Lessons learnt the hard way

Now that this blog is over 3 years old it can be amusing to look back at posts from several years ago and see how wrong I was!

Two years ago in early 2006 I thought eBay was cheap at $43. It had a forward PE then of about 40 which I thought made it a bargain. So I bought more. And watched the share price drop like a stone for the next few months. Two years later, even after a good couple of weeks for the share price, eBay is at $33. No dividends were paid in that time either. Hmmmm.

Where did I go wrong? Paying 40 times forward earnings made the purchase risky. Maybe I could have had a small eBay holding but to put 25% of my portfolio in a company that expensive was unwise.

Benjamin Graham in his famous book "The Intelligent Investor" talks about the concept of a margin of safety. This involves accepting that your analysis could be wrong and the future is unpredictable anyway so only buying securities at a price well below what you think they are worth. And lowering the risk further by diversifying.

The good news is that eBay the company has been doing quite well, even though the share price hasn't. In a year or two my shares could be showing a profit. You never know, in five years the shares could be showing a 10% annualised gain. But it has been a long wait.