Writing this article made me sick to my stomach.
You see, I had to pull data on stocks that would have made my portfolio much larger than it is today -- had I not made the mistakes I'm about to share.
As painful as it is to revisit these mistakes, I hope that by my sharing them, you'll avoid making them yourself. Then I'll share one way to ensure that you'll never fall victim to these mistakes -- something I'm very excited about.
My first mistake
I bought Starbucks
It was a maturing company with a widely recognized brand and a loyal following.
But Starbucks' slowing growth took a huge toll on its stock price -- sending it to less than half what was then its all-time high, and making it a clear bargain in my eyes.
On top of that, the company had only begun to master its international business. Sure, coffee is a tough sell in countries such as China and Japan. But I thought it could easily be the McDonald's
By that, I mean they could cater to each country's popular social drink. Coffee in America, tea in Japan, mate in Brazil, etc., similar to how McDonald's has successfully riffed on local tastes (and why sales in the Asia/Pacific, Middle East, and Africa segment of its business have doubled over the past five years).
These scenarios are still what make Starbucks such a strong company today (and why McDonald's could also be a smart investment, even at three times the size).
But I got impatient.
As Starbucks's stock continued falling, I started thinking, "There are better places for me to put my money right now. A lot of companies look much cheaper." So I sold out at $8.78 -- not far from where it bottomed out.
Today, Starbucks trades for around $52, meaning it's up 492% from where I sold, 197% from my initial purchase price.
The lesson: Never forget your original thesis; "superbrands" don't disappear easily, even though their stocks may test your patience.
My second mistake
Next up is a sin of omission.
As dominant as Google was -- and still is -- in the United States, Baidu was its clone in China. Just as Google is the No. 1 ranked website in the United States according to Alexa, Baidu is the No. 1 ranked website in China.
Seems like an obvious buy, right? Well, it wasn't to me.
You see, at the time, the stock was up nearly 150% over the past year. And its price-to-earnings ratio was well over 100. As a stubborn "value investor," I wrote off the stock completely.
I even neglected to buy when the stock took a tumble at the end of 2008, dropping below $11 a share. As with Starbucks, I was sure there were cheaper stocks.
The result? Baidu now trades for $140, meaning I missed out on what could have been a mind-boggling 1,172% gain.
Google's growth has been incredible -- its top line has grown at a compounded annual growth rate of 29% over the past five years, and Baidu's growth has been even more impressive -- at a five-year rate of 77%. Yet analysts still predict these companies will grow 18% and 47% annually, respectively.
The lesson: Don't anchor to a stock's past performance; game-changing, high-flying stocks will always have P/E ratios that seem ridiculous -- don't focus on that one metric.
My third mistake
Lastly, we come to Netflix
I bought some shares around $30 in April 2008. I liked the company's growing brand, the size of its untapped market, and its smart preparation for streaming video, as well as the acumen of founder and CEO Reed Hastings.
Then I got cocky. I started toying with elaborate spreadsheets, running countless discounted cash flow analyses of Netflix and what its share price should be worth under various scenarios.
After running hundreds of scenarios, I settled on a conservative fair value of $45. Meaning if it started to approach that, I'd be willing to sell.
So when March 2009 rolled around, and Netflix started creeping toward my target price, I sold out at $43 a share.
Regrettably, Netflix went on to trade as high as $304.79 this past summer. Meaning this mistake forced me to miss out on as much as a 914% gain.
And even though the stock has dropped to just over $100 again, its most recent quarter showed encouraging numbers, with subscriber growth again accelerating.
The lesson: Don't fool yourself; it's hard to accurately predict what a much-loved, high-growth company is capable of -- or how the market will reward its success.
If you add it all up...
Here's where it gets really ugly.
If I had only invested $10,000 in each of these stocks and not made any of these mistakes, that $30,000 investment would be worth more than $187,000 today. Instead, because of these mistakes, that amount is worth just $29,300.
- I got bored and impatient with a stock.
- I anchored to a stock's recent success and high P/E ratio.
- I ran so many valuations of a stock that I lost sight of the big picture.
Hopefully, you won't make the same mistakes I did.
Adding salt to the wound...
I did all this against the advice of an investor I trust -- Motley Fool co-founder David Gardner, who had recommended all three stocks.
And, if you hadn't heard, this is a man who boasts a documented annualized return of 19.4% over the past 17-and-a-half years.
If you're interested, David Gardner is putting the final touches on a new venture, where he and a team of top analysts will give real-money-portfolio advice on when exactly to buy and sell the stocks that David believes in most -- in a clear, concise, and actionable manner.
This new project of his is called Supernova, and you can find out more about it -- and secure yourself an invitation to join -- simply by sharing your email address in the box below.
Adam J. Wiederman owns no shares of the companies mentioned above. The Motley Fool owns shares of Google and Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, Netflix, McDonald's, Baidu, and Google. Motley Fool newsletter services have recommended writing covered calls on Starbucks. 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 Motley Fool has a disclosure policy.