10 Reasons Why I Think I Made My Worst Investments Ever
I’ve been thinking about my investment style and how it’s changed over the years.
My first few years were pretty rough. I dove right in. I put some money in a brokerage account and just started. I was buying and selling with really no real idea. It was pretty reckless. But everyone starts somewhere.
The other day I started my taxes. That had me looking back at some old trades. Some of them are just awful. But hilarious. I had to include two examples in this post (see them below). I hope by writing this all down I’ll avoid making these mistakes in the future:
1. The P/E ratio is the absolute worst metric ever. It needs to be burned off the front page of every finance website. It is a backward looking metric. The stock market is forward looking. WTF. Avoid this. If a company has a really low P/E ratio, it generally has one for a reason.
2. Stay away from any and all foreign exchange risk. If you buy stock in an ADR or a company based in a country outside the US, and that country’s currency takes a hit, your portfolio is going to feel it. Managing investments is hard enough, you should not have to also worry about currency fluctuations.
3. Picking bottoms and calling tops is Russian roulette. A stock that’s down 50% from its highs can still drop another 50% from there. A stock that’s up 100% over a year can still climb another 100% in the next year.
Here’s one trade where I tried to be the man and short NVIDIA after a massive run
And here’s another. Yes, I actually said this. I thought the tech trade was over
4. Know where you’re going to get out before you make the investment. This makes life much easier. Before you buy a stock, know why and when you’re going to cut it out of your life if it goes against you. Don’t get trapped. Don’t waste time.
5. You need to be a master at avoiding FOMO (fear of missing out). There’s nothing worse than watching a stock spike, and so you buy it. You don’t want to miss out. You just need to join in. F that. Don’t do it. Chasing a stock rarely ever works.
6. Never buy a stock because of buyout rumors or because you think it will get acquired. You want to own strong companies not rumors or theories.
7. Always know your shareholder yield. Does the company pay dividends or have a history of buying back stock? That’s money being returned to you. If there’s no shareholder yield (dividends or buybacks), you’re basically left with a bet on growth. Know the difference. It will change your timeframe and expectations for any single investment.
8. You can’t ignore the overall market. In bear markets, they say all correlations go to 1. It’s hard to find quality stocks in bear markets. Everyone makes money in bull markets so don’t let it get to your head.
9. Study the tax code. It will immediately change the way you invest or trade. Trading can be a lot of fun. But at tax time it sucks. It’s a lot of work and even more taxes. You can save up to 20% on capital gains taxes when you hold a stock for more than a year.
10. The Internet is your best friend in the world of financial markets. But you have to double check everything. There’s so much free research available. There are also so many smart people writing and sharing ideas each day. But you still need to double check it all. If you like a trading or investing idea from someone online, make sure you corroborate the data yourself.
A Few Things I Learned Watching a Hedge Fund Manager Lose $4 Billion on One Trade
Maybe you also followed this story. Or maybe not. But basically a really big hedge fund manager, one of those guys who people quote and probably talk about at Harvard Business School, placed a super big bet on this company called Valeant.
Valeant is a pharmaceutical company trying to cure problems with skin and infectious diseases. They actually also own Bausch Lomb so that means they have a giant eye care business.
This hedge fund manager made a bet that Valeant would keep growing their business, diversifying, and acquiring. He once even called them the next “Berkshire Hathaway.”
This thesis turned out to be wrong. Like really wrong. The company crashed. People started to call Valeant out for jacking up the prices of their drugs. They also were apparently doing some dicey bookkeeping things. Just Google “Philidor Valeant scandal” if you want to learn more about that.
The end result looked like this:
So what did I learn from this story? Are there any interesting takeaways for you? I think so. And by writing this I hope I won’t make the same mistakes. Maybe now you won’t either. Here are a few things I learned from witnessing one of the worst trades ever:
Risk management is everything. No single investment or trade should ever be able to wipe you out. You want to play this game forever. In 2015, this hedge fund manager had $12 billion in assets under management. He poured $4 billion into Valeant. So he essentially risked a third of his clients money on a single outcome.
