think it’s cheap.
- You need to document your reasons for buying something, so you can check if your thesis has changed when events happen.
- When something significant happens to the company, check your thesis; it may be sufficient reason for you to sell.
- Don’t anchor on price.
- Don’t be overconfident.
- Don’t let a mistake get you down; even the best make mistakes.
It was an expensive lesson, but in a way, I’m happy for having had it because I learned something and it didn’t break my spirit. However, it will be a lot more difficult to accept the losses if I repeat the mistakes again.