A Loss of 55%!? How my worst loss became my greatest lesson

“Knowledge born from actual experience is the answer to why one profits; lack of it is why one loses”

G.M. Loeb from The Battle for Investment Survival

Back in Feb./Mar. of 2011 I made two purchases of Ship Finance International Limited (SFL) for an entry price of 19.20 and 20.36.  I was just getting my feet wet in the investment world, hell, I barely knew how to open a brokerage account!  I had also just stumbled upon the concept of dividend investing and naively thought the better the yield the sweeter the deal.  At this point in my development I had just enough knowledge to be dangerous.  I really should have spent more time studying and being an observer of market behavior.  I should have spent much more time in the due diligence process of stock analysis for the companies I was interested in and increasing my understanding of valuation methodology.  This clarity of hindsight was nowhere to be found twelve months ago, no sir, not for this new investor who had a fist full of dollars and a thirst for yield!  Silly, silly boy…

It turns out SFL has a complicated arrangement with Frontline Ltd. (FRO) in regards to its finances.  This was far more complex than my newbie investor mind was prepared to handle.  When things turned south for FRO it took SFL with it and I was now the proud owner of a stock which had just lost 55% of its value.  Ouch!  (Update: with the new year market rally my loss is down to 36% as of 2/17/12).  It may also be helpful to know that these are “paper” losses, I have not sold any portion of SFL which would lock in an actual loss.

Ok, so I can hear some of you guys asking yourself, “What the hell did he learn from this train wreck!?”  Glad you asked, lets take a look.

  • Lesson 1: Don’t Panic!  This was my first big loss on a stock purchase and up until this time I had no idea how I would react to such an event.  I thought I knew, but until you’re tested you don’t know what your emotional reaction will be.  I’ve now learned that I can take a hit and keep my wits.
  • Lesson 2: Know what the hell you’re doing!  I had no business in purchasing SFL because I really didn’t understand it.  I own T and MCD in my portfolio and I know how they make money.  I didn’t have this knowledge with SFL, all I knew was it had a pretty yield.  Yes, sometimes I need to be smacked in the face to learn something.  Apparently losing 55% of my money is a sufficient smack. * rolling eyes*
  • Lesson 3: Don’t chase yield!  Yes that yield may be pretty and shiny and you may want to possess it, but don’t let the $$ signs cloud your judgement.  If you really want that high yield you better be damn sure you know why it is that high and willing to assume the risk with eyes wide open.
  • Lesson 4: Have an idea of when to sell.  This is a weakness for me.  I spend a lot of time determining when I will buy, but not enough in deciding when to sell.  I seriously considered cutting my losses and applying that loss against my gains in other stocks to offset the tax liability.  On the other hand I had the notion of not letting short-term stock price fluctuations influence my investment decisions.  Ok, with all due respect to my rational self, losing 55% is not a “short-term fluctuation”, it’s a bona-fide lose your shirt, fall off a cliff, apocalyptic event!  So that’s a bit theatrical, but you get the point.  Truth be told I didn’t act because I really didn’t know what to do.  I didn’t have the experience to judge what the best course of action would be so I decided not to act  and take a wait and see approach.

I’m still not sure what I will do with SFL this year.  I may cut it loose or continue to hold and see if I can regain some of the loss.  I am lucky that it represents a small portion of my holdings so my overall portfolio was not impacted (drastically) by this loss.  Regardless of what course of action I decide on I firmly believe what Loeb said about knowledge born of experience being the path to profits.  Yes, this lesson cost me in the short-term, but what have I gained over the long-term?  Hopefully just a little bit of wisdom, which is nothing more than knowledge + experience.

How about you, any hard learned lessons on your path to becoming a wise investor?

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6 thoughts on “A Loss of 55%!? How my worst loss became my greatest lesson

  1. I’m still not very confident with investing in individual stocks. I had some stocks vest a couple of years ago and I kept them instead of having them sell all immediately like I do now. This meant that I had a small amount of individual stocks that I didn’t really know at what point I should sell them. I learned that trading windows are annoying and eventually ended up selling the shares to help raise more money for the down payment on the condo I was supposed to be buying last fall.

    I also tried ETFs and realized that they were too close to individual stocks psychologically for me so I went back to index funds, which are much better for me.

    • Leigh– You bring up an excellent point that I think investors do not give careful consideration to, which is your own emotional constitution. Failing to consider what your comfortable with is a recipe for disaster when investing. No matter what the benefits of a stated investment plan are they will not be profitable if they are not in alignment with your emotional comfort. There are great options in indexing and if your comfortable with that keep with it. In the end, I think it comes down to what your savings rate is with your investment return being icing on the cake. I think I read that you had like a 60% savings rate? Your cake should be quite delicious when your ready for it :-)

      • Emotions are exactly why I started out investing for retirement with 5-year CDs. One of my old ones that is coming due soon is even earning 5%! When I was in college, the fact that I was putting some money away for retirement was more important than where I was putting the money.

        Last year, I saved 61% of my overall net income (including monthly salary and bonuses). Included in that number is ensuring that I invest 20% of my gross income for retirement using vehicles like maxing out my 401(k) and my Roth IRA and investing in index funds in a taxable investment account.

        That number will unfortunately go down this year with trying to buy a condo, moving, and increased housing expenses. But then I will have a mortgage instead of rent :)

      • Five percent CD?! Wow… I’ve heard of those but thought they were just some mythical creature, kinda like a unicorn! You seem to have your financial house in order over there. I tip my hat. Even if your savings rate is reduced a bit from the purchase of the condo you’re still doing quite nicely. Keep it up…

  2. The best lesson that I can offer is to stick with investing and learn from your losses. Don’t give up. Most people go thru this phase when they are starting to invest. E.g., I was investing in REITs a few years back. i bought 5 or 6 different ones. The financial crisis made it clear to me which ones were the good ones and why they were the better ones to invest in. It takes time and experience to make good choices.

    The company you talk about, SFL has two problems: a glut of ships and a bad economy.

    • Thanks for stopping by SFI. It’s nice to know others have had similar experiences when they were starting out. It’s easy to talk about our gains, but much more intimidating to admit are losses.

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