Everyone makes investment mistakes, though few admit to them.

Warren Buffett is a rare exception. In Berkshire Hathaway’s annual shareholder letters, Buffett has written of errors of commission, including overpaying in his purchase of Precision Castparts, and errors of omission, such as not buying shares in Alphabet (GOOG) and Amazon (AMZN).

In the spirit of Buffett, it’s time for me to admit to an investment error. An error of commission. And not just any error - probably my worst-ever.

In December 2021 and January 2022, I bought Russian stocks via ADRs listed in the US.

The stocks included a bank and three energy stocks. My theory was that the oil outlook was bullish, these stocks were dirt cheap, priced at 2 to 4 times earnings, and Putin wouldn’t be silly enough to carry out threats of invading Ukraine.

It turns out Putin was silly, and my stocks remain frozen due to the ongoing war. It’s likely these stocks are worthless.

What are the key lessons from this tale? Many would simply point to losing all my money. Losing money hurts, though I don’t think that was the error in this case. The outcome or result isn’t a mistake - it’s the result of a mistake.

Others would point to the error of trusting Putin to be rational and not invade Ukraine. True enough. In my defence, I did weigh up the possibility of an invasion against other things such as how much that was priced into the stocks. Put simply, I thought the possibility of making 3-4 times my money on these stocks was worth the small risk of being wiped out. Clearly, that calculation turned out wrong. However, I don’t think that’s the key lesson from this episode.

To shed further light on other possible lessons, I’m going to share a war story from my days as a portfolio manager.  

Style drift

I used to work at a large investment manager overseeing two equities portfolios. The investment strategy for these portfolios was based on buying quality stocks at a reasonable price for the long term. The funds were performing ok, but then a few things happened:

  1. The chief investment officer (CIO) left
  2. A pair of investment managers serving on the team who were more value oriented in their stock picking took over running the funds.
  3. The company announced a review of the entire investment department.

All of this coincided with another curious happening. The company started sending daily emails to everyone in the investment department on the performance of each fund. Now everybody knew and could track how each fund was performing on a daily, weekly, monthly, yearly basis versus an index.

The message seemed clear: though most of the funds told investors that they had three-to-five-year investment timeframes, management was signaling to the fund managers and analysts that short-term performance mattered, and that their jobs were on the line.

Unsurprisingly, the new investment managers of the two funds I worked for, changed the investment style to one they were most familiar: emphasising value, even deep value, stocks over quality ones.

Investment consultants have a term for the change that happened: style drift. The two funds had shifted investment styles from choosing quality stocks at a reasonable price to focusing on value stocks.

In the eyes of consultants, style drift is a major red flag. It can mean that a fund is switching styles because the current one isn’t working, or due to personnel changes, or because internal or external pressure has forced a change.

The key lesson

What does this have to do with my Russian stocks? Well, I think these stock purchases were a form of style drift when it comes to my own portfolio. Normally, I like to own stocks that are steady compounders. Ones that can grow earnings at a decent clip and pay steady dividends. It’s a conservative style of investing that emphasises diversification and the long term.

The Russian stock purchases were a large detour from this style. They involved concentrated bets over diversification; cyclical stocks over steady earners; emerging market companies over developed market ones. That’s not to mention the geopolitical risks from investing in Russia.

Stay the course

Why did I deviate from my normal investment strategy and style? I think it might have been a combination of:

  • Being a contrarian investor has always held some appeal to me. I like the idea of investing against the crowd and admire fund managers who do that. Russia probably felt like the ultimate contrarian investment.
  • The prospect of a quick profit.
  • The rush and thrill of investing in something new. This was: Russia! Oil! Buying into geopolitical turmoil!

There may be a larger lesson, and that it’s best to stick with your investment goals and strategies. To stay the course, even to when it’s tempting to do something different.

Otherwise, you can end up like me: with money frozen in an account tied to Russia.