By Dan Caplinger | September 13, 2012
In the run-up to the Fool's Worldwide Invest Better Day on Sept. 25, you're going to see a lot of good investment advice from a wide range of experienced investors. But, one thing I've found is that you often learn more lessons from the mistakes you make than you do from the successes you have.
That's why in my effort to try and help you become a better investor, I'm not going to tell you the biggest winner I ever bought, or the investments that I've held over the years that have given me slow but steady gains. Rather, I'm going to share one of my most embarrassing experiences as an investor, in the hope that you can avoid the same fate with your investments.
The story begins in 2006 with a stock called Precision Drilling (NYSE - PDS). At the time, the big boom in oil and gas production that we've seen blossom over the past several years had just started, and investors were still figuring out the lay of the land. With its emphasis on the Western Canada Sedimentary Basin and its rich reserves of conventional oil and gas as well as oil sands and coal bed methane, Precision Drilling looked to be on the cutting edge of a promising trend.
Two other things were attractive about Precision Drilling. First, its share price had dropped considerably from its summer highs, making me think the stock was cheap. At the same time, as a royalty trust, Precision Drilling had a huge dividend yield around 10%, making it a cash cow as well. That was enough to make me buy.
Unfortunately, soon after I bought the stock, Precision Drilling got some bad news. As part of a tax reform package, the Canadian government had decided to eliminate special royalty-trust status. As a result, Precision Drilling, along with Penn West Energy (NYSE - PWE), Enerplus Resources (NYSE - ERF), Pengrowth Energy (NYSE - PGH), and a host of other trusts, would have to give up its favorable tax treatment within five years. In what Fool analyst Christopher Barker would later refer to as the "Halloween Massacre," Precision Drilling's shares plunged along with its peers.
Then, Precision Drilling got more bad news as production levels started to drop. Because royalty trust payouts are based on income, the dividend that Precision Drilling paid got cut by more than half in just six months.
At that point, my original investing thesis was totally shot. Favorable tax status was doomed to extinction, and dividend income was no longer reliable. The appropriate thing to do would have been to sell immediately. Yet, it wasn't until much later that I finally got out, taking a big loss on the stock.
As promising as Precision Drilling was, I made several mistakes with it. First, I never wrote out a clear explanation of why I'd bought the stock or what I expected from the company. When bad times came, that lack of preparation left me unprepared to deal with the consequences.
Second, when the price suddenly dropped, I was reluctant to sell. I wanted to earn those losses back and believed that the market would bounce back. Yet even as oil and gas prices continued to rise, Precision Drilling didn't participate in the rally that other stocks saw. That should've been a warning sign in itself, but it only made me more tenacious.
Last, given how key a role dividends had in my purchase decision, the dividend cut should have been an unequivocal sign to get out. Instead, I changed my view, thinking that a lower dividend would help the company. That may have been true, but it was contrary to my original thinking, and all it did was allow me to justify holding on when I shouldn't have.
You won't always avoid stocks burning you. But, by writing out the reasons for buying and not letting emotions guide your subsequent decisions, you'll be able to handle problems a lot more effectively.
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