My Biggest Loss Was My Best Decision

Earlier in the year I took a loss on Hewlett Packard which I bought close to $41 and sold at $36.50. It was the worst single stock loss I had to take in years because the position was big and the loss was large. It was difficult as  a value investor to sell the stock at seven times earnings as usually when a stock becomes cheaper I buy more. The loss is still very fresh in my memory.

At the time I bought Hewlett Packard I overlooked some blemishes because it was getting hard to find any stocks that met my criteria. My general thesis was that even if one removed all the earnings from the consumer PC division the stock still traded cheap.

When HP reported earnings the CEO reported problems in the consulting division, which I assumed until that point was the most solid part of the business. He blamed the previous CEO for starving the business in order to make earnings numbers. As the preceding CEO was a former GE guy who always beat the number it was not hard to believe. At that point I was not sure what I could trust as it took the new CEO six months to figure this out.

I have a general rule that I don't own what I don't understand. At that point I realized that I did not have  a full understanding of what I owned and it was possible that the new CEO did not know either. Taking a large loss is one of the most painful things for me in investing but I knew I had to do it. My principal of needing to understand what I own has kept me from losing money in financials the past few years as well as saved me from an even larger loss in HP. I feel slightly better about my HP loss today.

7 comments:

Friday links: worst month evah | Abnormal Returns said...

[...] Tsachy Mishal, “Taking a large loss is one of the most painful things for me in investing but I knew I had to do it…I feel slightly better about my HP loss today.”   (Capital Observer) [...]

Our Leaders Have No Idea What To Do Here | Phil Pearlman said...

[...] Must Reads: This post on taking losses and this one on surviving a crash are as important as anything you will read in this [...]

Onlooker from Troy said...

Good anecdote.  Glad you dodged that bullet today.  Yowch!

Robert Speck said...

Thanks for sharing what many others like to quickly bury.  I especially love the fact that you have the rule of not investing in what you do not understand.  So, was your decision to sell and take the loss mostly to do with a lack of faith in the capability of new CEO or due to poor visibility into the operational situation that HP is managing?  I just published a blog post related to this topic that I'd love your opinon on: http://processmaximus.wordpress.com/2011/08/17/operational-risk-investment-risk/ if you have the time.  All the best and thanks for sharing this.

Onlooker from Troy said...

I feel like I need to sacrifice a position here to satisfy the trading gods so we can put in a bottom.  :-)

Tsachy Mishal said...

I know how you feel.

Pink Pangea said...

Thanks for sharing!  I also need to clearly understand something before investing in it.