Tuesday, November 10, 2015

Investment screw ups (as in my screw ups) part I

Sup guys! I’m sure many of you have read articles describing some investment mistakes that you should avoid. The mistakes will probably not be the mistakes made by the author himself, of course. Well, I don’t mind owning my screw ups and looking like an idiot when it’s deserved. And I know no better place to kick off this series than with the Greedy Dragon portfolio’s first (and hopefully last) position to go bankrupt: Alpha Natural Resources, a coal miner.

Lesson number 1: You ain’t no Carl Icahn

I stupidly held on to the stock because it still had a significant amount of cash on its balance sheet. My reasoning was that the cash could buy management time to close down or sell unprofitable mines, buyback debt at sharp discounts to par, and do other neat stuff to get things back on track. Boy, was I a naïve little piglet in the headlights of an oncoming 18-wheeler when I learned that management might not actually do the right things for shareholders. I’m not a Carl Icahn who can meaningfully change the direction of a company by investing hundreds of millions or billions of dollars in a company and getting a few board seats. I’m just a small shareholder who has no say in what management does. However, I could still defend myself by simply selling the fucking stock. But because I wasn’t smart enough to sell, I have no one to blame but myself.

Lesson number 2: Markets can remain depressed longer than a company can remain solvent

While the company did have a healthy amount of cash, it was cash flow negative. Unless coal prices recovered, it was just a matter of time before the company went belly up. I was hoping that coal prices would recover before the company burned through its cash. In effect, I was gambling and not investing, and I got caught with my dick out. I should have recognized that I didn’t have a fucking clue when the market for coal would recover. For all I know, coal prices could remain depressed for the next decade. That’s why when investing in troubled industries, it’s important to find companies that are still capable of generating free cash flow despite the shit they have to deal with. After all, you can never be sure when things will turn the corner.  

I’m pretty sure that I’ve read about most of the investment mistakes that I’ve made in some article or textbook. While I’ve forgotten what I learned then, hopefully losing money in real life will burn these lessons into my memory so I don’t forget them again. I hope you guys learned a thing or two from my fuck ups. I know I haven’t written about what I’ve done with the Greedy Dragon portfolio in months, so I’ll work on that soon. Thank you for reading. Take care and stay rational.               

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