Sold, rejected but not forgotten: Tracking 2nd level and 3rd Level investing mistakes
Some 15 months ago, I had a post about stocks I had either sold or not bought after analyzing them.
This time I want to update that list plus provide some “theoretical” background why I think this is an important part of any investment process.
Types of investment mistakes
Of course there are many mistakes to be made in investing. Nevertheless, for this exercise I would categorize “investment mistakes” into 3 general categories along the typical process of most “stock pickers”. The process normally looks something like this
A) Stock screening & quick analysis
B) Deeper Analysis
C) Buy decision (or not buy)
D) Sell at some point in time
At all stages, mistakes are easy to be made. Nevertheless I would argue that most analysis goes into what I would call Level I mistakes:
Level 1 mistake: Buying a stock which performs badly.
This is quite easy to identify, because if one looks at most investment reports, one will see the performance of the current portfolio with the bad performers “jumping out of the report”. I guess most of the efforts in many investment firms goes into finding out the reasons for those underperformers and then trying to improve.
A lot less effort usually goes in what I would call “level II” mistakes:
Level 2 mistake: Selling a stock which outperforms strongly after selling.
This is a little bit more tricky. There is a lot less literature of “when to sell” compared to “when to buy”. Once you have bought a stock, there should be already a fair amount of time and effort been made to analyse the stock. So in my opinion it makes a lot of sense to keep stocks on one’s radar screen even after selling. Nevertheless it is of course much more fun to look at new stocks and forgetting about the old stuff. Especially if sold stocks systematically outperform, one should check if one is not a prisoner to some well known investment biases
In my opinion, it also makes a lot of sense to systematically track the performance of sold stocks in order to find out if one could (and should) improve the investment process
Finally, there is a third systematic family of mistakes:
Level 3 mistake: Stocks analysed intensively but not bought
This is one of the advantages of blogging: Whenever I write a longer post, I already have invested quite some time on the specific stock. So it is quite easy for me to track those posts where I did for any reason not buy such a stock.
Again, I think one should look at this closely in order to identify potential biases etc. in one’s investment process.
From theory to practice: The last 17 months
So let’s look first at all the stocks I sold since the March 2012 post:
|Stock||Reason sold /not bought||Date||Perf||Perf BM||Delta|
|KPN||Special situation expired||10.05.13||34.2%||3.3%||-31.0%|
|Total Prod||dissapointing CI||08.03.13||21.3%||7.1%||-14.2%|
|Total Prod||dissapointing CI||10.04.13||12.1%||9.0%||-3.2%|
|Buzzi||business model problems||23.05.13||2.8%||2.7%||-0.1%|
|Piquadro||Sold because of business problems||08.08.12||2.7%||24.5%||21.8%|
|Nestle||Sold because of Pfizer acquisition||23.04.12||11.8%||35.0%||23.3%|
|Praktiker||Sold because of Anchorage||04.07.12||-81.3%||30.6%||111.9%|
Explanation: a negative number means that the stock has outperformed my BM since I sold it, a positive number means the Benchmark outperformed vs. the stock.
On (unweighted) average, the stocks I sold underperformed the benchmark, so this looks OK. This is clearly driven by the Praktiker bonds, where I am very happy that I sold them. On the other hand, I missed out some nice gains as well. With KPN for instance, I think I was a little bit too quick with the trigger finger. My “autumn cleaning” exercise was on average also positive. So this is a good encouragement to follow-up on this exercise.
Next come all the stocks I have analysed but not bought in the same format:
|Stock||Reason sold /not bought||Date||Perf||Perf BM||Delta|
|Reply||Cashflow red flag||31.08.2012||140.6%||24.5%||-116.1%|
|Banknordik||forgot to follow up||26.11.2012||70.1%||19.5%||-50.5%|
|Curanum||not really interested||05.09.2012||66.7%||25.0%||-41.7%|
|Severfield||Too expensive stand alone||21.03.2013||47.7%||7.9%||-39.8%|
|Osram||Target of 23 EUR not hit||08.07.2013||35.7%||6.1%||-29.7%|
|M6||only short analysis, issue with CI||26.11.2012||43.0%||19.5%||-23.5%|
|Hankook||could not buy privately||29.10.2012||31.0%||21.0%||-10.0%|
|Astaldi||too much debt||23.07.2013||11.2%||3.0%||-8.2%|
|Porsche||still don’t like them||29.11.2012||24.3%||17.7%||-6.6%|
|CIR||no margin of safety||17.07.2013||7.3%||4.0%||-3.3%|
|Canal+||no real upside||19.09.2012||19.1%||19.6%||0.5%|
|Bongrain||Doesn’t earn coc||26.11.2012||17.0%||19.5%||2.5%|
|Greek GDP linker||10.06.2013||-2.6%||3.7%||6.3%|
|Accell||low FCF, insider selling||26.10.2012||12.3%||20.5%||8.1%|
|Solvac||not cheap enough||13.12.2012||4.4%||14.9%||10.4%|
|Mr. Bricolage||Too much debt||13.09.2012||9.4%||20.9%||11.5%|
|Morgan Sindall||no mean reversion potential||23.10.2012||1.0%||21.6%||20.6%|
|WSU||because of US problems, not cheap||19.04.2012||10.6%||31.9%||21.2%|
|TNT Express||Too expensive stand alone||21.11.2012||-5.2%||20.8%||26.0%|
Here unfortunately, the average doesn’t look so good. On average, the stocks I analysed but did not buy outperformed the BM as well. The most obvious miss is Reply SpA. However here, I still think that in the long run it pays to avoid companies with questionable accounting. In this case, clearly at least for now I was wrong to discard it.
A little bit more bothers me that 2 of my potential special situations, Osram and Severfield outperformed. Both were pretty clear-cut cases (Osram, classical spin-off, Severfield classical rights issue), but somehow I was lacking conviction to follow through on the idea. I think I have to be more careful to separate my careful market view and focus on quality from the special situation area.
Looking at sold stocks and stocks rejected lat e in the investment process makes a lot of sense. In my case, I think selling looks OK, whereas I will have to work on my “special situation” investments.