Why I'm Down More Than 80%, and How to Avoid My Mistakes

As any graduate of Alcoholics Anonymous knows, the first step to setting out on the proper path is admitting your weakness. In that spirit, I'm writing about my biggest mistake so far during this bear market. Here. Publicly. For the whole world to see.

If legendary investor Peter Lynch of Fidelity Magellan fame could educate investors by publicly admitting to holding AIG (NYSE: AIG  ) and Fannie Mae (NYSE: FNM  ) at the end of last year, what's an analyst like me got to lose?

I hope two things come of my story:

  1. Someone, somewhere out there learns something from my mistakes. Feel free to consider me a sacrificial teacher.
  2. Having studied psychological commitment and consistency in 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 of the past year has been my investment in Allied Irish Banks (NYSE: AIB  ) . To date, I'm down 88%. Not quite as big a loss as investors in casino operators Las Vegas Sands (NYSE: LVS  ) and MGM Mirage (NYSE: MGM  ) have experienced, but what consolation is a few percentage points' difference when you've lost 88%?

And yet, painful though that loss is, seeing how avoidable this was in hindsight hurts even more. Perhaps the only comforting thought is that in Warren Buffett's recent Berkshire Hathaway (NYSE: BRK-A  ) annual report, he writes that he also suffered a significant loss by investing in Irish banks. Some have speculated that AIB was among them. So at least I was fooled alongside a much better investor than me.

Following the crowd
My first major mistake was 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.

Prior to my purchase of AIB, it had been recommended by our Global Gains newsletter, and purchased by the team charging up our real-money Million Dollar Portfolio real-money service. Advisors in both services wrote that the stock was trading with low historical and relative multiples, a very attractive dividend yield, and a significantly undervalued price.

While they made compelling arguments, I failed to carefully evaluate whether I agreed with their assessments. And I became even more hooked as these fellow analysts also began purchasing AIB 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 buy decision, rather than seeking a contrarian opinion that might indicate danger ahead.

Seth Jayson, co-advisor of our Motley Fool Hidden Gems newsletter service, recently shared with me that confirmation bias is one of the most common predispositions investors face. He explained that truly great investors develop an ability to honestly look at both sides of an investment thesis.

Anchoring in loose sand
As if those mistakes weren't enough, I also became anchored to the price at which each 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 AIB fell another 50% from the most recently recommended price, the stock became twice as attractive to me, as did the doubled dividend.

These mistakes fed off each other, collectively convincing 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 mostly upside, without truly understanding the risks and pressure points. And I didn't even consider the possibility of a suspended dividend (which recently beset the company).

This company -- which, hurt by the falling Irish economy, recently needed to boost its construction and development loan reserves -- was much more complicated than I originally thought. Andy Cross, also co-advisor at Hidden Gems, recommended to me that investments should always pass what he calls "Einstein's razor," which dictates that an investment thesis "should be made as simple as possible, but no simpler." The complexity of AIB forced me to look to other investors, and to bypass my 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 investment theses. Even if AIB had risen 88%, it still would have been a mistake for me to buy it, because I hadn't sufficiently examined the reasons for owning it. You must be able to distance yourself from the positions of people you respect.
  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. Citigroup (NYSE: C  ) might have looked cheap at the start of 2008, when it was down nearly 50% from just six months earlier. But credit tightened, defaults rose, the economy worsened, and the stock fell another 87% in the months that followed.
  3. It's best to simply bypass investments that are too complex, or that you don't believe you solidly understand.

These takeaways -- and countless other investor psychology topics -- are heavily studied by Hidden Gems advisors Seth Jayson and Andy Cross as they seek out the world's top small-cap companies. That has now become an even higher priority for them, as they construct a real-money portfolio of their best small-cap ideas for our Hidden Gems newsletter service.

Not only can you see their buy guidance right now, but they're also offering you the chance to read their research so you can see if you agree with their analysis. Click here for a free guest pass -- there's no obligation to subscribe.

Fool analyst Adam J. Wiederman owns shares of both Allied Irish Banks and Berkshire Hathaway. The Motley Fool also owns shares of Allied Irish Banks, a Global Gains recommendation, and Berkshire Hathaway, an Inside Value and Stock Advisor recommendation. The Motley Fool's disclosure policy likes to learn from its mistakes.


Read/Post Comments (29) | Recommend This Article (108)

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 April 14, 2009, at 5:18 PM, sana5000 wrote:

    i think your advice is right on, thanks for sharing it. I fell in love with 2 stocks Visa and GE and road them down 25 points and 20 points and paid a fortune for it

  • Report this Comment On April 14, 2009, at 5:56 PM, MyDonkey wrote:

    Nah, don't be so hard on yourself, kid. 96.8 percent of CAPS raters were wrong too.

