You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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When You Realized That You Bought Wrong Stocks

In last week article about Warren Buffett, I expressed at least three reasons why I, personally, make him as a role model. They are: 1. I don’t have enough time to read more about any other great investors, 2. Not only teaching about stock investing, Buffett also teaches how to be ‘a good man’, for example he does not take advantage from the loss of others. 3. Buffett is one of few investors who is always happy and relaxed in doing his job at Berkshire, and that makes him a pleasant person.

However, there is still another reason why Buffett is very unique compared with many other investors, that he deserved to be a role model. Unlike most other investors who just tell their big success in making huge profits from stock markets (expecting people call them great investors or kind of), Buffett told a lot about his mistakes, which we can then learn a lot from them. One ‘mistake’ that he told repeatedly is his decision to acquire Berkshire Hathaway in 1962, which the Berkshire’s textile business still cannot make any profits even though the management team had already work hard several years after.

But, Buffett’s mistake was more than that. Yup, even Berkshire kept losing money, Buffett still insisted to keep company’s textile factory assets that lowered the whole performance of his investment portfolio. Buffett was finally given up and decided to sell the Berkshire’s last textile factory in 1986, after more than 20 years since he bought Berkshire’s shares. In many his later writings, Buffett complained heavily that if he had immediately get out from Berkshire, then used the money and the next 20 years of time to fully focused in other profitable investments, he should be much richer than he is now.


This company is actually one of Buffett's biggest mistakes

So the lesson here is, if you realize that you bought the wrong stock in the first place, do not hesitate: Immediately sell the stock, even in a loss position.

But illustrious sir, what if the loss is already too much? If the stock is sold, does not it mean that we just realize these big losses? Well, related to this, just some time ago, I received an email with the content as follows, call it Mr. A:

‘Mr. Teguh, I have invested in stock market since March 2013 (almost 5 years, quite long enough), but every year I kept losing money. In mid-2017, I read your book titled ‘Value Investing: Beat the Market in Five Minutes!’ and start buying stocks based on your strategy in the book. And it turns out that the results have been very good although overall is still negative, because there are some of my stocks that still in loss position such Wijaya Karya Beton (WTON) and Pembangunan Perumahan (PTPP). Please your advice Sir.’

Note: In his portfolio, Mr. A holds eleven different stocks which, except WTON and PTPP which were purchased in 2015 and 2016, nine other stocks were just purchased in the third and fourth quarter of 2017. Interestingly, of the nine shares, which is certainly purchased based on value investing method, seven of which generate significant profits up to hundreds of percent (INDY), while the other two are down but only by 1 – 2%. However, since the position of WTON and PTPP is minus 46% and 36% respectively, while more than 50% of the portfolio value is still locked in those two stocks, the overall portfolio performance is minus about 4%.

So, my response is:

‘Your portfolio is already good. Most of the stocks that you own, including the purchase prices are also according to value investing principle. It’s just that you have to learn to ‘accept mistakes in the past’ and ‘move on’, by selling WTON and PTPP, because these two stocks were not purchased based on value investing rules, aren’t they? Yes, that means you will suffer meaningful loss, but you have to consider how much profit that can be generated in the future if the money is invested back to the right stocks, rather than keep it idle in these two stocks without any certainty of when the loss will turn as gain.’

Well! What Mr. A experienced above is probably a common case for retail investors, whether he is a novice or experienced. Now be frank: Take a look at your portfolio, are there still one or two potentially loss shares that you used to buy at random and without analysis/just follow some recommendations that are not even clear where it came from? How many years have you kept the stock? And could you imagine how much profit you should make if you immediately sell the stock, and used the money to buy other better stocks??

This is why if there are investors who ask advice to me related to his/her portfolio, and it turns out the portfolio consists of junk stocks (or the stock that is actually good, but the purchase price is wrong/overpriced), and the investor also admitted that he/she bought those stocks without strategy and analysis at all, then my suggestion is: Sell all the shares, either it is in profit or loss position, then start all over again from the beginning. But Sir, that means I will take the loss? Yes, that’s right. But first, consider it as the cost of learning from experience. Because not only you, I myself (and also Warren Buffett, as well as many other big investors) have also been forced to sell stocks in a big loss position. But precisely because we dare to accept the fact that we chose the wrong stock, then move on, then the result is now fairly good. Yup, because the ‘experience’ is the most valuable teacher, and at the same time the most expensive, much more expensive than if you buy a book, join seminars, etc, but on the other hand the result of the ‘lesson’ is the best and you will never forget for lifetime. You can read the full story here.

Then secondly, as mentioned above, try to look forward, just think about how much profit can be generated in the future if we sell unproductive stock then reinvested the money to the right shares, rather than that money left locked in those unproductive stocks without any certainty of turnover. Yup, so when you continue to hold shares whose positions loss for years, then at first glance you did not lose anything (because the shares have not been sold, so you did not take the loss yet), but in fact you have already lost twice: 1. The stock price may fall further, especially ifthe stock is not worth investing in the first place, and 2. You lose the profit opportunities in other stocks.

Anyway, as it’s still early in the year, so if there is one or two stocks in losing position in your portfolio, and you know very well that the losses have no certainty about when it will turn positive, then it’s time to move on! And if after reading this you immediately decide to move on, then that means you (in this case) are even better than Warren Buffett, which takes up to 20 years to realize the Berkshire textile factory would not make any profit. What? You still not dare to sell quit all the position because the loss is too big? Alright then, you can sell half of it first. So if you hold 100 shares of the stocks, you can sell 50 shares first, then use the money to buy another better stock, and see the results later.

Original article was written and published in Bahasa Indonesia in January 9, 2018. Any inquiries, send email to teguh.idx@gmail.com

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