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Where did I go wrong?
Since initiating coverage in REA Group onto the watchlist on 5 May 5, 2009 (Hold $4.44), the share price has increased sevenfold if you add in dividends. An equal amount invested in REA Group and the five mistakes of commission detailed above would have left you well in front.
The average loss from these five stocks was 33 per cent.
Most painfully of all, I failed to re evaluate the business's value after the share price had tripled. Had I been open minded and not anchored to lower share prices, the stock would have still produced a 150 per cent capital gain.
Anchoring drags you down
If you find the next InvoCare, CSL or REA Group, don't try to be too cute with your valuation. Buying a few wonderful businesses and holding on is far easier than coming up with 10 new ideas every year. And it's likely to be a faster way to multiply your returns.
Second, I thought that the number of real estate agents in Australia would fall as property prices fell, reducing REA's potential customer base. This is still a risk but it hasn't happened.
Making the most of your mistakes
Third, I spent too much time looking at reported earnings, which were artificially low, rather than free cashflow (see "Why cashflow yield beats PER"). Depreciation was high because of the large, upfront expense of building the website, but it wasn't going to be an ongoing drain on the company's cashflows.
100 per cent of an investment but returns can be multiples of your original Prada Bags And Wallets
We'll get to the lessons from these failures later, but there's one mistake worse than these five combined.
Fourth, I painfully underestimated the company's pricing power, reflected in the almost quadrupling of average revenue per agent over the past five years.
investment. I underestimated REA's quality and overestimated Westfield's and GPT's.
The underlying dynamics of an industry and a business produce the analytical ratios on which we rely. We need to understand what drives them. The numbers alone are not enough.
It's easy to get bogged down in such things as "per share" ratios, but the bigger picture matters more. Spend time thinking about how a company's market value could significantly increase and also how it might come undone.
Discounted cashflow models have a place but sometimes you need to give a business room. Buying cheap and holding on to a great business while it's performing despite what might seem a high valuation can multiply your money many times over. If you already own such stocks, sometimes your best course of action is to do nothing.
First, an investor I respected was down on the company. Yes, we had just experienced the biggest panic in more than 20 Prada Nylon Clutch
Valuation is more art than science
years, but I was biased by his view before even opening REA's annual report. It hindered my independent thinking and prevented me from backing my own view.
My biggest mistakes since joining Intelligent Investor Share Advisor more than seven years ago came from recommending Westfield Group, which has produced a loss of 9 per cent, GPT Group (66 per cent), Envestra (46 per cent), Aristocrat Leisure (27 per cent) and Billabong International (16 per cent).
One day I'll get to write about my biggest wins, but we don't learn much from our successes, except perhaps excessive self confidence.
Having dragged myself through the mud, here's what I've learnt from my five errors of commission and one of omission.
CSL is a much larger business than it was 10 years ago but could be far bigger in 10 years' time. Analysing a product or service's life cycle will help. While technology services or products might have short lives, healthcare products might have very long ones.
Fortunately, the recommendations that have worked out more than made up for them.
Too often I've anchored Prada Pouch Women on past, lower share prices when valuing a high quality or high growth business. This has been far more hazardous to my wealth than anchoring to my purchase price after a stock has fallen.
One of the hardest things about analysing one's mistakes, at least in my case, is knowing where to start. For once in my life, I'm spoilt for choice.
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