My New Most Embarrassing Investment Mistake

Recently, we Fools were asked to relate two stories for Worldwide Invest Better Day – one about an investment that went wrong, and another about our most embarrassing investment mistake. I recently made a new mistake that will definitely replace both stories next year. Read on, and learn from my errors.

What was this terrible investment?
It was Diamond Foods (Nasdaq: DMND  ) . Yes, that Diamond Foods, one of the most scandal-ridden companies in recent years.

A year ago, Diamond, owner of Emerald nuts, Kettle Chips, and Pop Secret, was in talks to acquire Pringles from Procter & Gamble (NYSE: PG  ) , which would have made it the second biggest snack food company in the world. But it wasn't long before people questioned Diamond's accounting methods, which mainly involved shifting payments to walnut growers into future periods, giving an unnatural boost to profit margins.

The scandal resulted in the ouster of Diamond's CEO and CFO, and an internal accounting audit was launched, which put an end to the Pringles deal. Meanwhile, one of the directors and a member of the audit committee committed suicide, and the Securities and Exchange Commission soon launched its own investigation.

Ultimately, the company announced early this year that it would stop reporting quarterly results as it determined which practices were at fault and how far back the company would need to restate its earnings results.

Clearly, this was a solid, well-run business that I should have invested my money in, right?

What we call "foolish with a lowercase f"
Basically, my thesis was that the news couldn't get much worse for this company. The stock price already reflected the worst-case scenario, I thought, and all Diamond had to do was meet the SEC's Dec. 7 deadline for its earnings restatements, for better or worse, and the stock price would rise once the uncertainty was gone. This sounded reasonable, and I decided the best thing to do was to buy call options for the December 2012 expiration and the $25 strike, essentially betting that the stock would go over $25 per share from about $18 before the third week of December.

Let's be very clear: This was not investing. This was betting. I had basically no information to base the decision on, and if I was wrong, I would lose my entire wager -- ahem, "investment." My foray into gambling is what makes this my new most embarrassing investment story. With few exceptions, I invest for the long term and only after thoroughly studying a company's fundamentals. I should have known better.

Naturally, the market gods punished me for my hubris. Last Monday, Diamond announced it would release its earnings restatements the following Wednesday, which sent the stock soaring and gave me the chance to take a huge profit. I held, and on Wednesday, Diamond essentially slashed  two years of earnings in half and had nothing good to say about the yet-unreleased earnings for this year. The stock fell 20%, and barring some kind of miracle, it looks like I'm going to lose my bet.

The lessons learned
I made two big, glaring mistakes. The first mistake was going into an investment situation with nothing more than a hunch to base a decision on. Hunches can be good, but not when they're your only argument, especially given what we know about how greed can lead to overconfidence.

My second mistake was taking such a short-term approach. True, I was betting on the outcome of an event with a set date, and using cheap, short-term options allowed me to use much greater leverage than if I'd used stock. But this is the same sort of logic people use when trading on earnings reports, unemployment figures, and other event-based situations.

Despite the market's reaction to the restatements, Diamond's future is not as bleak as it seems. Its brand portfolio includes some of the most popular snacks on the market, and unlike the late Hostess Brands, Diamond has positioned its brands as the snack of choice for many health-conscious consumers. Natural savory snacks have benefited  from the same growth trends propelling healthy-food companies such as WhiteWave Foods (NYSE: WWAV  ) and Whole Foods Market (Nasdaq: WFM  ) .

And while I've learned my lesson about speculating on unknowns, rumors abound that Diamond could be an ideal buyout candidate for a larger firm, including Kellogg (NYSE: K  ) , which ended up buying Pringles when Diamond's deal fell through, and whose CEO even mentioned earlier this year that Diamond is "clearly a fit in the portfolio."

But because I took a short-term approach, my position in Diamond will expire in a few weeks, probably too soon to benefit from any recovery the company might enjoy. But stay tuned for my next article, as I'll dig deeper into the company's newly released financials and decide whether there's still an opportunity here for a serious investor.

In the meantime, you can acquaint yourself with Whole Foods, one of the more successful and respected companies in Diamond's industry. In our brand-new premium report on the company, we walk through the key must-know items for every Whole Foods investor, including the main opportunities and threats facing the company. We're also providing a full year of regular analyst updates to go with it, so make sure to claim your copy today by clicking here.


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  • Report this Comment On November 23, 2012, at 11:52 AM, zrxman60 wrote:

    Almost all my "investments" are embarrassing in one way or another. I've invested in a couple of corporate bonds that did well, everything else was a loser.

  • Report this Comment On November 23, 2012, at 1:41 PM, whyaduck1128 wrote:

    I have a very small part of my stock market cash allocated to "gambling money", pure speculation. One thing I do with this money is to buy calls on seemingly short-term-troubled stocks. However, I don't usually buy very short-term options; I buy options expiring in six months to a year. This gives me time in case the underlying stock doesn't do anything short-term.

    Does this work? Probably not. I'd probably be better off just buying good stocks. However, it's fun. I've had some decent-sized gains (and losses) with this strategy and I've enjoyed the ride.

    But never, ever, do I take money from my long-term investments to play this game.

  • Report this Comment On November 23, 2012, at 2:56 PM, WickWeichert wrote:

    I once spent an entire year trading in options. At the end of the year, I totaled all trades and found that I had wasted A lot of effort, only to break even on 600 trades. I have not traded options since.

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