    Now that the price of AIB is down to $2.76 it's an absolute STEAL. Hubba hubba!

  • Report this Comment On April 14, 2009, at 6:32 PM, JoeAgresti wrote:

    losers

  • Report this Comment On April 14, 2009, at 6:37 PM, Fliujniligui wrote:

    Well, for AIB I ended up buying and loadign on each drop from 20$ to 1.01$. Gut prevented me to buy more at 0.75 but it would have been great. I was holding a massive float of them but sold half of it exactly at the dollar average cost I had because I think AIB is still a great buy but there is now a new little problem : The Nama. AIB was in my opinion, after analyzing statements and loan portfolio I had access in all their reports from 2003 to 2008, able to withstand the 7 billions euros loan losses to come in 2009-2010 without total nationalization or shedding its valuable assets. And now comes the Nama, who doesn't state about the loss to take on loan transfer, which would just wipe out all AIB common equity NOW if the hair cut is over 25%, meaning, nationalization. Some brokers advanced a 15% haircut, but who knows. AIB was conservative with 70% LTV but now collateral fell in value by 40 to 80+% and EVERY DAY passing in Ireland means unemployment and house demand slumps well beyond March 2nd worse case stress test (We are already past it)

    For this, buying AIB before the Nama was announced was analytically justified, but now that the Nama is announced but gloomy and foggy, in a background of "Ireland always overshoots on the downside", Reducing exposure or even sell all at any price is a reasonable option. I think AIB was well managed and that if Nama is realistic and if there is effective bottomming of global economy in next 9 months, government may nationalize just 75% of AIB and on the very long run, 25% of AIB is massively worth more than its current market cap. I chose to reduce exposure to sleep well and I admit that I risk a total loss on the remaining, but still believe the business was well run and managed, just got trapped by Irish Economy fed up by Anglo and HBOS reckless 100% mortgage lending.

    Would I buy again ?

    Yes for a short time if it returns under 1$ and that it is not (yet) nationalized.

  • Report this Comment On April 14, 2009, at 7:43 PM, Need2Relax wrote:

    Why not just buy stocks that are hitting new all-time highs? Those would be the strong ones. You can easily find them at any stock website. It seems much safer to buy stocks as they rise, instead of buying as they plummet & hoping they reverse direction just as YOU buy it. Then make sure you sell before it completely deflates again. Ride the trend up, then get off and ride another one up.

    The more I think about it, the more it makes sense to me.

  • Report this Comment On April 14, 2009, at 9:21 PM, Varchild2008 wrote:

    Yea... Biggest cause for mistakes is taking someone else's opinion as your basis for investing in an equity.

    I never do that. Well.. Not anymore... I got burned a bit last year as a newbie investor... Bought into an equity recommended to me by a friend that made me lose $2 Grand real quick. The name? E*Trade.

    Now I go by what I think and sure I share my thoughts on Motley Fool but ultimately.. I do so just to show how I conduct my own personal research.

    If I want to buy RETAIL.... I visit the store.. If I want to buy a BANK stock... I better be familiar with the company. etc. etc. etc. If I drink the beverage, I buy the beverage company. If I play the video games then I buy the video games company.

  • Report this Comment On April 14, 2009, at 9:40 PM, jmoule wrote:

    One of the great investment classics is "Where are the Customers' Yachts?" by Fred Schwed. The high point of that book is the Peter Arno cartoon accompanying the thought that you can not explain marriage to a virgin. The point: You can read all that you want about investing, but you will never learn anything until you do it with real money.

    Another classic is Bernard Baruch's autobiography. He amassed a great fortune. He learned early (by mistake) never to venture more than one fifth of his funds in any one investment.

    Your request for advice infers that you are new to this frustrating occupation. I hope that you can regard this experience as the necessary cost of learning.

  • Report this Comment On April 14, 2009, at 11:25 PM, radman99 wrote:

    I think this story falls in the category of don't try to catch a falling knife.

  • Report this Comment On April 14, 2009, at 11:38 PM, AirForceFool wrote:

    Great article... yeah, just because a stock fell from $10 to $2 doesn't mean it isn't headed to 50 cents... not in this market... which is why everyone should try to short some stocks in CAPS... learn to pick losers... if you get at good at picking companies that you don't want to own, at lest you will weed out a few of the companies that you shouldn't buy in real life... understanding what is bad is just as important as understanding what is good... Chris

  • Report this Comment On April 15, 2009, at 12:10 AM, ronpaulite wrote:

    Thank you for sharing your mistakes.

    Everybody makes mistakes. So there is nothing to be embarrassed about. The important thing, as you said, is to learn from them.

    Good luck to your future investments.

    Got Gold?

