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Confessions of a Value Investor II:

Part of the price value investors pay is buying into a market before the bottom is confirmed or the cessation of selling has completed and one quality that serves any value investor well is humility.

I own 170 shares of Manulife Financial (MFC) and through this market decline I’ve watched those shares trade within a tight conservative range as many other global financials have fallen precipitously or failed. On October 1st Manulife finally had its moment in the crosshairs and began a sharp decline of over 45% during twenty-seven days as investors sent it to a new 52-week low.

As the stock declined below $25 every piece of data I had told me the company was significantly under-valued. My Situational Analysis was unchanged and no matter how hard I tried to find significant weakness in the company I came up empty. As a long-term investor I was mesmerized by the opportunity I found at my fingertips. As I watched the share price accelerating downwards I was perpetually tempted to pull the trigger on doubling my position with the cash I had available.

Yet I knew my emotions were getting the best of me…so I walked away.

How much I would be up today on that stock and the long-term gains that I’ve missed out on from that decision I don’t care to know. Likely I missed the best opportunity I will ever have to snatch up shares of Manulife at such a low valuation; $0.37 per share away from a 5% yield.

What did I buy instead? I bought a boring energy infrastructure trust, Alta Gas (ALA.UN), which pays out a 12% yield and is just 3% of the market capitalization of Manulife.

Why would I do such a thing? I blame it on discipline.

The fact is that at the time I had a 4.5% exposure to Manulife in my portfolio and doubling my exposure would have made it worth over 8%. For all of the upside that I could have enjoyed I could have as easily exposed my portfolio to a significantly higher downside. I made the choice of diversification despite knowing that Manulife remains one of my favourite stocks. I ignored emotions and made the disciplined decision even though I knew, from my analysis and due diligence, that Manulife was the better investment.

Did I make the right decision in hindsight? Yes.
Is that something that’s easy to swallow based on where Manulife currently trades? No.

The trouble with investing, and it can be seen in the volatility of this current market, is the impact of emotions on decisions. As an independent investor you have to concentrate your attention on mitigating risk because no one else is going to do it for you. Despite the enthusiasm for many to gamble with their capital I don’t share that attitude or interest. My goal is on long-term appreciation of a diversified portfolio and I know, ego aside, that I made the right decision.

There are always opportunities to make a big gain, but you can also lose as much or more when you’re focus is away from focusing on risk.

See Also:
Confessions of a Value Investor I

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{ 21 comments… add one }
  • Paul (augustabound) October 29, 2008, 6:03 pm

    You still like Manulife even if they need to access more capital?

  • Nurseb911 October 29, 2008, 6:58 pm

    I do Paul.

    The company is still situated from a product perspective to grow significantly in all areas of their business. If I were 65 with 15,000 shares facing a 10% diultion I would be very upset. But I understand the need to re-capitalize if the market has put them in that position. It’s part of my portfolio, but as I pointed out I couldn’t rationalize exposing myself to a 8% weighting despite how cheap I felt the company was. I don’t see them issuing capital, period….but I could be wrong.

  • STOCKMANMARC October 30, 2008, 9:21 am

    Nurse

    Have you looked at markel(mkl), alleghaney(y),or Berkshire(brka)or(brkb). These insurers seem have tighter control or should I say more picky on writing policy’s. Plus all three have excellent stock pickers running their investment portfolio’s. Just my thoughts.

    STOCKMANMARC

  • Nurseb911 October 30, 2008, 9:27 am

    I have examined each in the past, but I hold MFC in my taxable account. Here I take advantage of a dividend tax credit offered by the Canadian government. If I were to hold any US companies their dividends are taxed 100%.

  • Michael October 30, 2008, 12:39 pm

    Hello,

    Great Site! Two questions:

    1. What brokerage account are you useing, ie costs per trade, etc…

    2. What tool are you tracking your portfolio with, ie msn money, quicken, excel spreadsheet, etc..

    Thx

    Michael

  • Nurseb911 October 30, 2008, 1:15 pm

    Thanks for commenting and visiting the site Michael.

    1. I use TD Waterhouse as my main brokerage and pay $9.99 per trade and find their research tools adequate. If you’re a US investor their platform is very similar to TD Ameritrade (disclosure I hold shares in TD)

    2. For tracking my portfolio I use an adapted excel spreadsheet that downloads information directly from yahoo. I’ve modified the main excel program with a number of features that link to spreadsheets on historical data that I’ve created for the stocks I own. I track all my trades, ACB and tax information in other excel spreadsheets.

    If you have any other questions please feel free to contact me privately via my contact page along the header of the site.

  • Anonymous October 30, 2008, 1:53 pm

    Hi Brad,
    I’ve been exploring your site carefully, and receiving your posts, for about a month now. Excellent information, highly appreciated.
    On Tuesday I made my first-ever non-ETF trades, having just gotten set up on Questrade. I bought 50 shares of MFC and 50 of Methanex. Not until later did I realize that I hadn’t quite done what I thought I did… The ticker I used for MFC was just that, “MFC”, not “MFC.TO”, though I did use “MX.TO” to buy Methanex. So to my horror I discovered yesterday that my trade went through New York instead of the TSX, and I took a huge hit on the exchange rate!
    I’m not unhappy (at all) with my investment, but what this beginner wants to know is: did I buy something different than what I wanted, or the same thing but with in a different place? Are there any tax implications (for a Canadian) to buying MFC through a US exchange?
    – Rod (rod@crazier-than.com)

  • Nurseb911 October 30, 2008, 2:18 pm

    While I’ve never made the mistake of buying a NYSE listed CDN company (TDW makes you choose between CDN or US exchanges prior to a purchase) I can certainly appeciate your frustrations about the currency hit.

