So I’ve been at this value investing thing for awhile now, and along the way I can definitely say that I’ve made my share of mistakes.  Or growing pains as I like to think of them.  Anyway, I’m going to go over two of these mistakes (really the same mistake twice…) today.

And so it begins…

On at least two occasions in the last year, I’ve bought into stocks that I identified as being materially undervalued, and of high enough quality that I actually wanted to own them.  So far, so good.  The thing is though, after I’d done all my due diligence and research and established my positions I sold out of them early, and received far less than what I consider to be fair value for them. And because of it, I reduced my total return in 2011 by about 10%.  So there’s the cost of these mistakes.

Now, I actually made money on both of these trades. The thing is, I only made around 20-30% when on the first I should have made around 100% and the second, around 60%. So, why did I bail out early? I was too focused on macro events and worried about the possibility of “the market” going down that I wanted to try sell and then re-buy later at a lower price. What I should have been focused on is the fact that I owned stakes in two companies that I knew were worth more than I paid for them and been confident in my research and sit and wait.  Now, the thing is, the market actually did go down, but these stocks traded up to fair value due to improved quarterly results and the announcement of a corporate restructuring.  It was a stark reminder that ‘the market’ and the companies that make up the market are two completely different things.  The market itself can be overvalued, but likely at least some of the companies that make up “the market” won’t be.  And once you find them, you need to hang onto them until Mr. Market wises up to his errors and agrees to buy them at fair value.

So, what have I learned?  I’d like to think I’ve increased my discipline to sit tight once I’ve found positions that I’m happy with (unless something cheaper or higher in quality comes around).  I’ve also learned to trust my analysis, at least a little bit, as both these investments played out how I thought they would, just on a much shorter timeline.  The other thing I’ve learned is that you never really know how you’re going to act in the market until your own money’s actually on the line.  Now that I’ve experienced that as I’ve been investing in stocks that I pick on my own for over a year now, hopefully I won’t make the same mistakes again as I’m sure there’s plenty more out there to experience.

Until next time,
Nathan @ EngineeringIncome.com