  • Report this Comment On April 15, 2009, at 12:24 AM, alexwolf2009 wrote:

    It is all so Irish... You better tell me what will happen with BAC , C, USB or MS as the end of the April approaching and the governments stress test results will be anounced?

    I also fell in love with Irish and bought another Irish beauty(IRE) and wondering if the futures is also bad for them?

  • Report this Comment On April 15, 2009, at 2:03 AM, rezamohsin wrote:

    This is what has become a typical Motley Fool article - use any and all reasons to pen something with an interesting headline, and end with a plug for a Motley Fool paid service. And the article goes further by weaving in Seth and Andy's sage perspectives on confirmation bias and Einstein's razor :)

    At the very least let's not go so overboard to have inconsistency within a single article where the counsel is to avoid "too much weight on the research, opinions and actions of others" when referring to Global Gains / Million Dollar Portfolio, and ending a couple of paragraphs later by recommending another paid service.

    Well, thanks for writing. But do keep in mind that an article every once in a while that is not an excuse to plug a paid service would be very welcome by the readers.

  • Report this Comment On April 15, 2009, at 8:15 AM, saintmoritz wrote:

    I'm a little confused by this statement:

    "an investment thesis 'should be made as simple as possible, but no simpler.' "

    Is this irony, or just redundant? If a thesis is as simple as possible then it cannot be made simpler.

    *shrug*

  • Report this Comment On April 15, 2009, at 8:23 AM, icuryy4me wrote:

    "Prior to my purchase of AIB, it had been recommended by our Global Gains newsletter, and purchased by the team charging up our real-money Million Dollar Portfolio real-money .."

    Don't be so hard on yourself. After all one would understandably expect that the advice that you pay for to be very different from that which you might find in discussion boards, blogs and so on. They do portray themselves as mentors and one could reasonably take the attitude, especially if one was a novice, that "They know best".

    Nevertheless, you point out an important lesson and it has been reinforced by the comments. Do your own research.

  • Report this Comment On April 15, 2009, at 8:41 AM, ReillyDiefenbach wrote:

    Buy and hold R.I.P 2009.

  • Report this Comment On April 15, 2009, at 11:17 AM, lenri wrote:

    I think we are all going to learn from mistakes after this recession. Education often comes at a steep price.

  • Report this Comment On April 15, 2009, at 11:32 AM, joandrose wrote:

    If I knew last year what I know about the equity market this year - I'd have made a killing . Instead of going down 30 percent.

    Funny thing is that next year I will still say if I knew last year what I know this year - I'd have made a killing . I already know the facts are all there to see -why then can I not interpret them correctly ? ?............just one more fool !

  • Report this Comment On April 15, 2009, at 1:21 PM, dreulandb wrote:

    How about just dollar-cost-averaging into a properly-allocated index fund portfolio like Warren Buffet wants you to do?

  • Report this Comment On April 15, 2009, at 7:46 PM, crankly09 wrote:

    You can't win if you never play folks.....

    I bought loads of AIB, GE, BCS,CSE and SIRI this quarter when the whole world said back off!!!

    Up over 114% Q1 2009, still making up for being down 68% in Q4 of 2008.......BUT BUYING MORE OF ALL EVERY CHANCE I GET!!!!!!!!!!

  • Report this Comment On April 16, 2009, at 12:50 PM, none0such wrote:

    "You never count-your-money

    when ya sittin' at the TAble

    there'll be time enough to count it

    when the dealin's done"

  • Report this Comment On April 17, 2009, at 8:15 PM, malina2308 wrote:

    Well so what do you folks think? Would it hit another $1 soon? I'm planning to buy next week, not sure if I should hold on.....I was trying to stay away from financial stocks, since everything seems to be so gloomy....but AIB fluctuate between $2-$4. I'm just counting to make a quick buck on them.....

  • Report this Comment On April 18, 2009, at 3:11 AM, eskamo wrote:

    The concept of paying someone to share the secrets of generating wealth has always perplexed me. Anyone who genuinely knows how isn't wasting their time peddling articles and newsletters about how to accumulate wealth.

    For rich people to exist there must be poor people. This simple truth explains why it is impossible to sell the secret of becoming rich. "If everyone is special then no one is special."

    In the end, The Motley Fool and those people doing the late-night infomercials have simply found that it's more profitable to sell their ideas to the masses rather than actually employing their strategies for themselves.

    Be reasonable, unemotional, and any time you feel yourself getting to eager or risky, put the brakes on and re-evaluate what you're doing. Only time will reveal which of us were meant to be wealthy and which of us remain part of the crowd.

    Big gains are addictive and seductive - steady, small gains add up over time. In the end remember this - every dollar you make is coming from someone elses pocket.

