What I Learned From My Recent Investing Mistakes

This is a difficult article for me because I hate losing money due to bad decisions. But losing money is exactly the result of my purchasing decisions. Leggetts & Flats (leg -0.65%) lately. Now it’s time to evaluate what went wrong so I can learn from my mistakes. Here are my key takeaways from the big losses I incurred after deciding to buy (and sell) Leggett & Platt.

1. Investment diary works.

I don’t have a formal diary per se, but I track all my important investment decisions in a spreadsheet. The main goal of the sheet is to monitor dividend payments, but the sheet has two important cells that have nothing to do with dividends at all: “Reason for Purchase” and “Success/Failure”. This is the diary of my logic and the results of my transactions. If you don’t keep these simple records, you won’t be able to properly track your results. If you’re not doing anything similar, this might be a good place to start. It helps keep me honest and provides insights that my all-too-human mind wants to ignore.

Image source: Getty Images.

2. Everyone makes mistakes

It was a coincidence, but around that time I decided to sell my position as CEO of Leggett & Platt, Warren Buffett. Berkshire Hathaway (BRK.A 0.58%) (BRK.B 0.38%), admitted his big mistake. To quickly summarize, Buffett made a buy decision. paramount global (for someone 1.44%) If you sell it later, you will incur quite a large loss. He didn’t say exactly how much, but I’m sure it was a lot more than he lost at Leggett & Platt.

The real point of this particular lesson is that I am only human (and I assume you are too). It’s okay for humans to make mistakes. Buffett is an important character in the story because he is a very famous and respected investor. If the Oracle of Omaha sometimes makes mistakes, what chance do we mere mortals have? Don’t beat yourself up over investment mistakes. Instead, focus on holding yourself accountable by learning from them.

3. Diversification solves problems

“Don’t put all your eggs in one basket” is an old saying about the benefits of diversification. I love diversification and it saved me once again. Yes, I lost a lot of money on that particular trade. But I have a diversified portfolio, so the overall loss wasn’t that significant to my wealth. And when the company’s stock price fell, it also added a second tranche to the Leggett & Platt deal (two mistakes at once, it seems). But because I followed the diversification guidelines, this was a bigger blow to my ego than to my finances.

4. The story changed, but I missed it.

So what did I do wrong? Leggett & Platt makes very basic products that everyone buys, including beds and furniture. To be honest, this company has some similarities to some of the companies in Berkshire Hathaway’s own portfolio. That said, Leggett & Platt has been heavily leveraged for a long time. I knew that, but given its status as a Dividend King, I thought Leggett & Platt was prepared to deal with the downsides of the cyclical businesses it operates. After all, the company has done it many times before.

This time it was actually different. Over the past few years, foam use has increased significantly as the technology behind the bed (40% of sales in Q1 2024) has changed. To keep pace with the industry, Leggett & Platt has invested in foam and even supplied up-and-coming bedding companies such as bedding startup Purple. (By the way, Leggett & Platt also counts Berkshire Hathaway as a client.)

LEG data from YCharts

New entrants in the bedding space, often selling their products online, have changed the dynamics of the industry. When people were asked to socially distance during the coronavirus pandemic, sales of household items such as beds surged significantly, likely driving demand. This has been driven, at least in part, by the aggressive expansion of startups selling beds on the Internet. In the end, no one really won when demand fell and the bedding sector found itself in a deeper rut than expected. Leggett & Platt is likely to survive the recession, but its excessive use of leverage has left it in a financially vulnerable position.

I have watched companies try to temporarily support cash flow and do nothing even though they knew it was a sign of financial weakness. I gave Dividend King the benefit of the doubt, not really appreciating how his most important business had changed. To continue the turmoil, the board cut the dividend. This was the right move for the company, but it was a terrible move for me as a dividend investor. In the future, I will pay more attention to changes in business dynamics and how they interact with the company’s business model and, above all, the use of debt. I might take a slightly more conservative approach to debt, favoring companies with lower leverage.

5. Make lemonade

The biggest benefit of this mistake will be the lessons I am learning (again), but there is one more piece of wisdom to be gained from it. When life gives you lemons, make lemonade. I sold some stocks at the beginning of the year and made a big profit. Harvesting losses on Leggett & Platt trades can help offset the capital gains impact of those profits. It’s not exactly the ultimate consolation prize, but it softens the blow a little.

Be kind to yourself when investing

I’ve had a lot of success with an overall approach of buying companies with a long history of dividend increases while their stocks trade at historically high yields. I don’t believe the strategy was wrong or failed. What I need to do is be more discerning in my final choices. And perhaps most importantly, I must embrace the lessons I learned from the failed Leggett & Platt deal with humility and kindness toward myself. I’m just as human as Warren Buffett, and it’s okay to make mistakes as long as you do your best to learn from them.