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Contents

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INTRODUCTION

Studying our losers will help you to identify high-quality companies and spot the red flags that send investments off the rails. By learning from our experience, you should sleep better and become a better, more successful investor.

PART I - THE STOCKS WE SOLD TOO LATE

There is a unique unhappiness about buying a company, watching the investment case come apart and then failing to act quickly enough to limit the damage. This section endeavours to answer the question; after making up our minds about a stock and putting money behind it, in the face of changing facts, why didn’t we change our minds?

Case Study #1 Strathfield Car Radios: Jive in and Flail Away

There is a unique unhappiness about buying a company, watching the investment case come apart and then failing to act quickly enough to limit the damage. This section endeavours to answer the question; after making up our minds about a stock and putting money behind it, in the face of changing facts, why didn’t we change our minds?

Case Study #2 Roc Oil: When Love and Loss Collide

When a genial Welshman who had made a fortune at his previous company walked into our office, it was love at first sight. Despite an acquisition we were convinced would turn bad, the impression he left was so great even after he died, we couldn’t let go.

Case Study #3 Star Entertainment: One Star, Many Sinners

Casinos are a licence to print money – or should be. Star Entertainment, which became synonymous with staggering mismanagement, arrogance and ineptitude, proved otherwise. The eventual loss was a hefty 80 percent, the lessons equally weighty.

Key Takeaways from the Stocks We Sold Too Late
PART II - THE STOCKS WE SOLD TOO SOON

These are the ones that got away. They may not be the most emotionally scarring errors, but they can be the most expensive. Underestimating value and selling too cheaply are the biggest mistakes of all.

Case Study #4 Cochlear: Cutting the Prettiest Flower

Cutting a successful investment off at the knees aches far more than incurring the losses on stocks such as Star Entertainment and Roc Oil. Welcome to our most expensive mistake of all—one of Australia’s few world-class businesses.

Case Study #5 ARB Corporation: Dropping the Bull

ARB was everything we look for in a successful investment: it was a market leader, its founder had skin in the game, and it had great products and a growing market. With a stunning financial performance over decades, we underestimated the impacts of each of these qualities.

Case Study #6 Apple: Crumbled

Wall Street got one of the world’s best businesses wrong twice in five years. After making nine times my money, so did I. The decision to sell a good business is the hardest of all. Apple illustrates the difficulties.

Key Takeaways from the Stocks We Sold Too Soon
PART III - THE STOCKS WE SHOULD NOT HAVE BOUGHT AT ALL

It is one thing to lose money on a stock by selling too early or too late. It is another to do so with a company you later realise should never have bought at all. This is a categorically different kind of error.

Case Study #7 Timbercorp: The Buy from Hell, Via the ATO

Between April 2007 and September 2008, we made 16 recommendations on Timbercorp – seven ‘buys’ and nine ‘strong buys’. It went on to lose members up to 96 percent of their stake, making it our worst call ever. The problems began right from the very start.

Case Study #8 PMP: Gutenberg’s Value Trap

PMP was an apparently cheap business operating in a difficult industry with a plan to improve it. The plan didn’t work, and we sold out for a 64 percent loss. When competent managers fight a poor industry, it is the industry that usually wins.

Case Study #9 Amaysim: Downwardly Mobile

In a corner of the mobile market, Amaysim was so dominant even its main supplier relied upon it for new customers. Then came a vicious price war from which the company never recovered. This is the story of how competition killed Amaysim, producing a staggering loss.

Key Takeaways from the Stocks We Should Not Have Bought at All
PART IV - STOCKS WE SHOULD HAVE BOUGHT BUT DIDN'T

So far, this book has been about errors of commission – decisions that subsequently proved wrong. There is another category of mistake – failing to act when we should. This section concerns our our mistakes of omission

Case Study #10 Meta: Missing the Fat Pitch

An investing lifetime entails a mere handful of truly great opportunities. When one comes along, it is best to swing big. This is the story of Meta – of how I saw the ball coming, did all the work and failed to even pick up the bat, missing out on a 500 percent gain.

Case Study #11 Afterpay: Who Wants a 10,000 Percent Gain Anyway?

A human’s greatest fear is to look stupid. The best way of overcoming that fear is to confront it. Missing out on Afterpay – a near hundred bagger in less than five years – and not regretting it for a moment is our (very public) contribution.

Key Takeaways from the Stocks We Should Have Bought but Didn’t
APPENDIX

Seven essays that go deeper into the issues raised by the case studies on which this book focuses.

1. Can't Buy Me Business Models

The Beatles were turned down by six major UK labels, including EMI, before George Martin signed them to EMI-owned Parlophone in 1962. The story offers important lessons for investors and music buffs alike.

2. Roundabouts and Flying Wheels

You may think investors have little to learn from the UK Roundabout Appreciation Society. I beg to differ. Welcome to the world of flywheels, via a napkin on which Amazon’s business model was built.

3. Red Flags and Avoiding Disaster

There are many signals that should keep you out of certain stocks. These are the big ones.

4. Why Breaking Up Is Hard to Do

Why selling a stock is more difficult than buying it and what to do to make it easier.

5. How to Feel the Fear and Buy Anyway

Value investors implicitly understand that cheap stocks are a product of pervasive fear just as expensive stocks are an expression of greed. But in both cases, when the time comes to act, many of us stumble.

6. Making Better Decisions

The brain is wired to undermine portfolio performance, but there are ways to bypass the malfunctioning.

7. The Case for Optimism

There’s no point investing if you don’t believe the future will be better than the past. If your time frame is long enough, there’s good reason for believing it will be.

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