Everyone makes investing mistakes. Not everyone studies the errors and comes up clean. James Gruber, assistant editor at Morningstar.com.au, decided to do so and shares his learnings with us.
Here goes...
In December 2021 and January 2022, I bought Russian stocks via ADRs listed in the U.S. The stocks included a bank and three energy stocks.
My theory was that the oil outlook was bullish, these stocks were dirt cheap, priced at 2 to 4 times earnings, and Putin wouldn’t be silly enough to carry out threats of invading Ukraine.
It turns out Putin was silly, and my stocks remain frozen due to the ongoing war. It’s likely these stocks are worthless.
Some would point to the error of trusting Putin to be rational and not invade Ukraine. True enough. In my defence, I did weigh up the possibility of an invasion against other things such as how much that was priced into the stocks. Put simply, I thought the possibility of making 3-4 times my money on these stocks was worth the small risk of being wiped out. Clearly, that calculation turned out wrong.
Normally, I like to own stocks that are steady compounders. Ones that can grow earnings at a decent clip and pay steady dividends. It’s a conservative style of investing that emphasizes diversification and the long term.
The Russian stock purchases were a large detour from this style. They involved concentrated bets over diversification; cyclical stocks over steady earners; emerging market companies over developed market ones. Not to mention the geopolitical risks from investing in Russia.
Why did I deviate from my normal investment strategy and style? I think it might have been a combination of many factors.
Being a contrarian investor has always held some appeal to me. I like the idea of investing against the crowd and admire fund managers who do that. Russia probably felt like the ultimate contrarian investment.
There was also the prospect of a quick profit.
As well as the rush and thrill of investing in something new. This was: Russia! Oil! Buying into geopolitical turmoil!
What we can learn from his mistake:
- Investing is all about probabilities. That is why position sizing, diversification and asset allocation needs to be taken into account.
- Stay the course, with respect to your investment goals and strategies, even when it’s tempting to do something different.
- Being a contrarian is a good strategy, but temper it with sound judgement. Dig deeper. Get another view. Try to be as objective as possible. There should be sound reasoning as to why you are deviating from the crowd.
- Be careful of all narratives. The ones being fed to you, the ones you choose to believe in, and the ones you conceive in your mind.
- The moment emotions come into play - take a step back. It could be fear (not in this case), excitement (rush and thrill of something new), greed (prospect of a quick profit), overconfidence (buying and hoping to profit from geopolitical turmoil).
- Losing money hurts. But the outcome isn’t a mistake. The outcome is the result of a mistake.
It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes. — Warren Buffett
The above is an extract from The dumbest investment mistake I've ever made.
Also Read:
Even Warren Buffett and Prashant Jain say picking stocks is hard
Why every investor must understand Position Sizing
Why stock prices are a distraction
A stock investing checklist
Read this if you want to be a trader
Stop viewing Growth and Value in silos