  • Report this Comment On April 18, 2009, at 7:18 AM, bouleversee wrote:

    You could have done worse. If you had bought Anglo Irish Bank you'd have lost the lot when it was nationalised. If you had watched your 3K rise to over 80k over several years as I did and then dwindle to nothing, you'd feel even more of a fool. However, in my own defence just when I was considering selling, I saw the directors were buying millions more and thought they must know what they were doing so I held on. Little did I know they were borrowing the money from the bank to buy them, only secured against the shares, No research would have discovered that at the time. I also noticed that several brokers/analysts were still recommending it as a strong buy.

  • Report this Comment On April 18, 2009, at 10:29 AM, salvadorveiga wrote:

    that's why Technical Analysis is good for... I'm a MDP subscriber and since I base a lot of my entries on TA, I've never purchased an MDP stock because TA was telling me the stock market would go down deep...

    Some might say - oh so why did you subscribe to them? You lost money... yeah sure, but if I had followed them I would've lost even more...

    My portfolio for 2008 and beginning of 2009, were pretty much shorting all MDP stocks...

    Once TA tells me it's safe to get back to the market LONG TERM then I will enter into MDP stocks... till then no matter how cheap a stock looks, it can always go down 60% or more...

    Look at AIB... I saw in MDP boards over and over again, when the stock was at 4$ people saying "How cheap !! this is a bargain..."

    Me? I shorted instead... and the stock took a nose dive of 80% to 1 buck !

    I don't care if I miss the first 20 30 or even 40% of a bull market... At least I conserved my cash and probably even gained more with shorts...

    One doesn't have to constantly double down on stocks... catching falling knives, in this case FALLING SWORDS, is a losers game...

  • Report this Comment On April 19, 2009, at 8:39 PM, karensboyfriend wrote:

    Boy, I had hope! Invested my disability check, hoping to live, oops!

    Glad Adam's coming clean. Forgot which tmf "advisor convinced me to buy ctrp and scur, but it seems like a large part of the "service" weren't as brilliant as I was led to believe.

    I still thing Tom and Dave are honest and ethical, but here's the advice my dad gave me. Don't gamble what you cannot afford to lose.

    My friend also told me "your a poor man playing a rich man's game. My other friend said "those that's got, get's" It would be ok if I could still work.

  • Report this Comment On April 20, 2009, at 7:52 PM, kjfritz wrote:

    I would not feel bad about losing a lot of money in AIB if I got free advise or did not do my own research, but when you pay and pay a huge fee to so-called expert advise that is another matter. I paid a very high fee to belong to MF's Million Dollar Portfolio. Be warned about MF.

    Sincerely

    kjf147

  • Report this Comment On April 21, 2009, at 4:03 AM, thisislabor wrote:

    Lessons learned # 3. is the only one i agree with you on the rest seem to me to be based out of fear from having gotten burned really banned. ... just my thoughts on this after reading your article?

    disregarding someone else's advice or regarding someone else's advice is alway relative to the individual involved. and sometimes is relative to an individual's history at giving advice in that subject matter too.

    btw, who the hell is einstein and why can't I buy his razor at walmart - and for what it's worth is it any better then a Gillette or Bic? ; P

  • Report this Comment On April 21, 2009, at 5:01 AM, alexreising wrote:

    Jesus... Have you ever heard of a stop loss? How can any financial professional take an 80% loss on ANYTHING? The first thing you need to evaluate in any investment or trade is your entry and exit points and you need to have those firmly, robotically established well ahead of buying or shorting anything.

    I can't believe you would openly admit to followign the investment advice of one MF subscription service, admit to it's EPIC FAIL and then attempt to plug another one?

    It's just leading sheep to the slaughter.

    Motley fool shoud consider other methods of monotizing their platform. Sell adspace... I'd rather see an ad for TD Ameritrade on here than read anymore bogus investment advice.

    Fools.... Stick to the words and advice of people in the community and tracked analysts who have proven track records and accuracy. Those are the people who have something to teach us, not writers.

  • Report this Comment On April 21, 2009, at 11:47 AM, RVerbalKent wrote:

    Well the single most important comment to come from this is about following your own advice! A lot of the herd mentality is created by the Pros hyping or dogging a stock for their own gains, and guess what, Other Pros get caught up in it too!

    I seriously contemplated selling much of my Mutual Fund shares back at end of May 2007..reason being, lot more downside risk than upside potential in my opinion..At the time the "Pros" weren't making much hay about that and Buy and Hold BS still prevailed, well now that I have just a little over half the money I had back then, I really am pretty much committed to riding this roller coaster ride out too..My Bad, but lesson learned. TRUST YOURSELF!

    As for buying bank stocks on the cheap, sure you can make good $$$ quickly but these same banks, Citi & AIB included can go belly up any day and you lose 100%. IS it worth the risk???

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