    To my knowledge all US companies held outside an RSP that pay dividend income are 100% taxable at your marginal rate. I would ask a tax professional if this is true for NYSE traded CDN companies though.

    You did essentially buy the same company. Often companies in Canada will issue shares on the NYSE as a means of creating additional capital for them to invest and give exposure to US investors to invest in their native currency. They should trade at the difference of the currency.

    It’s an unforunate mistake but I’m sure you’ll always be checking the stock ticker extra carefully on future trades.

    Thanks for reading the blog and I hope you continue finding content of interest.

  • Mark Perkins October 30, 2008, 11:39 pm

    I’m not saying I’m a great investor yet but I’ve read Buffett’s thoughts on diversification. He doesn’t like it and it makes sense not to need it if you essentially, know what you are doing. It’s are hard balance; stock picking, trying to beat the index with diversification.

  • Mark Perkins October 30, 2008, 11:40 pm

    It’s “are” hard
    -a rather

  • Nurseb911 October 31, 2008, 8:27 am

    Mark (StockPursuit.com),

    There are a few ways of looking at diversfication and putting that into perspective of what your long-term goals are. As a dividend growth oriented value investor I’m not all that interested in beating the index over any specific time period because my intention is to create a growing stream of tax-efficient income through investments.

    Diversification, in my view, is one of mitigating risk as best as possible. Each stock I own is for specific reasons and sometimes I like how two companies compliment my portfolio based on their independent operations that together make the two investments valuable.

    I don’t advocate holding more than 30 stocks because I think you can clearly over-diversify. But when I look at how my portfolios have performed during the market turmoil compared to the losses of the index I’m very happy with my choice to diversify the way I have.

    Look to Monday’s post for some more insights into that theme Mark.

  • Mark Perkins October 31, 2008, 6:36 pm

    read Monday’s post. I get your strategy now. sounds good.

  • Mark Perkins October 31, 2008, 6:39 pm

    I’ve actually planned on doing something similiar eventually with dividends and passive income. best of luck to you

  • valuegeek November 1, 2008, 7:50 am

    Kudos to you. I learnt the importance of diversification the hard way. I held a financial company that comprised 20% of my portfolio, and it declined by some 95% in the current crisis. Nowadays, I limit each position to 5% of my portfolio.

    Generally, I do not invest in companies that themselves hold a portfolio of stocks and bonds, as I find valuation of those holdings too difficult, but I am intrigued by your repeated mentions of Manulife throughout your site. However, I failed to find an actual analysis of this company. Have you ever published your valuation of Manulife?

  • Nurseb911 November 1, 2008, 9:05 am

    Mark – my post on Monday should offer more insights into my current portfolio so please tune in for that if you have further questions.

    ValueGeek – Great site (http://blogvesting.com/ for those who don’t know VG). I do tout MFC quite often on this blog but publishing any detailed analysis on my blog would bring about a serious conflict of interest beyond my ownership of their shares. Likewise with SC (Shoppers Drug Mart).

    In the future if either of those conflicts change I would be more than happy to publish a detailed analysis – but for the moment I feel more comfortable answering questions readers may have on those two investments.

    Of course if another blogger wanted to “invite” my analysis to be published on their site than I would be more than happy to do so.

  • valuegeek November 1, 2008, 6:59 pm

    In my opinion, you’re doing your readers a favor by publishing your detailed analyses of companies, especially if you clearly disclose that you already own the stock. Although I always do my own research (and I imagine that anyone who calls himself a value investor would do likewise), I find it very useful to hear about somebody else’s take on the risks and rewards involved in a particular stock, which may reveal areas that I might have missed.

    I find that insurance companies tend not to disclose their equity/bond holdings in any detail, and their cash flow is always extremely lumpy, which makes valuing these companies a very frustrating experience. Basically, the only time I dare to buy one of these stocks is if the insurance float is being invested by Buffett. It would be an eye-opener for me to see how you price MFC. If you are willing to freely share the results of your labor, I would be delighted to publish your analysis of MFC on my site (with the proper credits, of course).

  • Nurseb911 November 2, 2008, 11:19 am

    Fair enough ValueGeek,

    I have a number of current post-projects already slated for the next few months, but when I get the time to do a post I’ll consider taking you up on your offer.

  • STOCKMANMARC November 2, 2008, 11:09 pm

    Mark

    I have also read where Buffett has made the comment on diversification and that he is not hip on it, but if you look at his holdings in Berkshire he has around 90 companies, 40 public and 50 private. At this stage of his game I would say he is pretty well diverified. His style of investing represents more of a dividend growth investor than a “Focus” investor as when he started over 50 years ago. Studying the man and his style is quite interesting and one can learn alot.

    STOCKMANMARC

  • Assetologist November 3, 2008, 6:56 pm

    Great post and kudos to you for sticking with your own rules!

    I too recently reviewed my personal insights and I am afraid I am not as disciplined. One of my approaches is to jump with both feet into high risk / high reward stocks with a small portion of my portfolio. My justification is that my job provides a boring, high-yield bond type investment and 90% of my portfolio is spread among about 40 large-cap dividend stocks (including MFC).

    We each need to know our strengths and challenges and play our best game by design.

    Good Luck

  • Ethan Bloch November 6, 2008, 2:19 am

    Thanks for sharing. I’m my opinion, your short story here captured the stress and systematic thought process that goes into making tough investment decisions.

    Job well done. It’s refreshing to hear other people’s investment stories and I’m happy to hear you still feel confident about your decision; even though that good feeling is psychological expected ;p

    Cheers.

    Ethan

  • Nurseb911 November 6, 2008, 5:43 am

    I’m glad that my insights were something you enjoyed reading Ethan. I expect to make more mistakes in the future (hopefully to a lesser degree) and share them publicly so others can learn as well.

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