Everyone makes investing mistakes, even the best of the best. And when I say the best, I mean it. Take billionaire investor Warren Buffett as an example. This year he told shareholders of his company, Berkshire Hathaway that he made a ‘mistake’ by investing in North America’s largest four Airlines because the industry had changed in ‘a very major way’. That ‘mistake’ is part of the reason Berkshire Hathway reported a first quarter net loss of almost $US 50 billion for shareholders. So believe me when I say that everyone makes mistakes.
What’s important is that you take each mistake as a growth opportunity. Everyone is bound to screw up, but it’s those who continually get back on the horse and learn from their mistakes who succeed.
In this article, I’m going to get stuck into the biggest investing blunder I’ve ever made, what I learned from it, and how you can make sure you don’t do the same!
What was the investment?
In late 2015 I got word from a very close friend of mine about the nosedive Slater & Gordons (ASX:SGH) stock price had taken recently. For those of you who don’t know, Slater & Gordon is an Australian Commercial Law Firm known famously for their ‘No Win – No Fee’ slogan. SGH was also the first law firm to list publically on the Australian Stock Exchange (ASX).
In early 2015, Slater & Gordon acquired the professional services arm of a company called Quindell based in the U.K for $1.2 AUD Billion. But by the end of 2015, things turned sour for Slater & Gordon. The Quindell acquisition was significantly underperforming after the company was investigated for fraud. Legal regulations in the U.K. also changed, which meant Quindells revenues were impacted massively.
What made matters worse was that Slater & Gordon took on an enormous amount of debt to fund the acquisition of the faltering Quindell. All of those factors combined pushed the stock price down dramatically.
Why Did I Make The Investment?
Prior to the Quindell acquisition in early 2015, shares in SGH traded at an all-time high of just over $8 AUD per share. But later on in the year, the mess Slater & Gordon had gotten itself into with Quindell began to impact the stock price. It proceeded to plunge over 80% to $1.35 per share, which is when I bought my first parcel of shares in the company. And boy, did I think I was smart. Buy low sell high, right? That’s how you invest, right? How wrong I was.
Unfortunately for me, I didn’t see the red flags. I didn’t do any research into Slater & Gordon’s competitive advantage, management team, or analyse their financial statements with a fine-tooth comb. And most alarmingly, I barely understood what the company actually did!
So why did I invest?
Because I thought Slater & Gordon was ‘cheap’, nothing more, nothing less. Simply because the price had fallen so dramatically, I was speculating that it had to get back to those levels eventually. Almost 5 years later, I’m still waiting. But that’s not even the worst part, 99% of my original investment has completely dissipated since then.
Ben Graham sure was right when he said “confusing speculation with investment is always a mistake.” I learned that the hard way.
What Was The Mistake?
The lesson here is to never to make an investment simply because it ‘looks cheap’. The majority of the time, businesses are cheap for a very good reason, as was the case with Slater & Gordon.
What’s fundamental is that you do your research to understand why the business is so cheap. You should gather facts to develop a thesis and determine if the issue a company is going through is short term and manageable to deem if it’s a worthy investment. It wasn’t long after I thought Slater & Gordon was ‘cheap’ at $1.35 that I wished I’d never heard of them.
What You Can Learn From Me.
Legendary Investor Peter Lynch says that you should always “know what you own, and why you own it.” Unfortunately for me, I didn’t know who Peter Lynch was back then nor did I know anything about investing.
The next time you’re tempted to invest because something ‘looks cheap’, you should ask yourself these three questions.
Do I understand the business?:
Why do I want to be an owner of said business? And most importantly;
Why is the asset so cheap?
If you can’t develop well thought out answers backed by research to the above questions. Run. Run far far away quickly.
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Disclaimer: This website ( “The Money Pal”) is published and provided for informational and entertainment purposes only. The information in the Blog constitutes the Content Creator’s own opinions. The information should not be regarded as financial advice.