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.
Confessions of a Value Investor I