Investing: one mistake at a time

I started investing in September 2009. I went to my local UBS branch which assigned me to a “wealth advisor”. This wealth advisor told me about a few investment options but I was wise enough to turn them down. I had recently finished reading “Stocks for the long run” by Jeremy Siegel and even though I did not understand a lot about investing, I realised that investing in an index fund is going to be the best option for me. At least until I have learned enough to make decisions on my own. And so thats what I did.

I picked up a few elementary books (“Beating the street”, “One up on wall street”, “The little book of value investing”, “A random walk through the wall street”, “Devil takes the hindmost”, “Contrarian investment strategies”, “Super stocks”) and concluded that the best way is to buy stocks which were unloved and keep buying more if and when they drop.

The first mistake I made was not looking for a cheaper broker. I was with UBS and they charged Sfr 40 or 1%, whichever is larger, on buying and selling. I was biased towards investing at least Sfr 4,000 to meet the 1% commission. In the next year i.e., 2010 I bought four stocks – Bank of America (at $13), Hewlett Packard (at $40), Novartis (at Sfr 54), and Best Buy (at $30). Except Novartis, I had only unloved stocks in my portfolio and I kept adding when they dropped.

This is the graph of HP, BAC and BBY over my holding period.

My Stock Holdings

 

It is interesting that *all* my US stock holdings went down the drain. With each one of them I committed grave mistakes – most important of which were a lack of due diligence. If I had even done an elementary amount of work I would have found out that

  • HP had a terrible history of acquisition. Margin of safety required that I only buy when the company was selling for below $30. When HP dropped to $30 I would have realised the gross stupidity of management in buying Autonomy at outrageous price and suspending their share buyback program in the aftermath. This did not even require a lot of work ! I would have completely avoided investing in HP.
  • BAC was totally outside my circle of competence. I later incorporated into my worldview by arguing (with myself) that Buffett as well as Berkowitz are long. I convinced myself that I am coat-tailing and continued holding it through thick and thin. The stupides mistake I made with this stock was to not buy options when it was selling for around $5.5. I bought $300 worth of shares instead ! In my defence though I did not know about options then.
  • Best Buy was a mistake of margin of safety again (like HP). I should have bought below $24. Furthermore, retail is a cut-throat business and it pretty darn difficult to turn-around a retailer. This requires a larger margin of safety than for an ok business.

I still hold HP and BAC. I sold BBY at a very small loss.

In the middle of 2011, I had had enough of UBS commissions and I switched to Interactive Brokers. The low commissions and my newfound trust in “analysts” was a bad news for my portfolio, which went as low as $30,000 in Oct 2011 when the stock market collapsed (my equity value was $55,000). The analysts I trusted downgraded the stocks and I was left with huge paper losses.

Thankfully, I learned two very important lessons – trust only on your research and do not buy on margin.

There were some obvious byproducts of these lessons. Here are the most important ones.

  • Diversification is less than 15 stocks (one cannot keep track of more than that)
  • Risk is permanent damage to the business of the company as opposed to the drop in share price
  • Performance is absolute as opposed to relative
  • Cash is opportunity as opposed to getting eaten away by inflation. 
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