As any graduate of Alcoholics Anonymous knows, the first step to setting out on the proper path is admitting your weakness.
In that spirit, I'm writing about my biggest mistake so far during this bear market. Here. Publicly. For the whole world to see.
If legendary investor Peter Lynch of Fidelity Magellan fame could educate investors by publicly admitting to holding AIG and Fannie Mae at the end of last year, what's an analyst like me got to lose?
I hope two things come of my story:
learns something from my mistakes. Feel free to consider me a sacrificial teacher.Having studied psychological commitment and consistency in Robert Cialdini's classic work Influence: The Psychology of Persuasion, I hope that my public commitment to avoid repeating these mistakes prevents me from falling victim to them again.Mea culpa
My greatest investing failure of the past year has been my investment in Allied Irish Banks . To date, I'm down 81% (not long ago, I waved goodbye to more than 90% of my initial investment, but the stock has recently made some movement upward).
True, it's not quite as big a loss as those suffered by investors in American Capital (Nasdaq: ACAS), Satyam Computer Services (NYSE: SAY), Stone Energy (NYSE: SGY), and Patriot Coal (NYSE: PCX), but what consolation is a few percentage points' difference when you've lost 81%?
And yet, painful though that loss is, seeing how avoidable this was in hindsight hurts even more.
Perhaps the only comforting thought is that in Warren Buffett's recent Berkshire Hathaway annual report, he writes that he also suffered a significant loss by investing in Irish banks. Some have speculated that AIB was among them. So, at least I was fooled alongside a much better investor.
Following the crowd
My first major mistake was falling prey to social proof. I put too much weight on the research, opinions, and actions of others without thinking through my investment decision for myself and deciding whether it made sense in my portfolio.
Prior to my purchase of AIB, it had been recommended by our Global Gains newsletter and purchased by the team heading up our real-money Million Dollar Portfolio real-money service. Advisors in both services wrote that the stock was trading with low historical and relative multiples, a very attractive dividend yield, and a significantly undervalued price.
While they made compelling arguments, I failed to carefully evaluate whether I agreed with their assessments. And I became even more hooked as these fellow analysts also began purchasing AIB for their personal portfolios.
As a result, I also began to give in to confirmation bias -- where I sought out opinions that further confirmed my buy decision rather than seeking a contrarian opinion that might indicate danger ahead. Continued... |