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

by Mike

“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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