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August 28, 2023 at 11:15 AM
What You Need to Know
- One theme: Heavy stock or sector concentrations.
- Misuse of margin is another mistake.
- One strategist admits her portfolio is more complex than necessary.
Even the savviest investor can make a costly error that stirs regret and, possibly, provides a useful lesson.
Billionaire investor Warren Buffett himself has shared investing mistakes, including his admission to shareholders in 2017 that he had been “too dumb” to see the opportunity in Amazon.
Buffett acknowledged his decision to avoid investing in the e-commerce giant early on had cost shareholders in his Berkshire Hathaway a lot of money. While such a missed opportunity can certainly prove to be a miscalculation, so can the opportunity taken that would have been better avoided.
ThinkAdvisor recently asked high-profile investors and strategists to share their worst personal investing mistakes. A few responded with lessons they learned and steps they took to fix portfolio trouble spots.
Going All In on One Stock
Larry Swedroe, head of financial and economic research at Buckingham Strategic Wealth, said that in the mid-1980s, while working in investment banking and trading individual stocks in his own portfolio, he had the idea there would be consolidation in the U.S. banking industry, with big banks buying up smaller ones.
There was also talk at the time that the U.S. and Canada would sign the North American Free Trade Agreement (NAFTA), he noted.
Swedroe spotted a small bank in upstate New York near the Canadian border that was trading at a very low price to book value. Its earnings were growing consistently and friends gave it good reviews. Swedroe started to buy its shares, eventually reaching a $100,000 position, which was about 10% of his net worth.
“As it turned out everything that I thought would happen happened,” Swedroe said, adding that someone who had invested in a regional bank index would have done spectacularly well.
The idiosyncratic risk of a single investment, however, “came to bite me,” when a key executive committed fraud and the bank went under, he said.
“I lost most of my investment,” selling before the stock went to zero, Swedroe said. And because he had held the securities in his IRA, he couldn’t deduct the loss on his taxes.
“It shows you that even if you could predict the future, which I did very well on the major themes, that something unexpected and that’s idiosyncratic to an individual company can come back to bite you,” he said. “And so I learned a good lesson from that, that you shouldn’t take idiosyncratic risk.”
That means avoiding owning individual stocks altogether unless they’re in an account held for entertainment purposes, he added. The odds of a single stock outperforming the market are so low that investors shouldn’t try, Swedroe added, noting most stocks underperform the market.
