Profiting From My Mistakes

No doubt you've heard Frank Sinatra or some other crooner sing "My Way."

A few lines:

Regrets, I've had a few,
But then again, too few to mention.
I did what I had to do,
And saw it through without exemption.

When I look back on my modest but active investing career, spanning a decade now with perhaps another 40 to go, I also admit to having some regrets. What investor wouldn't? Thing is, I've had more than a few. And unlike the lyrics above, I didn't always do what I had to do. Instead, I did things my way -- and it didn't always turn out as expected. Still, some good can come from these sorrows if you learn from my missteps and avoid losing money. So I offer up my mistakes, mostly committed as a novice, so that you might literally profit from them.

My portfolio runneth over
Early in my investing career, it was hard to say no to intriguing companies. When I heard or read a good tidbit about a company, I wanted to own the stock, and many times bought it. At one time, 30 or more stocks filled my portfolio, which was suboptimal in many ways. To begin with, I couldn't keep up with each company even if I tried to keep things on track -- 30 companies times four quarterly reports yields 120 financial releases to read, with 30 of them hefty annuals. I liked modern fiction and biographies too much to devote much time to annual reports.

Another drawback to overdiversifying is that it dilutes the power of each holding. Let's face it, that many companies couldn't have held equal promise. If 10 were the most promising, then they were being held back by less compelling companies. It makes the most sense to put all your money in only the best ideas (perhaps eight to 15 in all) when you invest in individual stocks. (Note: For many people, mutual funds make a heck of a lot of sense. We've long recommended index funds for most people, as has Berkshire Hathaway (NYSE: BRK.A, BRK.B  ) chairman and superinvestor Warren Buffett. But if you want to try and outperform index funds, give our new Motley Fool Champion Funds newsletter a look. It delivers several promising and impressive mutual funds each month.)

But before I bought into any company, I should've weighed my interest -- would I actually want to read up on it and follow its progress? Too many of my holdings bored me -- except for their potential to make me rich or poor. My eyes glazed over as I thumbed through their annuals. I'd have been better off investing in companies whose products or services I knew, used, liked, and understood. Starbucks' (Nasdaq: SBUX  ) or eBay's (Nasdaq: EBAY  ) annual reports would've held my interest instead of Cisco's (Nasdaq: CSCO  ) or Dell's (Nasdaq: DELL  ) .

Ignorance is not bliss
As a novice investor, I failed to research many of my investments sufficiently. Instead, I blindly trusted the advice of magazine articles or talking heads. As you can guess, it was a crapshoot -- sometimes the tips panned out, other times they didn't. What a dumb way to invest.

I should've heeded the words in these wise lyrics:

I planned each charted course,
Each careful step along the byway.
But more, much more than this,
I did it my way.

That wasn't me. I did far too little planning, and was far too careless. I paid for my mistakes in thousands of dollars.

So it goes without saying that I didn't know enough about those companies in which I'd first invested. In fact, I recently reviewed some of my old portfolio printouts, and looking just at the ticker symbols, I can't even recall the names of some of the companies I owned. When I held them, I could have told you that they specialized in telephone equipment for hotels or semiconductor chips, but probably not too much more than that.

A smart investor should be able to talk for at least a few minutes about each company's strengths and weaknesses, competitive edges (with sustainable advantages over competition), financial health, growth record and prospects, management's style and integrity, and so on. But at that time, I couldn't tell you exactly why I bought the stock, much less what kind of performance I expected or what would make me sell off my shares.

Timing is everything
Some of those stocks I sold too late -- and really should never have owned. As I searched for my former holdings' tickers in the Fool's Quotes & Research area, many were unknown. The firms had been swallowed up or had simply gone out of business.

Other stocks I should have held on to, but in my haste to buy shares of the next exciting thing, I sold off various shares to generate the money to buy other stocks. I sold 50 shares of software maker Adobe Systems (Nasdaq: ADBE  ) back in 1995, generating proceeds of $2,830. Had I hung on, they'd be worth three times as much. I sold a small cache of Capital One Financial (NYSE: COF  ) shares in 1997, which today would be worth four times as much. The same goes for my shares of Oracle (Nasdaq: ORCL  ) and Applied Materials (Nasdaq: AMAT  ) .

It's also embarrassing to admit, but many stocks I held for just a few months. Looking back, I'm not sure what I was thinking. In the short run, a stock might do anything -- surge, swoon, or stay put. But the long run is what should matter to most of us, and I never gave most of my holdings a chance.

Trigger-happy
Over one or two years, before I calmed down, I probably placed as many as 100 orders per year. Since commission costs were higher in those days, I probably spent around $2,000 or more annually in brokerage commissions alone in that period. Ouch.

The greed factor
When I knew I wanted to buy or sell a certain stock, I often fixated on the price in meaningless ways. If it was trading for around $25 per share, I'd tell myself that I'd buy if it dropped to $24. Of course, sometimes stocks on the move just don't fall back where you want or when you want. I lost out on some opportunities that way.

Other times, if it did fall to $24, I'd tell myself, "OK, let it fall to $23 -- then I'll buy." This might not have been so bad if I'd calculated estimates of the stocks' fair values -- then I'd be making better-informed decisions and waiting for bigger possible profits and larger margins of safety. But that wasn't the case. Instead, I was just gaming things, taking chances on prices that might not fall any further.

Is the price right?
Too often, I studied a company enough to know that it was in good health with solid growth prospects and to believe that it deserved a berth in my portfolio. But I gave short shrift to the next necessary step in stock evaluation -- determining at what price it's worth buying. To buy at any price is generally not too bright. It's true that in those days, and through the late 1990s, many solid companies were overvalued, but they kept appreciating nevertheless. That didn't last forever.

Some investors look to buy something for a dollar that they think will be worth two dollars in the future -- even though it may really be worth 75 cents at the moment. That can work, but it's adding extra risk. If it's overpriced now, it may well drift down to a more rational level. Smart investors look to buy something worth a dollar for 50 cents. That's a more conservative way to invest, because you're building in a margin of safety. The stock is already undervalued, so it may be more likely to rise than fall.

Am I better off now?
Fortunately, I'm a smarter investor today. I trade much, much less frequently (perhaps only four or five times a year), which keeps my commission costs down. Plus, I'm using a less expensive broker and paying around $10 per trade, instead of the $50 to $75 I used to pay. (Find a better broker with the help of our Broker Center.)

I thinned out my portfolio many years ago, to about a dozen holdings, and it has been thanking and rewarding me for that. I know a lot more about most of the companies, too, and have held most of them for several years now. Though there are still a handful of Sun Microsystems (Nasdaq: SUNW  ) shares in my portfolio, and I'd be hard-pressed to rhapsodize about Sun and its glorious future. I simply don't know as much about the company as I should. I really should take my own advice and either learn more or sell it.

Share your wisdom
I invite you to share your own blunders or advice on our My Dumbest Investment board. Or just set me straight on our Fool News & Commentary board. If you enjoy reading about investing mistakes, check out these common investing mistakes and this classic Phil Weiss article.

Selena Maranjian produces the Fool's syndicated newspaper feature --check it out. She owns shares of Berkshire Hathaway and Sun Microsystems. For more about Selena, viewher bioandher profile. You might also be interested in these books she has written or cowritten:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool isFools writing for Fools.


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