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Tough lesson ... Croesus Mining.

Tough lesson ... Croesus Mining. Photo: Rob Homer

The best thing about writing on one’s investing mistakes, at least in my case, is the sheer richness and depth of the material. The hardest part is in knowing where to start.

I settled on a former Intelligent Investor Share Advisor resources analyst, a tall, rangy man possessed of a clutch of whimsical stories and a farming brain pre-wired for value investing.

Almost everything he recommended went up, and more often than not for the reasons he suggested it would.

Then along came Croesus Mining. It was 2005 and two years had passed since Share Advisor had recommended a gold company. Asset prices were rising and the economy was ticking along just a little too well.

A cheap, well-managed gold stock was just the ticket, offering protection against an economic slowdown with plenty of upside through a booming gold price if a recession ensued. I loaded up on our analyst’s recommendation.

In the end, it was the company’s hedging contracts and declining production that brought it undone. Croesus simply wasn’t producing enough to cover the cost of the hedging and the bankers pulled the pin.

On 16 March 2006 the company entered a trading halt from which it never emerged and almost every cent invested in the company, including the hundreds of thousands I had put in, was lost.

A cataloguing of my foolishness inevitably begins with the psychological. Almost every investing mistake begins in the brain - the organ that instructs the fingers to tap out the buy and sell orders.

I was impressed by our resources analyst, and rightly so. His humility and capacity for doubt impressed so much that the more he reaffirmed it the less likely I thought he might actually be wrong. Yeah I know, weird.

Psychologists call this the halo effect, a tendency to over-emphasise personality to explain behaviour and choices.

It’s in the nature of stock picking to get calls wrong, but the less that happens, the more investors are inclined to believe that it won’t, that they’ve found someone with ‘the golden touch’.

Hero worship such as the almost messianic adoration of Warren Buffett blinds us to the possibility of human error, and there’s nothing like a great track record to seal the deal. Chalk up mistake #1.

Strip out the halo effect and you realise that every investment must be judged on its merits, not on the personality of the person making the case for it.

My own ego also played a part. I’d just sold a large part of my shareholding in Intelligent Investor and had more money than at any other time in my life.

That primed me for the hot-hand fallacy, the misplaced belief that a person that has experienced success once is more likely to do so again.

That’s why I allocated 30% of my portfolio to a speculative gold stock at a time when I wasn’t gainfully employed, had no plans to work for another few years, had three young children under five and a serious health problem.

This was a portfolio allocation error of giant proportions but its genesis was entirely psychological. By adhering to Share Advisor’s maximum portfolio weightings, I may have avoided it.

Nature has a way of correcting for the three classic errors I made. It’s called failure, which is what my investment in Croesus became.

But perhaps the greatest and potentially more costly mistake is to resist the evolutionary impulse to improve ourselves by reflecting on our experiences, to instead wallow in the psychological pain of loss and take nothing from it.

I like to think I have learnt from a painful experience but if not, perhaps you have gleaned something valuable from my telling of it.

At the very least, I do know I have overcome loss aversion bias. In 2008 Croesus emerged from bankruptcy with my shares being worth less than $500. The company made a compulsory purchase and, after banking a cheque for a few hundred bucks, I considered the matter closed.

Then I read this story. Croesus had become Sirius Resources and by March 2013 was up 8,600% on the year. Even my paltry shareholding of a few hundred bucks would have been worth tens of thousands had I hung on. But if that’s the price of a good story, so be it.

Disclosure: Surely that’s enough disclosure isn’t it? No, John Addis doesn’t own Sirius Resources. Siriusly. But he is a Director of Intelligent Investor Share Advisor (AFSL 282288), where can get a 15-day free membership which unlocks all of Share Advisor’s stock research and buy recommendations.