Learning From Your Mistakes – AAL

EVERYONE has made a mistake investing, it’s part of the learning curve in the stock market.  No one is immune, everyone has a bad pick, bad timing, or gets hit by Mr. Market.  I’m going to talk to you about my biggest mistake, but from the positive side of things.  I like to have CNBC on in the background and watched as American Airlines, a company I considered to be in the too big to fail category, announce on November 29, 2011 that it was going bankrupt.  To be fair bankrupt companies are EXTREMELY risky investments, but with the assets and brand recognition I thought that it could still have merit.  American Airlines (AMR at the time) plunged to $0.20 a share.  This is the definition of junk status and the airline was in terrible shape.  Interestingly enough the entire company was valued at $90 million, which is less than the cost of a typical passenger plane.

To understand bankruptcies you have to understand that the common stockholder is the very LAST person to get anything back.  If you’ve ever ridden a stock to bankruptcy you’ll know what I’m talking about as it is highly unlikely you got any fund back from the liquidation.  This is not a game for the faint of heart and can decimate positions in your portfolio, significantly impact your saving, and have a highly negative impact on your financial position.  Do not invest in companies that are bankrupt without first understanding the risk.

In this case I was definitely intrigued though.  Every once in a while a calculated gamble can pay off.  I purchased 1000 shares of Bank of America for $6 back in the financial crisis and it’s done quite well for me.  I considered doing the same thing with American Airlines, but I didn’t have the capital readily available, nor was I ready to pull the trigger on a stock like this at this point in my investment career.  Back in 2011 I had roughly $100,000 in assets so this would be extremely risky given the overall size of the portfolio.  I considered buying $2000 worth of shares which would have been 10,000 overall shares in a company that literally had no value based on the bankruptcy status.  It would be a bold gamble, but one that could pay off handsomely.

In the end I didn’t do it, which is probably a good thing in the long run because I understand bankruptcy way better than I did back in 2011.  However, this is where you also have to learn to not look in the rear view mirror and regret your inaction.  Had I purchased those shares, excluding dividends that were reinstituted, the shares would be worth just shy of $500,000 today.  OUCH, yeah that hurts.  I eventually bought 150 shares for $907 and turned that into a little over $5000 when the company became stable and US Airways got involved, but yeah that a couple less zeros than it could have been on the end of that number.

Long story short here, you’re always going to have to I wish I did moments in the market.  It’s best not to dwell on them and learn from your mistakes.  I doubt I’ll ever get the opportunity I though I had with the now AAL, but it made me a better investor and kept me in the high quality stocks that grow dividends these days.  It’s a mistake I’ll happily live with because I’ve had and seen the other side of the bankruptcy equation in another stock in my portfolio and it was painful.

Overall I’m happy with the outcome and the lesson it taught me.  You’re going to miss things, it happens, but not six years later and four times the assets in my accounts it has kept me honest and out of chasing the big returns on stocks I really have no reason to be in.

How about you, what stock did you miss that would have been life changing?

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