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Confessions of a Value Investor I:

I’m starting a new series today of posts that I hope to keep to a minimum, but will serve as an important lesson for myself and readers of what mistakes a value investor can make when their decision process or research is flawed by serious errors.

Today, as a value investor, I confess to swallowing a tough pill as I sold out of my entire position in Norbord (NBD) after exactly 24 months of holding these shares.

When I originally bought NBD I was a fairly green value investor and consumed at that time with reading everything I could get my hands on about other value investors, their holdings, philosophies and disciplines. NBD at that time was a value favourite of Irwin Michael of ABC Funds and one through my own research that I felt offered decent value at its then valuation of $8.50 per share. The stock was a low-cost producer of OSB and had been hit hard in sympathy with lower sales linked to the declining housing market in the US despite a strong European presence.

This was the tragic mistake I made in purchasing this stock prematurely: timing a sector

Instead of exercising more patience and conducting a more thorough analysis of external risks I felt that secondary research via a fund manager, an attractive dividend and strong backing of institutional owner Brookfield Asset Management meant this stock was a conservative choice to begin my Value Portfolio with.

What I didn’t know was that the housing market in the US would continue a steep decline over the next 24 months, supply would increase drastically leading to plant closures and decreased profitability, European nations would meet increased housing pressure of their own and despite a strong stance in the continued purchases by Brookfield the shares continued to decline.

Today I sold my entire position of shares for $4.52 to take a total loss (excluding dividends) of nearly 44% after an initial and a subsequent purchase. After exactly two years I felt that securing a capital loss in NBD to match capital gains generated by the sale of other successful holdings in the portfolio this year appeared to be a prudent decision on my part as an investor.

While it might appear as though I exercised extreme patience over the last two years with NBD, I didn’t sell it earlier because it served as an important lesson each and every time I looked over my portfolio and saw its large double digit loss in my portfolio. This stock has taught me a lot as an investor over the last two years and helped to change more than a few of my attitudes; the most significant being a throughout Situational Analysis.

As I’ve shared before with readers; I feel it’s more important at times that an investor focus on their failures rather than their successes. A successful trade is always something you feel good about, but rarely examine critically for the reasons of why you did well. When you make a bad investment, just like Buffett looking in retrospect on his own mistakes, you learn more about yourself and the critical mistakes that can be made in the hopes of avoiding those same errors in the future.

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{ 8 comments… add one }
  • Philbert September 4, 2008, 4:54 pm

    Interesting. I too hold NBD and have seen the exact same behaviour as yourself. I am curious why you sold.

    Do you feel that your money would work harder for you some where else? Or did you feel that the turnaround in this company would never come? Do you feel that the quality of Norbord has slipped (not withstanding the current rocky building environment)?

    For the time being I will continue to hold this company because I believe the fundamentals are strong and when the dust settles (however long that takes) they will be one of the few left standing.

    I follow Irwin Michael closely and noted that he recently close out his position in KEYN:

    Do you continue to hold your position in KEYN?

    I happened to have sold my position in KEYN in July for a profit of 30% in 5 months and was quite interested to see that Irwin had sold his position.

  • Philbert September 4, 2008, 5:00 pm

    Additionally, in hindsight, would you have bought Norbord now or in the near future?

  • Nurse B, 911 September 4, 2008, 5:10 pm

    Thanks for the comments Philbert,

    I will address your questions in detail in a post during the next few days since you took the time to ask some very specifically

  • Anonymous September 10, 2008, 2:57 pm

    Your story makes me think we’re closer to the bottom. Thanks for posting.

  • Nurse B, 911 September 11, 2008, 1:46 pm

    Thanks for reading Anon,

    While I can’t be certain that we’re near a bottom, I certainly see value in the market. Good luck with your investing!

  • Ethan Bloch November 6, 2008, 2:28 am

    Hey Brad. A big shout out to you for having the guts to start these confessionals up.

    I think they’re awesome, as they help you learn from your decisions and help us learn vicariously through your decisions.

    A win-win, and who doesn’t love a win-win?

    Keep’em coming.

    Cheers.

    Ethan

  • Nurseb911 November 6, 2008, 5:45 am

    Thanks Ethan – definitely more confessions to come in the future as I expect to continue making a few mistakes every now & then in my investing activities.

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