Friday, April 19, 2013

My biggest mistake in the last 12 months

It was a mistake of omission.

There is this startup with a promising but unproven technology. I spent weeks searching the business and the market. I got to point of pulling the trigger. It was at a price that I was comfortable with to put in a small stake based on my calculated risk/reward, knowing I could lose it all. I literally had my finger on the "buy" button when I hesitated, wanting an even cheaper price. The next week, price started running away from me and has never returned. If I'd bought it, it would've been a 3-bagger in less than 3 months and would've taken care of my 2013 return single-handed.

It's been really painful watching the price running further and further away from me on a daily basis. Trust me. It's painful. Even having reflected on the lessons learned, knowing probability plays a role here and drilling on it does me no good, I can't help agonising about it.

Emotion can kill an investor.

Another lesson: net-net mentality is sometimes wrong.


  1. net net mentality is always wrong. If you wait for a company to get dirt cheap, you get cheap dirt, not a great business with growth/earnings potential.

    Anyway, the lesson here is that net-net investors will always miss out on the really great businesses. The other lesson is buy the stock first, then do the research. You are always better to buy a few shares as a starter position when you first find the company and then continue with your research.

    1. SBTrades:
      1. "Cheap dirt" is good if it beats the index handily.
      2. Since you recommend people "buy the stock first, then do the research", I'd like to invite you to invest in a business venture of mine. Send me the money first, and I'll explain the details later.

  2. The company in question wasn't NEA by any chance was it John?

  3. John, you will get over it quickly. And apart from a few mumbled expletives now and then, life will go on. From what you have wrote, the only possible "mistake" may have been fine tuning your buy price. If it did not get to your buy price determined by a margin of safety, then there is no error. If it got to your buy price and you got greedy for a lower price, then it is an error in process and consistency. If you are doing wide diversification, then this is minor, but if you run a concentrated portfolio and failed to load up, then that is a major error.

    It really has nothing to do with net-net mentality, but more with consistency and discipline of process.

    Just a reminder, a "net-net mentality" method practised by Walter Schloss returned 21% per annum for 46 years. So with due respect SBTrades, unless you can do better than this, your comments are probably premature.

    1. Hi Peter,

      Nice to hear from you again. How's your A-Z ASX sweeping going?

      Thanks for your thoughtful comment.

      My view is: for investments like net-nets and distressed junk bonds, getting the price right is the overwhelming factor determining whether the investment case is successfully or not. The low price isn't just a margin of safety, it also determines the return. It's because the upside is capped. An average business can only reverse to mean; a junk bond can only return to par.

      On the other hand, for something like a growing company, the entry price is less important than getting the economics of its business right. Mistake in the entry price will quickly be corrected by the growth. For a growing company, you want to spend more energy on understanding the economics of the business than waiting for the super cheap price. You want to be more stringent on the business quality than the price.

      Hence, I do think different types of investment opportunities require different approaches. If you wish, it's a Schloss/Graham mentality vs Fisher/Buffett/Munger mentality.

      And there is nothing wrong with pure net-net approach. Schloss and Klarman are still practicing it profitably in the modern days.

      Anyway, good discussion.