How I Lost 89% on One Stock, and How You Can Avoid My Mistakes

As any member of Alcoholics Anonymous knows, the first step to righting your wrongs is admitting your weakness. In that spirit, I'm writing about my biggest investing mistake ever. Here. Publicly. For the whole world to see.

After all, if legendary investor Peter Lynch of Fidelity Magellan fame could publicly admit to holding deathtraps AIG and Fannie Mae at the end of 2008, what's a guy like me got to lose?

I hope two things come out of my story:

  1. Someone, somewhere out there learns something from my mistakes.
  2. Having studied psychological commitment and consistency in Dr. Robert Cialdini's classic work Influence: The Psychology of Persuasion, I hope that my public commitment to avoid repeating these mistakes prevents me from falling victim to them again.

Mea culpa
My greatest investing failure was my investment in Allied Irish Banks (NYSE: AIB  ) . Having held for a few years hoping for a recovery, I recently sold my entire stake for a locked-in 89% loss.

As painful as this loss was, seeing how avoidable it was hurts even more.

Perhaps the only comforting thought can be found in Warren Buffett's 2008 Berkshire Hathaway annual report. Buffett wrote that he incurred a significant loss by investing in Irish banks. Some have speculated that Allied Irish Banks was among them. If so, at least I was fooled alongside a much better investor.

Following the crowd
I first went wrong in falling prey to social proof. I put too much weight on the research, opinions, and actions of others without thinking through my investment decision for myself and deciding whether it made sense in my portfolio.

Before my purchase of Allied Irish Banks, it had been recommended in our Global Gains newsletter service. The advisor wrote that the stock was trading with low historical and relative multiples, a very attractive dividend yield, and a significantly undervalued price.

While it was a compelling argument, I failed to carefully evaluate whether I agreed with their assessments. And I became even more hooked as other analysts began purchasing Allied Irish Banks for their personal portfolios.

As a result, I also began to give in to confirmation bias -- where I sought out opinions that further confirmed my pending buy decision, rather than seeking a contrarian opinion that might indicate danger ahead.

Confirmation bias is one of the most common predispositions investors face. And it's the truly great investors who develop the ability to honestly look at both sides of an investment thesis.

Anchoring in loose sand
As if those errors weren't enough, I also became anchored to the price at which the service recommended the stock. I fixated on those price points; in my mind, anything lower than their entry prices became a clear bargain.

So when Allied Irish Banks fell another 50%, the stock became twice as attractive to me, as did the doubled dividend.

These mistakes fed off each other, collectively persuading me to overlook my normal investment process. I took shortcuts. I failed to perform as much research as I typically do. I fell in love with the stock, viewing it as pure upside, without truly understanding the risks and pressure points. And I didn't even consider the possibility of a suspended dividend (which later came true).

The company -- which, hurt by the falling Irish economy, needed to boost its construction and development loan reserves -- was much more complicated than I originally thought.

The lesson here? Investments should always pass the Ockham's razor test -- that an investment thesis should be made as simple as possible, but no simpler. The complexity of Allied Irish Banks forced me to look to other investors and bypass my own investment process.

Lessons learned
The key takeaways from my mistakes, then, are:

  1. While it can be helpful to look at the opinions of others, you still need to carefully consider whether you agree with their thinking. Even if Allied Irish Banks had risen 89%, it still would have been a mistake for me to buy it, because I hadn't sufficiently examined the reasons for owning it. You have to distance yourself from the positions of people you respect. This is something that gold investors should be cautious about today, with gold exchange-traded funds like SPDR Gold Trust (NYSE: GLD  ) inching higher and higher as more "investing gurus" are bitten by the gold bug. It's also something investors in Apple (Nasdaq: AAPL  ) should be cognizant of, now that it's the most widely held stock by hedge funds. After all, following the herd can -- and often does -- burn you.
  2. It's much better to leave a stock's price history out of your analysis, so that you're not tricked into a value trap. Companies can, and often do, change. Energy Conversion Devices (Nasdaq: ENER  ) might have seemed like a bargain at the start of 2010, when it was down more than 50% from the previous year and after it announced plans to restructure to "more efficiently leverage future growth." But it doesn't seem like it would have been wise to buy it -- the stock is down another 50% year to date and the company's still struggling to find its footing. United Community Banks (Nasdaq: UCBI  ) and Delta Petroleum (Nasdaq: DPTR  ) shared a similar fate and also look less than promising today.
  3. It's best to simply bypass investments that are too complex, or that you're not certain you solidly understand.

