Last Friday one of my positions dropped 25% on one day. The stock in question is the REIT CBL, owner of several malls in the US. The decline was a real wake up call for me, and moving forward I must be more selective of my purchases.

The table below gives the timeline of my CBL investment:

Date Event Amount
06/26 Buy -$1 559.14
07/18 Dividend $47.70
10/17 Dividend $47.70
11/06 Sell $1 042.20

As the table above illustrates, CBL has not been a good investment for me. But why did I buy it in the first place? The embarrassing answer is that I did not do my homework. My fixation for high yields led me to this investment without looking to much at the numbers. No I'm writing this post to remind myself of this error, and hopefully avoid such mistakes in the future.

I'm currently reading the book The Single Best Investment: Creating Wealth with Dividend Growth. I haven't finished it yet, but it seems like a good read, and it may help me to avoid another CBL case in the future.

In the chapter I'm reading right now, the author presents a couple of tests that a stock should not fail in order to be purchased. Let's see how CBL does on some of them:

1. Debt level: Debt-to-equity ratio should be maximum 100%
Fail. Debt-to-equity ratio is 360% as of September 30th.

2. Positive cash flow: cash flow to the company after taxes is 3 times the amount of interest paid
Fail. Free cash flow is about 2.4 times interest paid.

3. Consistent growth in earnings: Around 5-10% per annum
Fail. The earnings has actually been declining.

4. Payout ratio: less than 60%
Success. Payout ratio of 54.2% by September 30th.

5. Creditworthiness: minimum investment grade
Success. S&P rate CBL at BBB-. So just reaching investment grade.

The hard fact is that I would have avoid this blunder by following these tests.

Now I'm not sure if these guidelines are a perfect fit for me, and I do believe I need some time to adjust them to my own strategy. But moving forward I will for sure do two thing:

  1. Finish the book The Single Best Investment.
  2. Have a real look at the numbers before making an investment.
November 6th, 2017 15:17

We all learn from mistakes, I've made my share of mistakes in investing and learned a lot from those mistakes over the years. I find it very useful to write down the mistakes and learnings from them for future reference. I used to write it down in a notebook by hand, nowadays I use a spreadsheet where I record all my Sells with a reason next to it and any learnings from it.

Recently, I had to trim my OHI position by half due to very high risk after their latest ER. I was overweight in it (got a bit greedy of very high dividend). I should have known better to keep the position in check, but we all are humans and greed sometimes gets the best of us.

BBB- with High Yield is generally a very high risk investment since BBB- is only one notch above Junk status. Therefore, for rule#5, I go for at least BBB while keeping position very small for any BBB-. I only own three BBB- stocks out of my 40 some stocks.

Another book I would recommend, "The Five Rules For Successful Stock Investing".

Take care and happy investing

The Beta Post
November 10th, 2017 12:39

Sound like a good habit to write down things to learn from your mistakes. I'll try to use this blog as my notebook for mistakes.

Thanks for commenting as always :)

November 9th, 2017 23:56

Good wake-up call for sure. I suppose it´s espesially hard to be super strick with REITs because the business seems so safe that once can accept "debt/equity" to be over 1. This was also a wake up call for me, so I will go through my own portfolio and take a look at those measurements. Thanks for the advice

The Beta Post
November 10th, 2017 12:43

Yes you're right about that Stockles! The author of the book also writes about different D/E levels for different industries :)

Thanks for commenting!

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