Don’t ever average down! This hedge fund manager did not cut his losses when the stock started to crash. Instead he averaged down. He bought more. Then he played the options market. Just cut your losses if it’s not working anymore. Get out. Paul Tudor Jones said this best:
Humility is everything. If you are going to make a trade like this, at least do it quietly. Don’t go on CNBC and tout it. Or promote it. When everyone knows about it on the way up, they’re also going to know about it on the way down. It might make things even worse. The media and people will turn on you for entertainment, clicks, and laughs.
Social media is your friend. There are some seriously smart people on social media. The Valeant ($VRX) stream on StockTwits is filled with conversations, charts, and debates at all times. Don’t ignore that. Or even the bloggers. A few investment writers totally nailed it. They’ve been writing about Valeant and its problems for years. To this day it’s free and open on their blogs.
It happens to everyone and it will happen to you. No one makes great investments 100% of the time. Everyone gets hit here and there. Even Warren Buffett admits to this. He wrote about it in his latest letter to shareholders. Like that one time:
“I made one particularly egregious error, acquiring Dexter Shoe for $434 million in 1993. Dexter’s value promptly went to zero. The story gets worse: I used stock for the purchase, giving the sellers 25,203 shares of Berkshire that at yearend 2016 were worth more than $6 billion.” — Warren Buffett
Narratives are fun, but you also need to see the data yourself. What’s really amazing is how this hedge fund manager lost a ton of money. His brand and skill is being questioned and criticized around the globe. But someone recently showed me something interesting. The following chart shows the price of Warren Buffett’s Berkshire Hathaway vs. this hedge fund manager’s company Pershing Square. Yes, by this metric he’s outperforming Buffett! As a spectator, it’s fun to get into big story lines and narratives. But always make sure you corroborate the data:
Just opened a high interest savings account and on my way to open an IRA right now! I’m so grateful that I can do this because I remember days when I couldn’t save shit because I didn’t have shit to save! #godissooogood
10 quotes from Warren Buffett’s letter to investors about the great Wall Street rip off
Warren Buffett just roasted Wall Street.
Warren Buffett just used more than 3,200 words to basically destroy Wall Street and one of its main sources of income — taking fees from the cash you invest with them.
If you’re not sure what‘s going on here, there’s a quick story you need to know about. In 2005, Buffett made a $500,000 bet. He essentially said an S&P 500 index fund would outperform any basket of hedge funds. The hedge funds might have the look or a ridiculously over the top name like Swift Eagle Crane Capital or Stat Sig Alpha Management, but still a basic low-fee S&P 500 index fund would outperform them over a long period.
Buffett won. And in his recent letter to investors he explains in detail what happened and what he thinks everyone can learn from his $500,000 wager. Here are 10 hand-picked quotes from his letter and at the bottom you can find a link to the entire letter.
1. Here’s Buffett explaining exactly what happened:
“I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds — wildly-popular and high-fee investing vehicles — that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers — who could include their own fund as one of the five — to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities.”
2. Here’s Buffett explaining how he straight up eviscerated hedge funds with his simple bet. Mic dropped. Game over:
“In it, the five funds-of-funds delivered, through 2016, an average of only 2.2%, compounded annually. That means $1 million invested in those funds would have gained $220,000. The index fund would meanwhile have gained $854,000.”
3. In which Buffett drops an amazing parody based on a classic Wall Street movie:
“I’m certain that in almost all cases the managers at both levels were honest and intelligent people. But the results for their investors were dismal — really dismal. And, alas, the huge fixed fees charged by all of the funds and funds-of-funds involved — fees that were totally unwarranted by performance — were such that their managers were showered with compensation over the nine years that have passed. As Gordon Gekko might have put it: “Fees never sleep.”
4. You might have a Vanguard fund. Do you know who the founder of Vanguard is? Buffett says he’s one of the most underrated men in all of finance:
“If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing — or, as in our bet, less than nothing — of added value.”