These takeaways -- and countless other investor psychology topics -- are heavily studied by the Million Dollar Portfolio team, as they invest in the best stocks across The Motley Fool universe.

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This article was originally published April 14, 2009. It has been updated.

Adam J. Wiederman doesn't own shares of the companies mentioned above. Berkshire Hathaway is a Motley Fool Inside Value pick. Apple and Berkshire Hathaway are Motley Fool Stock Advisor recommendations. The Fool owns shares of Apple and Berkshire Hathaway. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 03, 2010, at 2:50 PM, TMFThump wrote:

    Adam,

    I found your piece very interesting due to some personal parallels. I too put some of my hard-earned money into AIB and proceeded to lose 90% and perhaps more as I still retain a position in the stock. Unquestionably, financials are difficult to value, and I relied on the opinions of others to my own misfortune. The complexity you speak of can easily be applied to just about any bank, which you are indirectly suggesting most investors should steer clear of -- an opinion I would agree with.

    Equally interesting about my own experience with AIB is how I came to own it. It's very ironic that you would point to your errors with confirmation bias on this Irish bank in a piece used to promote Million Dollar Portfolio. For one the very nature of MDP is to target investors of lesser experience who tend to rely on the opinions of others when building their portfolio. Stranger yet is that I came to own AIB through my subscription to MDP and the stock having been purchased by that service nearly three years ago.

  • Report this Comment On November 03, 2010, at 3:50 PM, cabincruser wrote:

    Hi adam and killtheump ,

    i was one of the lucky ones who DCA'd on aib at a buck wayyyyyyyyy back when it was still an MDP Buy, ( in fact , the actual morning before it was put on hold in the afternoon ) and when it bounced back up ( and MDP said to sell ) i actually made money on the position.

    Since that Sell , aib has again fallen victim with the rest of the banks.

    So lessons learned certainly are painted by perspective and experience ....

    AIB taught me to dollar cost average into a position and not jump in all at once.

    In hindsight it may be easy to say it was a poor investment though that is seldom evident at the time.

    If one followed the crowd into nflx or cmg the tendancy might be to say Don't fight the Trend , eh , instead of don't follow the crowd . ( Momentum vs value investing?)

    So i have made plenty of my own mistakes and what i learned from others mistakes on aib was that some investments just don't pay off no matter how much due dilligence one performs or digests.;^)

    As P. Lynch said , 'Whoever turns over the most rocks wins the game'

    Glad to hear that MDPortfolio will be gettin' some fresh blood to contribute to due dilligence and help turn over some more rocks .

    Thanks for your kind perspective.

    Fool on , cabincruser

  • Report this Comment On November 04, 2010, at 8:37 AM, cstash wrote:

    this article should be titled: how you could of made 900% on this stock.

    aib hit a low of 70 some cents on its last low down, and aib was a motely fool recomendation with it also having high ratings in a couple of the fools premium services. but with no coverage and even a sell recomendation when it hit the low. from that point on aib ran up to 10 somthing. since then I have not subscribed to on single fool premium service. its called poor coverage period. I still think aib is going to survive no matter what. but as far as fool premium services, no thank you

  • Report this Comment On November 04, 2010, at 10:06 AM, eansor wrote:

    Adam -

    I wonder how many Fools (fools) there are like us in all of Fooldom who purchased this stock due to its high visibility and recommendations from fool.com and then held on too long thinking there was no way it could sink any lower and then having too large a loss position to justify selling. You are a brave soul to lock in such a loss. I for one will hold on to my paper loss position with the expectation that, like the proverbial phoenix, this too will one day rise from the ashes. Just like Thornburg Mortgage.

