That painful mistake can serve as a lesson

Value Judgments

Your Money

April 04, 2004|By JANET KIDD STEWART

IT'S TIME for true confessions.

I fell in love once with a hotshot health-care stock that increased tenfold and then rode it down to a heartbreaking loss. I didn't always dollar-cost average. In flat market years, I've been too cheap to rebalance my investments, figuring the trading costs would eat up that year's performance.

Yes, mistakes were made. But learning from them and behaving differently next time? There's the trick.

For answers I went to the pros, chatting up two experienced money managers and a wealth adviser, who agreed to share some of their own investing lessons learned the hard way.

David Herro has been running the Oakmark International Fund since its inception in 1992, and has delivered an impressive track record, logging a five-year total annual average return of more than 13 percent. Since its inception, the fund has delivered an annual average of near 12 percent.

Those are thrilling numbers, but the ride was bumpy. Twice during the 1990s Herro misread the time to buy foreign stocks after precipitous market drops.

In 1994, he jumped into Latin America during the Mexican peso implosion known as the Tequila Crisis. And in 1998 he bought into the troubled Pacific Rim region.

On both occasions he was too early and fund investors suffered continued declines until the regions stabilized.

"The truth is there is never stability and tranquillity. It just doesn't exist," Herro said. "Just when you think things are calming down, a Spain happens."

Unlike individual investors, Herro can't panic and change his investing style when a stock goes south. As a value-oriented firm, Oakmark looks for companies trading below their intrinsic worth and waits for a pickup in the stock.

That said, the experiences reinforced the need to factor in all the worst-case scenarios that can affect even well-run companies, such as huge currency fluctuations that alter foreign balance sheets for a long time, he said.

Lesson learned: Patience is a virtue.

"We learned to be more patient when buying distressed stocks," Herro said. But investors "can't be too picky when quality businesses are selling at low prices, for the upturn can be swift and of high magnitude, as happened in both those cases."

Letting go of a stock is one of the hardest things Michael Mach does. The manager of two Eaton Vance mutual funds that invest in companies with huge market capitalizations spent time as a family therapist before becoming a money manager, so he understands a thing or two about human nature. Selling a loser stock, he says, can be especially painful.

"I always feel like the dumbest guy in the world," Mach said of the moments when he is deciding to sell a stock that hasn't performed. When shares of a company decline between 10 percent and 15 percent - the exact amount varies based on market volatility and the individual stock's track record - he bolts. A month later, he re-evaluates the stock for a possible repurchase.

"We'll give the stock a timeout and move to the sidelines," he said.

Lesson learned: "When you eliminate the toothache, the pain is over and other opportunities present themselves," Mach said. "You have to be quick to admit mistakes. It's not about being right or wrong, but you have to get your ego out of the process."

As a tax adviser to wealthy clients, Jim Ciarlette, a Northern Trust vice president, has let the tax tail wag the investment dog, something he advises clients never to do.

"I held a tech fund longer than I should have because I didn't want to pay a big tax bill when selling the shares," he said. Subsequently, the fund's value plunged. "Now I always tell people you have to be comfortable with the price of the stock regardless of the tax implications."

Admitting mistakes is no fun, especially when they cost money. But as my ice skating coach used to say, "You stop falling, you stop learning."

E-mail Janet Kidd Stewart at

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