5. Buffett explains how Bogle fought against countless enemies, critiques, and haters. A lesson even for anyone trying to start their own firm or business today:
“In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”
6. Plot twist. You ready? Buffett thinks no other class has been scammed by Wall Street harder than the elite. And not because of their incompetence, but because of their desire to feel elite:
“In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites” — wealthy individuals, pension funds, college endowments and the like — have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is — on an expectancy basis — clearly the best choice.
7. How much money have hedge funds earned in fees regardless of performance? Here’s Buffett’s calculation:
“My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade.”
8. One of Buffett’s greatest skills is his ability to observe human behavior and watch it repeat over time — in panics and in booms. He writes:
“Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something “extra” in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else.”
9. When Buffett drops an adage, you have to pay attention:
“The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.””
10. Yes, Buffett has a brother-in-law named Homer. And of course Homer has a great little lesson for everyone:
“Long ago, a brother-in-law of mine, Homer Rogers, was a commission agent working in the Omaha stockyards. I asked him how he induced a farmer or rancher to hire him to handle the sale of their hogs or cattle to the buyers from the big four packers (Swift, Cudahy, Wilson and Armour). After all, hogs were hogs and the buyers were experts who knew to the penny how much any animal was worth. How then, I asked Homer, could any sales agent get a better result than any other? Homer gave me a pitying look and said: “Warren, it’s not how you sell ’em, it’s how you tell ‘em.” What worked in the stockyards continues to work in Wall Street.”
Now if you want to read Buffett’s entire letter to investors, and even see his annual report for 2016, go to this PDF right here. If you enjoyed this compilation of Buffett quotes, or learned something new about fees on Wall Street, please like or share this post!
Investing in edu v. spending on ‘stuff’ that you don’t need but want
A reminder that spending money on your education is better than spending money on new clothes, shoes, travel etc. Every dollar spent (well) on education will come back to help you get where you want to be in the long run. So ask yourself, do you really need to save your money to buy a cool new Apple watch, or can you invest that money in ways that can help develop your knowledge and skills like taking a computer science/programming class?
If you live with consumer debt, you are not alone. According to U.S. Federal Reserve data U.S. households have on average $15,863 in credit card debt and $33,090 in student loans. The upside to the personal debt crisis is that there are tried and true methods for getting rid of it. Here is a step-by-step guide to getting out of debt, once and for all:
1) Get real and collect statements for each and every one of your debts.
2) Get your free Credit.com credit report to double-check the accuracy of your debts, including notes of missed payments and credit limits.
3) Create a list of all your debt, including interest rates, monthly minimum payments and any deadlines.
4) Create a monthly budget, and figure out how much you can afford to pay towards your debt.
5) Research lower rates. Depending on your credit score, you may qualify for credit cards with lower rates.
6) Call the holder of any outstanding medical bills and negotiate.
7) If you’re totally overwhelmed with this process, or truly believe that you cannot dig out of debt on your current income, get professional advice.
I recently read about 40 pages of quotes from value investors around the world. The quotes were compiled by Value Investor Insight and they’ve made the entire collection free for anyone to read — you can view them all here.
But for those who don’t want to read all 40 pages, I’ve highlighted 15 of my favorite quotes below. By journaling and sharing them here, I hope they help my investment process going forward and also yours.
1. It is one of the hardest things to do and that is to remain a disciplined, long-term investor at all times.
“If the entire country became securities analysts, memorized Benjamin Graham’s Intelligent Investor and regularly attend- ed Warren Buffett’s annual shareholder meetings, most people would, nevertheless, find themselves irresistibly drawn to hot initial public offerings, momentum strategies and investment fads. People would still find it tempting to day-trade and perform technical analysis of stock charts. A country of security analysts would still overreact. In short, even the best-trained investors would make the same mistakes that investors have been making forever, and for the same immutable reason — that they cannot help it.” Seth Klarman
