Friday, August 7, 2015

My Three Most Costly Stock Picking Losses

I recently read Jonathan Milligan’s e-book The 15 Success Traits of Pro Bloggers. To be clear, I don’t aspire to be a “pro blogger”. Admittedly, I have been struggling with this blog lately. Although the blog started out as a personal trading journal, recently, I seemed to have attracted a more general readership. I feel that my broader readership could be better served if I adopted a “pro blogger” mentality of looking for ways to add value and serve my audience.

One piece of advice that stood out to be me in Jonathan’s e-book was that readers will find it difficult to relate to you if you make yourself out to be a hero in your blog.  Those of you who know me are fully aware that I’m no hero. I make mistakes constantly. It’s through learning from mistakes that I’ve become a better investor. To that end, I decided to share my three most costly stock picking mistakes with you in hopes that you can learn from my misfortune and avoid losing your money.

Nortel Networks – Low 4-figure loss

When I started buying stocks in the summer of 2001, Nortel was a favorite of Canadian investors. It had been an international success story and at one time, accounted for a third of the valuation of all companies listed on the Toronto Stock Exchange. The company’s share price peaked at $124 in September 2000 before falling to $0.47 in August 2002. Ultimately, Nortel filed for credit protection in January 2009.

Lessons Learned:
-          Unlike my other early purchases (Bank of Montreal, Riocan, and  O&Y REIT), Nortel never paid a dividend, providing no downside protection.
-          I over-estimated the degree of support that the Government of Canada would provide the company. Although the government provided some help, it didn’t bail out the company in its darkest hour.
-          The capital loss I incurred when the share were delisted in 2009 was in my unregistered account and I used it to offset capital gains in later years. Always hold speculative stocks in your unregistered accounts.
-          Not every stock that goes down, will come back up. This might seem simplistic, but shares are often cheap for good reasons.

Yellow Pages Income Fund – Mid 4-figure loss
It’s November 2006, I’ve become interested in the Dogs of the Dow Theory, and buy a small position in the Yellow Pages Income Fund due to its high yield (~ 6%). I feel since I understand the business (selling advertising in their paper directories to offset the cost of printing), and with the monthly dividend, my downside is covered. Ignoring the negative impact of the Internet on the company’s paper directories, as the stock price drops further, I add more to my position in June 2010 to capture an even higher yield. The company finally cuts its dividend in August 2011, and later files for reorganization in the summer of 2012. I end up with a couple shares and a near-worthless warrant when the company emerges from its reorganization in the fall of 2012.

Lessons Learned:
-          Don’t chase high yield. One of my favorite Seeking Alpha authors, Brad Thomas, refers to “Sucker Yield” when distributions are unsustainable.
-          Following a theory, such as Dogs of the Dow, should be undertaken with extreme caution. Furthermore, I selected an element of the theory (buying one high yield stock), as opposed to owning several high yield stocks listed, that would have helped to diversify my investment risk.
-          Averaging down at a much lower price is only intelligent if the investment story hasn’t changed. Ignoring the impact of the Internet on Yellow Pages’ advertising rates and decreasing distribution of paper directories was ignorant.
-          Speculative stocks should be held in unregistered accounts, and not RRSPs. Not being able to use my loss on this investment caused me to pay taxes on capital gains in my unregistered account.

PHX Energy Services – Mid 4-figure loss (unrealized at the time of this posting)

Fast forward to last September 2014. Oil is trading at just over $100 per barrel, but is trending downwards. One of my dividend growth screens shows PHX Energy Services, a company that has steadily raised its monthly dividend from $0.04 in 2011 to $0.07 a share in 2014, and has the earnings and cashflow growth to back up these increases. I’ve set aside a small portion of my portfolio to make speculative short-term trades when stocks are down more than 3% in a day for no apparent reason, and decide to buy into this oil driller. As the price of oil declines to about $55 in March 2015, the company cuts its monthly dividend to $0.035, before further halving it to $0.0175 in May 2015.  As the price of oil continues its decline, PHX’s share price falls from $14 in September 2014, to less than $5 in August 2015.

Lessons Learned:
-          Dividend growth based on commodity price is only sustainable so long as the commodity price remains high.
-          Capital preservation is essential when a business starts to struggle.  Cutting a dividend is any easy way for the business to preserve cash.
-          Make sure to know the whole story before investing in a company. PHX has exposure to Russia, which likely would have scared me off had I known that before investing.
-          Develop a plan when to sell for any speculative trades.  I have yet to part ways this company despite two dividend cuts.

I sincerely hope that you can learn from my costly mistakes and avoid losing money by investing in companies on downward spirals.

Do you have any lessons you’ve learned from your negative investing experiences?  Did you make any mistakes similar to mine?

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