“I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.” – Charlie Munger, in an interview with Motley Fool analyst Morgan Housel.
I’ve decided to push aside my embarrassment and have a go at learning this trick. Without further ado, here are my three worst investing mistakes of 2013.
I bought Silver Chef Limited (ASX: SIV) at $5.26, when the share price tumbled from $7.45. Silver Chef is a company that leases equipment to various small businesses. Its most important segment is lending to hospitality businesses, but it has recently expanded, targeting tradespeople with a new offering trading under the brand GoGetta.
I bought shares somewhat instinctively because the price looked compelling on cashflow and earnings multiples (and because I was anchoring to the previous higher prices). However, I subsequently sold my shares for a loss at $5.08. I sold because I couldn’t get comfortable with the debt of $90 million on the company’s books, and I don’t think the value of the equipment on the balance sheet can be taken at book value. That’s because the equipment is leased out (the company cannot sell it), and even when the company receives the equipment back, it’s unlikely, to my mind, to realise book value on sales.
I was probably being overly paranoid, worrying about the liquidation value of Silver Chef’s equipment, especially as the company is depreciating its assets appropriately. As long as management is prudent, there is little chance that liquidation values will ever be relevant. Silver Chef shares currently trade at $5.42, so arguably the mistake was to sell at $5.08. The real mistake, to my mind, was buying without conviction in the first place. The lesson learned is that paranoia will likely get the best of me, unless the balance sheet is very strong. The decision to buy, then to sell, in such a short period of time, is nothing short of embarrassing.
Perhaps the most embarrassing mistake, certainly the most expensive, was to sell my shares in Capitol Health Ltd (ASX: CAJ). When the diagnostic imaging roll-up was trading at just 13.5 cents, I had a long conversation with a friend of mine who happens to be a young doctor. He explained to me that as the population ages, it is likely that there will be greater demand for MRI scans, as they are a useful diagnostic tool. He also commented that it was completely impractical for people to come to hospitals for scans, as the MRI machines at hospitals were in high demand for patients with acute health needs.
I heeded his advice, bought shares, and then subsequently sold them at 19.5 cents. Shares currently trade at 49 cents. That’s about a 150% gain since I sold my shares; more if you include dividends. Ouch! Once again, I was concerned about increasing debt, and I couldn’t understand why the company would take on debt and pay dividends and raise capital, all at the same time. In truth, the dividends can be justified as a mechanism to release franking credits. The worst part is that watching the share price grow, after I sold, became too painful and I missed the opportunity to buy shares when they came down to 35c, a decent price. The decision has been both costly and embarrassing. It is particularly frustrating that I did the research at the right time and understood the company well. I failed to stick to my convictions.
The worst mistake, on a philosophical level, was selling my shares in SEEK Limited (ASX: SEK) at $10.40 in April 2013. I was influenced by a different style of investing: one that favours rock bottom prices over high quality businesses. Although it is essential to understand Graham-style investing, I am comfortable with Charlie Munger’s style of investing in growth at a reasonable price. Graham-style analysis was not the best way to analyse Seek: what was I thinking?
I bought my Seek shares at about $6.80, after my favourite investment newsletter recommended the purchase. Although I did make a good profit from the investment, I believe that it was unnecessary to sell my shares, because there was nothing about the investment that was bothering me. I merely felt as if the shares were getting a tad expensive. Seek shares are now about 30% higher, trading at about $13.50 and I have learnt another expensive lesson. If a business is high quality and has plenty of room to grow over the long term, don’t sell all your shares just because the price has run ahead of itself!
In the investing classic The Money Game, George J.W. Goodman wrote: “If you are not automatically applying a mechanical formula, then you are operating in this area of intuition, and if you are going to operate with intuition – or judgment – then it follows that the first thing you have to know is yourself. You are — face it — a bunch of emotions, prejudices, and twitches, and this is all very well as long as you know it.”
I’ve got much to learn about myself as an investor. From the mistakes listed above, it would appear that my most common error is anchoring. My original decision to purchase Silver Chef was driven by the fact that the share price had just fallen, rather than high conviction in the opportunity. My decision to sell Seek seems almost entirely based on the fact that the share price had risen. The company continues to grow earnings and has excellent prospects to expand. There was no logical reason to sell shares, as the valuation was not that extreme. The most expensive decision, selling Capitol Health, was an impulsive overreaction to the fact that the company was raising capital, taking on debt and paying a dividend. While I maintain that is strange capital allocation practice, in the future I will not freak out and sell my shares on that basis alone.
Taking into account my successes as well as my failures, I did better than ever in 2013. More importantly, I more than doubled my knowledge about investing and stock analysis in 2013. I aspire to an ever-steeper learning curve and I hope that when I write about my mistakes of 2014, they will at least, be different kinds of mistakes. To quote one of my mentors, a successful businessman who recently passed on: “Not a day goes by that I don’t make some kind of mistake. I just try not to keep making the same mistakes.” I plan to remain very aware of anchoring and avoid companies that have debt that might cause me to panic. However, my number one investing resolution for 2014 is to read more and make fewer share purchases.
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Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article.