2. Value investors need to harness time and use it tactically.
“Time arbitrage just means exploiting the fact that most investors — institutional, individual, mutual funds or hedge funds — tend to have very short-term time horizons, have rapid turnover or are trying to exploit very short-term anomalies in the market. So the market looks extremely efficient in the short run. In an environment with massive short-term data over- load and with people concerned about minute-to-minute performance, the inefficiencies are likely to be looking out beyond, say, 12 months.” Bill Miller
3. Great investment ideas are not necessarily complicated.
“There’s a clarity that comes with great ideas: You can explain why something’s a great business, how and why it’s cheap, why it’s cheap for temporary reasons and how, on a normal basis, it should be trad- ing at a much higher level. You’re never sitting there on the 40th page of your spreadsheet, as Buffett would say, agonizing over whether you should buy or not.” Joel Greenblatt
4. There’s a perception that numbers, quants, and algorithms rule the stock market, but it’s so much more than that.
“I think my background has helped me learn to think well conceptually. Investing is not just about numbers. It’s also about imagination and structure and narrative and characters — the types of things we liberal-arts majors should know something about.” John Burbank
5. You should be able to defend your highest conviction investments at all times.
“There’s a virtuous cycle when people have to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions. You can’t be a good value investor without being an independent thinker — you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do. The back and forth that goes on in the investment process helps you get at that.” Joel Greenblatt
6. Your edge is not going to come from data or news, it’s going to come from something of your creativity.
“Everyone tends to see the same things, read the same newspapers and get the same data feeds. The only way to arrive at a different answer from everybody else is to organize the data in different ways, or bring to the analytic process things that are not typically present.” Bill Miller
7. A good investment is not entirely dependent on the balance sheet, it’s also about the management team.
“We tend to be more about the jockey than the horse. It’s important to under- stand how people are going to behave under stress. You don’t have to predict the future if you know the company has the assets and management to do well in difficult times. I believe that’s when the seeds for exceptional performance are planted.” Bruce Berkowitz
8. Every investment should have a price, and if it’s not there now, you will be rewarded greatly if it ends up there down the road.
“Our best ideas tend to come from what I call “old research, new events.” That’s typically the good company you’ve studied carefully and would love to own at the right price, that gets marked down after it trips or its industry goes out of favor.” Ricky Sandler
9. Always remember that a cheap investment is cheap for a reason and cheap does not automatically make it a value.
“One of the big mistakes value investors can make is to be too enamored with absolute cheapness. If you focus on statistical cheapness, you’re often driven to businesses serving shrinking markets or that have developed structural disadvantages that make it more likely they’re going to lose market share.” Bill Nygren
10. You must know your circle of competence and when you should or should not be investing.
“I’d always said that if a guy was long the best 50 companies he knew and short the 50 worst, if that didn’t work you were in the wrong business. But that strategy was literally a recipe for bankruptcy from 1998 to 2000. I said when I closed down that it was a market I didn’t understand, and I didn’t.” Julian Robertson
11. Change your outlook on life, it will spark the little things, which in turn will lead to the big things.
“People who are in a good mood are more inclined to try learning new skills, to see things in a broader context, to think of creative solutions to problems, to work well with other people, and to persist instead of giving up. If you were writing a recipe for how to make more money, those are among the first ingredients you would include.” Jason Zweig
12. Human psychology plays a massive role in the world of investing.
“To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Wells when he told them over the radio that the Martians had landed.” Jim Grant
13. Durability is a trait you should never overlook.
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” Warren E. Buffett
14. Avoid complacency and stay vigilant.
“One of the economists who has heavily influenced the way I think is Hyman Minsky, who always said, “Stability begets instability.” The very idea is that the more stable things appear, the more dangerous the ultimate outcome will be because people start to assume everything will be all right and end up doing stupid things.” James Montier
15. I am making this investment today because… You need to be able to answer that every single time.
“I never buy anything unless I can fill out on a piece of paper my reasons. I may be wrong, but I would know the answer to that. “I’m paying $32 billion today for the Coca Cola Company because.” If you can’t answer that question, you shouldn’t buy it. If you can answer that question, and you do it a few times, you’ll make a lot of money.” Warren Buffett