Investing Mental Error #37*: Substituting What You See for What You Believe

Had a good investing lesson REMINDER this morning:

My mind believing in a certain idea, that the facts I was seeing contradicted

I wanted to buy a particular small company stock, which I felt was cycling down due to the nature of its business. Some research I had done, and key people I spoke with gave me feedback that this down-cycle would likely last at least until the end of this year. Furthermore, there were obvious hints in the previous quarter’s report that business was in a down cycle.

With this said, I still bought a small position “hoping” that this quarter might show the end of the down cycle. However, when the press release opened with a report on “9 months” of income, I knew it would be bad. Investor relations people like to start the PR with a 6 month or 9 month figure when the quarterly figure is down and the 9 month figure (in this case) is up, or at least better. ¬†Showing the 15% growth Year to date was the IR staff’s attempt at hiding the tremendous slow down from this previous quarter to the year ago comparable.

Lessons

I defied a few of my rules – one, I bought before a report which I wasn’t so sure would be positive (I will rarely buy if I have a better handle on business trends and the stock isn’t reflecting that), two, I bought a stock without an obvious support point or breakout point. Three, I bought into the “cult” of the company and in my mind, made them almost invincible to the market forces affecting related companies. This mistake by far, annoys me the most.

Here’s what I knew and ignored – in 2008, the CEO of this company went full speed into the 2008 crash, investing and building out with no awareness of the market weakening. Perhaps his customers weren’t showing a slowdown either but his lack of even sensing a serious correction that many of us saw, worried me a bit in case his business slowed down again (because he might not see it again!). Knowing that, I disregarded signs of a repeat of this behavior. ¬†Sure enough, he did do it again – he attempted to grow the company so fast this year, that he raised a sum of money by issuing dilutive stock shares because the business cash flow wasn’t enough for his ambitions.

I can admire someone who seizes opportunity but I thought he was pushing too hard. Ignoring that thought, and the clues in the quarterly reports and sources mentioned above made me worried but I still took a shot at buying some. i should have been more patient because I do think this business will cycle up again strongly, but that time might be 6 months to a year away or more, plenty of time to lose 20-30% of a stock’s value. However, I’d rather buy a stock rising off a bottom not one continuing a down-trend. Which means I could wait for trends to turn before getting involved – I might miss 10-20% of a gain but the next move could be 150-200% so getting the absolute bottom is not important.

Thankfully it was a small lesson but it annoys me nonetheless to make mental errors. All we can do in investing is to keep honing the mind to avoid mental errors – which is something that takes time to weed out!

Tell me your investment/trading lesson – share in comments below and perhaps we can discuss in follow up posts.

* I don’t have a list that long, I just threw #37 in there for fun. Also, I typically don’t mention companies by name as this is not an investing blog but a financial ideas and planning ideas blog. The lesson is more important than the name of the company.