Sunday, February 24, 2008

my Walgreen mistake

As many readers of the moneygardener know I have a long position in U.S. drugstore chain Walgreen (WAG). I first bought shares in Walgreen on January 29, 2007, over one year ago, when the stock was trading at around $45. In October WAG announced a bad quarter, and investors dumped the shares hard. The day of the dramatic drop I actually doubled my position in the stock to average my cost down. This was a mistake!

Was this a mistake because Walgreen is a poor company, with a sketchy future? Absolutely not. I still believe shares of Walgreen should be a phenomenal investment long term. So why was averaging down on the day of that dramatic 15% drop ($47 to $40) a mistake?

The reason I believe this was a mistake, but a mistake I will learn from is:
  • This trade exhibited my lack of patience, as an investor

Why I thought I needed to average down so quickly when they announced that weak quarter, is a mystery when one looks back at it now. Yes hindsight is 20/20 but, in reality, I made the trade in fear that WAG would bounce back up to $43 or $44 very quickly, when investors came to their senses. It showed overconfidence on my part that I thought I knew more than the market. No one becomes enamoured with a good growth stock, just after they report flat earnings. In reality I had months to watch the stock and average down. I've been kicking myself over the past few months as shares of WAG have drifted down to a low of $32.50. I could have got them 19% cheaper than my averaged down price, if I could have shown some patience.

  • Why catch a falling knife when you can buy a stock on the rise later?

The interesting fact is that what I thought was such a great deal at a 15% discount at $40/share back in October, has been down to $32.50 and has now bounced back to today at over $37. It is my belief that Walgreen has now bottomed. If I would have just waited until all the pessimism was wrung out of the stock, even if I didn't catch the bottom I could have bought it today 8% cheaper, and on the rise, instead of reaching for that falling knife.

The good news is that over time, this should all be water under the bridge as I expect my shares of Walgreen will appreciate smartly over time. I want to try to learn from experiences like this as I continue on my quest to buy great companies, that pay growing dividends, at reasonable prices.


Anonymous said...

Hi MG,

The good thing about your mistake is that: WAG is a great company with proven track record. You will be ok.

My reading of the 20 year WAG chart tell me that it has bottomed out.It will hang around at this range until a stimuli will move it.

Although I do not purchase retail stocks for long term, WAG is still a good company.

Dividends4Life said...

MG: We all have been there. Periodically we will let emotion get the best of us.

This must be mistake week. I will be fessing-up one later this week also. I guess confession is good for the soul. :)

Best Wishes,

FinancialJungle said...

We're all very lucky, MG. If it wasn't for big mistakes like the dot-com bubble and little mistakes like Walgreen, we wouldn't be the investors we're today. Hope that's a good thing. :)

Better to learn the lessons now while we're young enough to fall. Congrat!

Anonymous said...

Thanks for your candour. As a novice investor I have learned both technical skills and reallife rigor of investing.

Mistakes lead to lessons and lesson lead to ....

Anonymous said...

Hey MG,

Here are a couple of quotes which may or may not make you feel a little better about what you feel is a mistake...I am not commenting on Walgreen as an investment as I know little about the stock...If your investment thesis is sound and you did not "overpay" for the stock, then don't worry about the quotes Mr Market is throwing your way...he's a manic depressive.

From a recent Buffet interview
"In stocks, it’s the only place where when things go on sale, people get unhappy. If I like a business, then it makes sense to buy more at 20 than at 30. If McDonalds reduces the price of hamburgers, I think it’s great."

Also, one from Marty Witman re: current market conditions..."If you are willing to accept the fact that you're not going to buy the bottom and you're willing to ignore what might be a chaotic operating picture over the next two to four years," he says, "there are fantastic bargains."


MG said...

Great comments!

I tend to lack patience as an investor and I always feel as though I will miss out on a bargain if I don't act quickly.

Julie said...

Thanks for posting about your mistake.

I have recently started investing, and did the same thing with bank shares... After CIBC posted their bad 1st quarter results and the banks dropped a little, I rushed out and bought more bank stock... only to see the bank stocks drop much more since then of course.

So your blog made me feel better. The silver lining is that I never learn as much as when I make a mistake!

Thanks and Cheers,