I’ve been debating in my mind how I would write this piece. In the end, I just decided that I would tell it plain. Part of investing is losing money. There is a connection between willingness to lose money in the short run, and ability to make money in the long run. My experience has been that if you don’t take the risk of losing significant money, you don’t make significant money. Another way of saying it is that if you don’t blow one up every now and then, you’re not taking enough risk.

With that introduction, let me present my 10 worst losses since starting this strategy 7.7 years ago, beginning with the worst, and moving to progressively lesser losses. These ten losses comprise 55% of the total dollar value of losses since I started this strategy.

Deerfield Capital

What can I say?  My original thesis was that Deerfield was a mortgage REIT that did it right.  In spite of my negative real estate views, I did not think that the risk would extend all of the way to prime mortgage and Alt-A (no stated income) collateral.  Alas, my training as an actuary should have told me to avoid companies dependent on market confidence to maintain financing.  As the repo haircuts rose, free assets diminished, aand they had to collapse their balance sheet.  My main mistake was thinking that repo haircuts couldn’t get that high.  I was wrong. I finally sold when I thought the likelihood of insolvency was significant.

YRC Worldwide

I got in this one too early.  My industry models sometimes flash “cheap” when things will get cheaper.  Sometimes I have the sense to remember that.  This time I didn’t.  YRC has more debt than I would like, but it has a huge amount of upside when the economy turns.  Waiting for that turn could be fatal, but I continue to do so.  One other note: for the remainder of this piece — where my graphs say exit, it does not mean sale.