The Best Action may be Inaction

Warren Buffet once said that there are only two rules to investing successfully:

  1. Don’t lose money.
  2. Don’t forget rule number one.

I’m sure you can find several blogs whose authors talk about the great investments they made. That’s great, but I want to talk about the flip side.

Back in 2007 I was looking for a good U.S. financial stock to invest in. The exchange rate was great and I had bought a decent amount of U.S. dollars at par or above. I wanted to make those dollars work harder and pay me dividends. I wanted a financial stock not because the market was on fire, but because financials tended to have healthy dividends that could increase over time.

A few companies entered my radar and I ordered 3 years of annual reports from each company to look at: Merrill Lynch, Indymac Bancorp, Allied Capital, and Old Republic International.

All had good dividend histories, not only of continuous payment, but also of raising those dividends. And except for Allied Capital (which had only been around about 40 or 50 years, I think) all companies had very long histories as companies, in one form or another.

Through reading their annual reports, however, there was just something about each company that I didn’t like. Allied seemed all over the place, and there was question to its dividend, Indymac had far too much loan exposure for my liking, and Merrill (which I had thought was just a mutual fund company) had a lot of questionable investments. Old Republic looked decent, though I didn’t know that I wanted to pay the $22 that it was trading at.

In the end, I didn’t buy any of those companies’ stock, and with good result. Over the next couple years, Allied cut its dividend, and saw its price drop from about $30 to a current price of about $4.50, Indymac went from a similar $30 to $0.44 before being delisted, and Merrill dropped from about $98 to a final buyout of $29 by Bank of America, whose stock subsequently went from around $40 to a current price of about $17.

Old Republic had the best result, only dropping about 50% from $22 to a current $11.50. It should be said for Old Republic, however, that even though it has seen a sell off of its stock, it has not only kept its dividend, but managed to raise it. I haven’t looked at their reports lately, so am not sure how they are doing otherwise.

Suffice it to say, in each of these situations my inaction on the stock was the best choice, even though I felt foolish in the beginning as some stocks went up a little.

Come the multi-billion dollar write-downs and bank runs that followed, however, I thought “Thank god I didn’t forget rule number one!”

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