“Failure is simply the opportunity to begin again, this time more intelligently.” – Henry Ford
“Failure is a part of success.” – Hank Aaron
A little over a year ago I sold my stake in my biggest nightmare investment and realized my largest loss to date, Best Buy (Ticker: BBY). No one ever likes to receive less cash than they invested. But you know what, it happens. What’s important are the lessons you learn from the experience and how you can prevent the situation going forward. This article will share my BBY tale and the lessons I learned from this losing experience.
When I was younger, my Grandma and my mom opened a custodial account at a large brokerage and began purchasing small amounts of stocks for me. We used one of our family’s friends that person has successfully guided my family’s investments for many years. After a couple of years and a few introductory finance classes, I decided to begin investing some money I had saved in the market. I was in the very beginning stages of my investing career, so I relied heavily on my advisor and the firms “BUY” rated stocks to help identify investment opportunities. My first investment was purchasing $500 of Transocean, which I flipped within a year later for a $500 gain. I thought I was on to something because I was able to exploit a major decrease in RIG’s stock price and ride the company’s rebound to doubling my money. After several discussions with my investment advisor, I thought I would give this strategy another whirl with a stock his firm had rated as a “BUY” based on relatively large decrease in the company’s stock price, Best Buy.
I initiated a position in Best Buy for about $32/share. The stock was recently off of a high of $45, so I thought I was purchasing the stock at one heck of a discount. As I mentioned, I relied heavily on the advice of the advisor, so I did not perform the extensive background research that I currently perform. Instead, this decision was based solely off of his recommendation. I missed some serious red flags as the company was getting hammered by online retailers and the phenomenon of show-rooming (Customers using big box retailers to test the product only to leave the store and purchase the store from a cheaper online retailer). After several quarterly earnings misses and reports of the increasing impact of show-rooming, my investment was down a staggering 67%.
When the stock hit its low of $11.29, I thought the company was on a one way train bankruptcy and my $1,000 was down the drain. At this time, the company’s founder was still trying to buy-out the company causing wild swings in the stock’s price. Finally, after the founder ditched his buyout efforts, the company’s new leadership slowly began the recovery process. The company aggressively attacked show-rooming and showed signs of promise, which catapulted the stock’s price into the $20s. For months, Lanny had been working with me to find an exit strategy for the stock. He was teaching me the importance of cutting my losses (I sure could have used that lesson before the tumble). Finally, the stock surged to $24.50 and I sold my position in the company and realized a $234 loss (23%). The headache was finally over and I instead used the funds to pay down some of my outstanding student loans.
This experience taught me a lot about investing. It sucks that the lessons had to come with a large loss, but the important thing is to learn from these mistakes and make sure you do not fall for the same traps again. Hopefully you can learn from my experience as well and prevent yourself from making a Best Buy-esque investing mistake.
1. Analyst opinions should complement your research, not replace it. This may seem obvious now, especially after learning in school about the risks at school, but analysts have an interest in producing positive analyst reports for companies. Their interests tend to produce analyst opinions that view companies with rose-colored glasses because of their firm’s relationship with the company they are evaluating. Instead of relying on a company’s rating system to purchase a stock, each investor should perform their own research to arrive at an independent investing decision. If I had the knowledge I had today and applied my own independent research over the stock, I would have found many of the red flags that existed at the time. It is okay to review analyst opinions; however, this should not replace your own independent research of a company
2. It is okay to cut your losses. Nobody wants to realize a loss on a stock. However, sometimes it is the best investing decision you can make. Cutting your losses will allow you to stop the bleeding and re-allocate your funds to better investing opportunities. I had several opportunities to do so before Best Buy fell off of the cliff. Instead, I took the wait and see approach and the only thing it resulted in me watching the stock price continue to tumble. If I would have sold at $24.50 before the stock fell down to $11.29, I could have paid down my student debt a year earlier and saved some interest. In this instance, I was lucky that Best Buy rebounded and I was still able to exit at $24.50. However, by waiting instead of selling, I could have easily been forced to realize a much larger loss in the event the company could not escape their troubles.
3. Invest in companies with a strong business model and solid earnings. Again, this may seem like a common sense piece of advice. However, at the time of investment Best Buy was anything but that. The company was faced with fierce competition and a business model that was outdated. As a result, their earnings, financial performance and stock price began to suffer. This opened my eyes to investing in companies that have historically demonstrated their ability to continue to grow their company and earnings at the same time. It may not be sexy, but over time these companies have proven their worth to a DGI’s portfolio.
4. Mistakes happen, just make sure to learn from them. This is the theme of my post. While I am upset with the result of my investment, I had to accept that every single investor picks a loser at some point in their life. It is important not to beat yourself up over the loser and not to give up on investing all together. The worst thing you could do is become fearful of the stock market, sell your holdings, and hoard cash (I know this is an extreme example). Learn from the mistake and begin researching your next investment opportunity. A loss is only a bump in the road, not the end of the street.
5. Don’t give up. I know this is the same as the previous point. But the most important thing is that an investor does not become discouraged by a loss. I felt the need to reiterate the point again.
I hope you all can learn from this experience as well. Please share your experiences and any lessons you have learned from losing investments. Each lesson can only make us better as investors.