Want to hear an investing secret? It's a very important secret, and if you don't know it then your investing efforts will likely lead to an immense amount of frustration and hair pulling. Ready for it?
No investor gets them all right.
You read it right. Nobody is a 100% investor. Not Warren Buffett, not Peter Lynch, not George Soros, not even the folks at Motley Fool Rule Breakers.
So obviously, I've made my fair share of bad calls -- both investing in things I shouldn't have and deciding not to invest in things that I should have. The thing is, I absolutely love my job, but one downside is that many of my worst calls have ended up being very public.
Since it's the beginning of the new year and a time for turning over new leaves, I thought I might take a moment to review a few boneheaded moments and see if I can at least pull out a few good lessons for 2011 and beyond.
Summer of 2009, I published this article, highlighting my skepticism about the Treasury market and the future of bond prices. In the year and a half since then, I've continued to talk down Treasuries both publicly and privately and put my money behind my view by buying ProShares UltraShort 20+ Year Treasury (NYSE: TBT ) -- an exchange-traded fund that more or less acts as a short on long-term Treasuries.
Thus far I've seen a bit more than 20% of my investment evaporate as low rates declined to even more impossibly low rates. Of course that wouldn't be all that bad if I didn't lay a hefty bet right from the start.
Had I done what I normally do -- that is, start with a partial position and add to it if the price gets more attractive -- I would have felt good about putting more into the ETF. As it is, I had a full position from the start and because I don't want it to be an overwhelming part of my portfolio, I missed out on opportunities to improve my position by averaging down.
The boneheaded move here? Letting ego get the best of me and assuming that I had beat the direction and timing of the Treasury market. I still think the position will work out over time, but it could have been much better if I left myself room to buy more at lower prices.
The king of networking
It was early 2007 when I published this article calling Cisco (Nasdaq: CSCO ) "the ultimate rule maker." At the time, the stock was trading at $26.30; today, the stock trades at less than $21. Sure, I would still point to Cisco as the big dog in the networking industry today and the price decline alone doesn't mean that my analysis was wrong.
So what is it about my past call that makes me groan? This:
Even though Cisco is up nearly 50% since the lows it hit in mid 2006, the stock is still only trading at 25 times trailing 12 months' earnings, or a PEG ratio of 1.7 times. Sure it's not exactly "value," but when it comes to true Rule Makers, it can be tough to find them in too many fire sales.
While saying that a price-to-earnings ratio of 25 is a worthwhile buy price may be forgivable -- if and only if the growth absolutely justifies it -- a PEG ratio of 1.7 is just not an investable multiple.
The lesson? Valuations were much higher prior to the crash, and I apparently took off my sober-judgment hat when thinking through whether that was a reasonable price for Cisco's stock. More recently, I took another look at Cisco's valuation and think that I was a bit more level-headed this time around.
The casino kings
Much to their chagrin, Las Vegas Sands (NYSE: LVS ) fans have recently read about the fact that I'm not a buyer of the company's stock at today's price. But I haven't always had that view.
In the summer of 2009, I published this article, detailing my thoughts on four major casino stocks -- MGM (NYSE: MGM ) , Wynn (Nasdaq: WYNN ) , Las Vegas Sands, and Ameristar -- and suggesting that MGM, Wynn, and Sands looked like good buys. I also gave all three stocks an outperform rating in my CAPS portfolio.
But what didn't I do? Actually buy any of those stocks. Disaster! Sands has since become my best pick ever in CAPS, with a return of 380%. Wynn (which I picked a few months earlier) climbed 263%, and MGM has gained 128%.
The all-too-painful lesson here is that analysis isn't worth much if you don't bother taking action on it.
One mistake to rule them all
Of course of all the boneheaded calls that I've made there's probably not one that I'd rather have back as much as my thumbs down on Ford (NYSE: F ) back in 2009. There were no two ways about my view in early 2009 -- I put my foot down and said that Ford was going to be one of the worst stocks for 2009.
Done laughing yet? As we know now, not only was Ford one of the best performing stocks of 2009, it's also returned more than 800% since the day my article was published.
So where did I go wrong? At that point, the country was not only mired in the worst of the recession, but the U.S. auto industry was in a pretty bleak position. General Motors (NYSE: GM ) went bankrupt, but Ford was most definitely not General Motors. While GM had been burning cash for years, Ford was actually producing significant amounts of free cash flow prior to 2008. And while Ford's EBITDA-to-interest ratio (a measure of solvency) was in the relatively safe range of 2.9 in 2008, GM wasn't even producing positive EBITDA.
The lesson here is to make sure to take in the entire picture when evaluating an investment. I got hung up on the magnitude of Ford's debt (to be fair, it was a lot of debt), but failed to realize that the company appeared able to deal with that debt. Fortunately for Stock Advisor subscribers, David Gardner and Karl Thiel didn't miss out on the high points at Ford and they recommended the stock in late 2009.
As painful as mistakes can be, there's often a useful lesson at the other end. Anyone else out there have a lesson they've learned from an investing mistake? Head down to the comments section and share your thoughts.
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