  • Report this Comment On November 04, 2010, at 11:37 AM, torpex77 wrote:

    Well, I sold 25% of my position this morning, for about a 55% loss.

    I keep telling myself to be patient, but this just keeps sliding down. I guess I think things are going to get worse before they get better.

  • Report this Comment On November 04, 2010, at 7:39 PM, itayyahel wrote:

    with all the respect I'd like to say that you all know everything. however you all don't know anything!!!!

    like those who said the banks and all the stock market is in fragile... therefore all those who made the biggest mistake of their life by listen to the media they didn't take part in the biggest rally ever I say to all of you you're all gambler but not investor.

    from every ten times you bet on wrong stocks you can lose all your investment because this is the American dream. the dream of 1 to 10000 that can be rich but all other can be the modern slaves. so stop scare people

    and remember live and let other live too.

  • Report this Comment On November 05, 2010, at 9:51 AM, luvkarena wrote:

    Hi Adam,

    I totally agreed your firm decision to cut the lost to stop the bleeding. For the current stock price that is lower than a dollar, it's very risky to hold and buy this stock cos the chances of delisting or transferring to OTC are very high. Look at FNM where 90% over owned by the government has been delisted and relisted in OTC. It's a similar case to AIB where the majority share holder is the Arish government. If delisted, other common shareholders will get back nothing...

    Don't fall into losers' curse and wait for the fat hope!

  • Report this Comment On November 05, 2010, at 1:53 PM, jvera60 wrote:

    I really don't see your point. Looks like some aspects of your article go against the Motley fool investing phylosophy. After losing 89%, why on earth sell? Why not hold to your position? What will you do when AIB bounces back? Write an article whining about how you lost the oportunity to make money? And on top of that you think you can sell MDP subscriptions with this article? Really, don't get it.

  • Report this Comment On November 07, 2010, at 7:32 AM, weetonyharris wrote:

    Hi there all,

    i am down on this stock 76% on paper, it works out to be the same amount i made on this stock the year before, buying at 2.20 and selling at 5.00.

    i re in vested my profit at 4.20 and have averaged down to 3.41. i am holding 8000 units.

    lucky me :(

    my question is, do i average down now when its at 0.80 or should i wait and see what happens, but what am i waiting to see ?

    any advice would be great.

    thx

    WTH

  • Report this Comment On November 07, 2010, at 11:20 AM, jvera60 wrote:

    Hi Weeton,

    I am not in a position to give u any advice. I am just telling what I am doing, and my situation is similar to yours. I hold around 5000 shares, bought at an average price of 2.4. I have been buying since 2007. I bought shares in those days at 42! Awful recommendation from TMF, I guess. In mid 2009 I bought some at .8, and this week I bought some at .92 .

    The price today indicates you are buying 1 dollar of assets for 7 cents. This is a risky game, of course. Having said that, the only downside for this is bankrupcy. So, if one doesn't expect AIB to go bankrupt (I don't), then the right thing to do is buy. And that is what I am doing. I have an open order at a price of .62 , just in case it continues to fall. I don't think that is going to happen, and I don't want that to happen, but if it goes down I am buying again.

    Take care.

  • Report this Comment On November 08, 2010, at 2:10 AM, weetonyharris wrote:

    thanks jvera

  • Report this Comment On November 08, 2010, at 8:37 AM, weetonyharris wrote:

    Jvera, why do you have an opener at .62, if it only goes down to .70 and then moves up will you buy more ???

  • Report this Comment On November 10, 2010, at 12:24 PM, jsbacker wrote:

    yeah, one should never sell for a 90 percent loss. that is beyond stupid. might as well let it ride.

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