It’s been a little while since I’ve done a financial mistakes post, so I thought it was time to knock one out. Maybe I’ve been delaying it a little bit due to the subject matter. Looking back at my disaster stock purchases is never fun – actually it was the research that delayed everything. I knew that by writing this post I’d actually have to do some work and look up what my timelines were. Hahaha. But I finally got around to it, so let’s dive in…
Well, there should be no surprise here. I have an addictive personality, and there’s nothing more addicting than trying to beat the stock market and show the world how smart you are.
Let me join my voice to the grand ol’ debate: how much is skill and how much is luck in stock picking?
What have a I learned in 15 years as an investor? Whatever someone tells you, there is a shit load of luck involved if you’re ever going to beat the market on a consistent basis.
You can be the smartest, strategic, analytical fuck in the world, but there’s always things that can happen that you can’t see coming, one-off mishaps that you just can’t plan for.
And I am not against holding stocks. There are a ton of different strategies that can work for you. So all of you dividend investors don’t get your panties in a bunch. What I am saying from my examples below, is that there are inherent, unpredictable risks in holding individual positions in equities that you cannot foresee no matter how much of a genius you think you are. If you’re cool with that risk, then you’re an all-star, and the world is your oyster.
So, let me share with you some of my biggest defeats over the years in individual stock investing. What I will try to highlight are factors that can destroy a stock’s value no matter how much research you do:
#1: FTR (Frontier Communications Corporation) – Management Makes a Terrible Acquisition
Oh Frontier… Frontier… Frontier. In January 2015, Frontier stock traded as high as $125 a share and was a consistent dividend darling with over 10% yield in the Telecom Services industry. Then in February 2015, management announced that it would acquire Verizon’s wireline assets in California, Florida and Texas for $10.5 billion. Why a company would buy landlines when everything is moving to mobile, I have no fucking clue. And this was a major one-off acquisition that was not consistent with Frontier’s past acquisition history either. So how do you plan for a terrible acquisition out of the blue that saddles a company with enormous and debilitating debt? You don’t. You never know it’s coming until it’s too late. Now FTR stock trades for less than a dollar.
#2: EEP (Enbridge Energy Partners, L. P.) – Tax Change for MLPs
Fucking tax law man, fucking tax law! For some reason it always comes back to taxes. This is going to be very difficult to explain in a few sentences but I’ll try my best. EEP used to be a high yielding (about 13%) MLP (master limited partnerships), which I enjoyed keeping in my Roth account for the tax benefits. But in March 2018, the Federal Energy Regulatory Commission (FERC) made an important tax rule change that many very smart people did not see coming. Specifically, this caused EEP to trade at substantially lower unit prices, making it extremely costly to raise capital by issuing new units. Therefore, after significant losses, the parent company (ENB) of EEP decided to buy out the remaining shares at a loss. This proved to be a very important lesson for me. Sudden changes can come from anywhere, even the government.
#3: GE (General Electric Company) – Dropped from the DOW, Mismanagement, Pension Liability and Dividend Cut
GE has been chugging along as one of the most trusted blue-chip stocks out there. But after a hundred years, GE was finally dropped from the DOW in 2018 as the last original member. There is a lot that happened here, but in a nutshell the power-generation unit was reeling, GE cut its dividend for only the second time since the Great Depression and the company took a big charge, setting aside $15 billion over seven years to pay for obligations held by GE Capital. This was a dividend darling for many and I personally had enjoyed good old fashioned slow and steady growth with dependable dividend increases, until in a few months the company lost 70% of its market cap. It just goes to show you that you can’t be chasing the past and the only guarantee in life is impermanence. No matter how great the company, some day it will fall.
#4: CHK (Chesapeake Energy Corporation) – Owner Fraud
Have you heard of Aubrey McClendon? If you ever owned Chesapeake Energy stock then you sure do. He was kind of a big deal in Oklahoma City as part owner of the Oklahoma City Thunder and a pioneer in employing fracking. Homeboy was charming and charismatic as they come and CHK was a natural gas darling for years. In its heyday, it peaked at about $62 a share in 2008. Then in 2012 allegations arose that McClendon had taken out more than $1 Billion in personal loans that posed as a conflict of interest. Soon after other allegations arose furthering his misconduct as CEO. In 2013, McClendon finally stepped down as Chesapeake CEO. On March 1, 2016, McClendon was indicted by a federal grand jury on charges of conspiring “to rig bids for the purchase of oil and natural gas leases in northwest Oklahoma”. He died the following day, March 2, 2016, in a single-vehicle collision when he drove his SUV at 88 mph into a concrete bridge embankment (the official death was labeled as an accident, but c’mon now). Chesapeake stock is now trading for less than a dollar.
#5: RIMM (Research in Motion, now trades as BB, Blackberry Limited) – Management Ignored the iPhone
Before all the kiddos out there, yes you millennials, get all hot and excited, when I say management ignored the iPhone, the iPhone wasn’t the iPhone yet. Capeesh? The blackberry used to be the juggernaut in the business world. It had a keyboard and the popular opinion was that the iPhone would never be able to compete in corporate America. Think of Microsoft and its Office Suite, how do you ever replace that? Shares of RIMM peaked in 2007 at $236 and CEO Jim Balsillie was on top of the world. However, as we all know today, after one missed opportunity after another, RIMM was basically obsolete as a company only 6 years later. Today BB trades at $6.72 a share. So when you think of Apple as unstoppable in the present. What happens if they miss on two iPhone rollouts in a row? Hasn’t happened yet. But it will eventually. Things that we think are certain today just might be on more unstable ground than we like to admit.
So what’s my final takeaway, stock picking is high risk and high reward. I have yet to see many people beat the market in the long term, but I’m not saying that you’re not that person. People win the lotto, right? Hahaha. But what I am saying is, build in the unanticipated risk if you want to go this route by offsetting some of your investments with more stable assets.
And if you’re a stock picker out there, best of luck to you. Because luck is what you’ll need…
-Q-FI
We all like to talk about those stock picks that made us an obscene amount of $, but not so much about the losers, so I appreciate you sharing. I’ve had 2 myself – China Green Agriculture and SaviCorp. The former started strong and then plummeted and the other was just pure fraud. Still lost less than $10K betwixt both but still sucked at the time. Like you say, it’s impossible to consistently beat the market stock picking and I never recommend it to folks, but it should not be entirely discounted either. I’ve done exceedingly well with all my other picks. Mostly it’s just about time in the market as opposed to timing the market. Great post!
Yeah – I’ll always have a special place in my heart for individual stocks. We remember those big winners so fondly, but I find rarely do people accurately describe their losses. And I agree, there’s definitely a place for them. But the older I get and the more wealth I accumulate, the more tilted toward index funds I become.