2023 Investment Mistakes and Learnings

Focus on not messing up and you will make a ton of money

Some time ago I figured out that if I stop making mistakes, I will actually get great returns and make a ton of money in the market (easier said than done). Well, this year I have come much closer to accomplishing my zero mistakes objective (only made two mistakes that I know of this year), and the returns have been great (it’s easier to have good returns when the market goes up though).

I do not classify a mistake as buying a stock that ends up going down. For me, an investing mistake is when the reasons for which you bought or hold the stock are wrong. Imagine you thought that X company would have 200 million Free Cash Flow, and it ends up having -50 million. Well, that’s a big mistake (regardless of what the stock price does).

In 2021-2022 I made a lot of mistakes and I wrote a blog post about them, check it out if you haven’t yet. During 2023, I think have not repeated any of them, which was my goal. Let’s review the mistakes I made in the 2021-2022 period and what I am doing to avoid them in the future:

Lessons from old mistakes from 2021-2022

Buying without a margin of safety: I am being much more strict than in the past with the multiples paid for businesses, but I am still paying up for great quality. Multiple compression is a real problem that can erase many years of compounding. I am also demanding higher business quality (although I make exceptions for clear Event-Driven situations).

To always be 100% invested, unconditionally: Although I am 100% invested right now, I am not forcing myself to this, there were several times during 2023 where I had some cash position. I’d rather wait with the cash until I find a great opportunity than invest in a mediocre one.

Paying too much when political risk is high: If there is political risk, or some kind of black swan risk, I will only buy a stock at very low multiples and will sell it if it re-rates (as I did with Georgia Capital). I’m actually uncomfortable with China and other risky countries although there are very cheap stocks (most are cheap for a reason) so I’m going to minimize my exposure to risky countries in the future. This countries might end up doing well, but I think I can find great investments in safer countries regardless.

Ignoring a fundamental change in an investment thesis: If a situation changes dramatically for the worst, I am the first to sell now. I have avoided lots of losses since I started doing this. Also, there are times when fundamentals improve dramatically (such as Meta after the layoffs, Fairfax Fincancial after interest rates rose, and I hope PagBank after rates drop in Brazil) and I am increasingly taking advantage of those aswell.

Buying a company with low profit margin in a period of high inflation: Definitely paying more attention to pricing power.

Not substracting Stock Based Compensation from Free Cash Flow: Always doing this now. Stock based Comp is not Free Cash Flow.

OK, so now let’s go to some additional mistakes I made:

Falling for adjusted earnings and accounting

This was actually a 2022 investment mistake, but for some reason I did not put it in the list last year, I think it would be impossible for me to make this mistake now, since I focus much more on GAAP earnings and FCF than in the past and my accounting knowledge has improved a ton. I invested in Embracer Group because I liked the CEO’s skin in the game and financial engineering (issuing stock at high multiples to buy companies). What I did not realize (or better said, decided to ignore), is that their earnings were mostly bullshit and full of adjustments, additionally, guidance included a major partnership that ended up getting cancelled and the stock got destroyed.

What will I do from now on? I will never trust adjusted earnings, and even if the CEO has skin in the game and a great past performance, I will not fall for the trap.

Quick important note for new investors: Never trust data providers such as TIKR or analysts on anything. They use Adjusted earnings to calculate Price to Earnings ratios and Free Cash Flow calculation is most often than not wrong.

Although it would look like by looking at TIKR: Embracer does not have positive Free Cash Flow

Buying peak earnings

Yeah, I thought I would never fall for this since I always have it into consideration with cyclical companies, and luckily it was a small position that I sold fast. But I started a position in Dusk Group Ltd after some lazy research, without realizing that I was buying peak, post-covid inflated retail earnings. Earnings were already falling but I looked at LTM figures instead of trying to figure out what future earnings would be. Now I always try to do projections and think how the business will evolve rather than how it has performed in the past. When I bought, the company was actually giving bad guidance so no excuse for me.

Tip: Usually profit margins affect more earnings than revenue growth in the short term.

Playing with leverage when there’s earnings uncertainty

Companies that have some debt are always risky, but if the market cap is low, as they pay down the debt, you can have both earnings growth (lower interest expense) and multiple re-rating (as the company gets safer). This actually worked well on Georgia Capital, and it’s working pretty well on Geo Group for example (although I have no position). However, once there is some uncertainty on the earnings going forward, I would argue that the best to do is to sell, since it’s a risky situation to have a ton of debt and negative or low Free Cash Flow.

United Natural Foods told investors that deflation was affecting their business in a negative way, and that earnings became more uncertain. Instead of selling I started a position, which quickly lost 30% of it’s value and I sold. I am still monitoring it to see if the situation changes, but my point is that if you are going to invest in a deleveraging value play, you need total certainty on the cash generation and debt repayments.

Avoid mistakes, it’s important

I still think that avoiding mistakes is very important for investors, there’s plenty of traps out there that you can fall for. Here’s some additional thoughts on mistakes from one of my X-posts:

What went well in 2023

Although I made a couple mistakes, most of my investments went very well this year. I have a big concentrated position on Fairfax Financial that is doing great, Meta Platforms recovered after the layoffs and increased operating leverage from revenue growth (and luckily I added at the bottom after the layoffs), Auto Partner kept delivering and margins did not suffer as much as I thought, and pretty much most companies are doing good to great. I started some new promising positions as well and this was the year in which I learned about Event-Driven Investing, which is giving me great results for now.

I will keep focusing on avoiding stupid mistakes, but I am sure I will keep making some (although I hope I will make less and not repeat any of the ones I already made). I am also learning a ton from other people’s mistakes. Hope you learned with mine. I am very confident on investing going forward, I think most of the mistakes I made in the past were totally avoidable, and I think I will not make them in the future. Guess it’s part of the learning process. I have become a much stricter investor now and I think this is very good.

As I said in last year’s mistake post, most people in social media hide their failures and brag about their successes, so watch out with who you follow out there! Don’t fall for fake track records. Most people sharing content in social media are bad investors (I think I was a bad investor until this year as well, but only time will tell if I have really improved).

I’m not sure about what I will do with this blog, I guess I will only post from time to time, don’t forget to follow me on Twitter/X though, I am still active there for now.

Kind regards,
Oscar.