I’m going to reciprocate Tyler’s mention of a previous post of mine, and give him due credit for the following: My Biggest Mistakes.
There are mistakes of commission and mistakes of omission.
The idea is when you make mistakes of commission (and they will happen), is to quickly recognize them, take losses, and move on. Ideally the losses can be kept relatively small (let’s define this as 0-20% of the original investment) instead of them developing into 40-50% losses.
Simple math illustrates why avoiding large losses are desirable: If you take a 10% loss, you need an 11% gainer to break even. If you take a 20% loss, you need a 25% gainer to break even. If you lose half, you’ll need something to double. Suffice to say, finding something that will double in the future is a lot more difficult than finding something that’ll appreciate 25%.
When looking over my track record, the types of mistakes that I have made over the past half decade or so have typically been ones of omission. Not buying IRobot (Nasdaq: IRBT) at the end of 2015 is something I am still kicking myself for. I usually require significant margins of error before pulling the trigger, and also I typically have cash allocations that are well above what a normal portfolio should have. Including my components of preferred shares (which are invested in companies that are predictably stable and are in zero danger of suspending such preferred share dividends, and have improving credit profiles), one could fault my investment style for not performing well enough – if I have a quarter allocation of cash and I can continue to generate double-digit percent returns, why shouldn’t I just spread the cash in the existing portfolio components?
Psychologically, I need to sleep well at night, and cash allows me to do this.
My biggest mistake of commission, by far, was in IMRIS, a medical imaging company. The original investment was back in 2012.
Medical imaging has a lot of barriers to entry. There is a chicken-and-egg problem: hospitals don’t want to deal with small providers because there are issues with support and maintenance. In addition, procedures and the “soft” side (training, hospital administration in line, etc.) has to all be in order.
The thesis, condensed: IMRIS had an innovative product (a movable MRI machine) that, from my research and knowledge about medical imaging, was actually useful. They had successful installations in various hospitals around the world, and they were starting to build the critical mass of credibility needed to make it through the next inflection point where they would hit the big time (or get bought out by a major such as McKesson, Siemens, GE, etc.). They had a significant shareholder (which presumably would not let the company go under).
They made a strategic decision to relocate their corporate headquarters from Winnipeg to Minneapolis, for the reason that it would be easier to procure US capital investment. This should have been a huge warning sign (an international corporate relocation is going to cause huge disruption to the operations of the business and I should have bailed out the nanosecond I read this) but I thought the other factors were too compelling.
Each quarter, management was promising they were on the cusp of this breakthrough, and each quarter, the financial results coming in were sub-par. Eventually, they ran out of money and had to agree to a debt financing arrangement in September 2013. The terms were quite onerous and I knew the game was up, and sold out for a very significant loss.
A couple years later they filed for bankruptcy protection. I would have lost everything had I held on.
The business itself turned out reasonably well for its new (private) owners. According to a 2017 press release, they obtained record revenue growth and bookings. Obviously one can’t see the financial statements of this now private entity, but I think the original investment thesis was valid – just that they ran out of money, which happens in these types of ventures which have long lead times with unpredictable sales funnels.
I was looking for an Intuitive Surgical (Nasdaq: ISRG) situation where they managed to reach that inflection point of critical mass, and once that happens, you achieve very large investment returns. ISRG is another example of an error of omission.
Going back even further, one of my most embarrassing losses was losing a moderate amount of capital on an investment in the debentures of Sterling Shoes. They declared bankruptcy in 2011. I just barely managed to unload my debentures (for around 20 cents on the dollar) before they filed for CCAA protection. This was simply an instance of me not understanding anything about the dynamics of the retail market they were engaged in – this was an error of pure incompetence.
Admitting mistakes, continuously looking for information that will dispel your investment thesis, and rectifying the situation as quickly as possible are traits of good investors. Investors that aren’t able to elaborate on mistakes they have made in the past are likely doing themselves a disservice.