Nobody likes to talk about their mistakes. Neither do I. But I would like to use my recent mistake as a lesson for everyone.
Before Chinese New Year 2011, my colleague shared with me two stocks that he think is worth investing. I took a look at the chart and found something striking – there was sign of accumulation (a concept I learned from Dennis). Feeling excited, I went to dig a little further and found that it had won many contracts for the past year. In addition, Swiber is in oil and gas business and since oil is on a strong uptrend, I it is favorable for the industry. My impression that the stock has potential was formed. Moreover, this colleague of mine has quite a good influence and is a trustworthy person. I bought the stock and shared it in the forum. Dennis was not bullish about the stock at all. There was no catalyst (any significant improvement to its earnings or other compelling reason to invest) at all. But I continue to hold it longer and see how the stock perform.
We all know that the market corrected during the Japan Earthquake. All my stocks went down, but I still held on to them as I saw it as a natural reaction in the market. Even if Japan had no crisis, the market would “find other reasons” to correct. Indeed, the market recovered and all my stocks regained their losses except Swiber. I was still quite stubborn, holding onto the stock, thinking that it would recover soon.
One day, I don’t know what struck me. Probably my subconscious mind started to remind me. I finally accept that it was my mistake and I should not worsen the situation. I put a stop loss below the support and let the market decide – If the stock continues to go up, I keep it. If the stock goes down, I sell it. Indeed I was stopped out and the stock continue to go down some more. Probably, it would go up eventually, but it does not matter. What is most important is to admit when you are wrong.
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Does the above example sound familiar to you? I hope you do not have such experience.
More projects do not mean higher earnings
Although Swiber was getting a lot of projects, they may not necessary translate to profits. Swiber may bid very low such that the profit margin is minimal. Ultimately, what makes a company valuable or its stock price higher is the amount of money it can take back minus its cost.
Forget about pride when you are wrong
I was too proud to admit that I am wrong and this pride costs money. It took me a while to realise and acknowledge it. Luckily it wasn’t too late. I know there are some people who are still holding on to their losses, even when they are terribly wrong. We must learn to take action to remove the weeds in our portfolio.
Do not listen to others
I always don’t believe in stock recommendations. Even though I preached it, I still committed the same mistake. We have a tendency to listen to others, especially when we are clueless. When things turn out well, we would want to claim the credit – I decided on the winning stock. When things turn out worse, we would blame it on others – the person recommended. We should take responsibility of our decision as well as doing the necessary research to evaluate the stock. The person who told you to buy stocks is not going to pay for your mistake.
Do not invest outside your competency
This is one of Warren Buffett’s timeless principle – do not invest in things that you do not understand. Without a good understanding in oil and gas industry, I was not able to really evaluate the profitability of the company. It was not a well calculated risk that I was taking. When one has no confidence in the selection of a particular stock, he/she will be affected easily by the ups and downs of the stock price, and do foolish things at the wrong time.
You may say that you have already knew all these. How amateur and stupid and I to make these mistakes. Put it frankly, I knew them too but I still committed all these sins without me realising until I reflect it on hindsight. We also know that to reduce weight means eating less and exercise more. How many of us do that? Talk is cheap. So what if you know all the investment principles but you don’t apply them?
I hope by sharing this, my humility would keep me on the right track.