Earlier this week I read the news that General Motors (GM) declared its first quarterly dividend since 2008. It plans on distributing 30 cents per share, which at today’s prices means that the annual yield will be at 3.11%. Although the stock price has gained only 10% since GM’s return to the NYSE in late 2010 (the S&P 500 has increased 55.33% over that same timespan), the price has nearly doubled in the past 1.5 years. Given recent performance, this new dividend is yet another reason for shareholders to be optimistic.
On the one hand, GM’s shareholders and management are to be commended for their recovery; it’s a development that few (myself included) foresaw when they declared Chapter 11 in June, 2009. Of course, they had a little help along the way, but nonetheless, they do appear to have learned from some of their past mistakes: poor gas mileage, high debt levels, employing Rick Wagoner, and in general, making cars that were pieces of s#@%.
For many reasons, I have little intention of investing in GM anytime soon. But this news reverberated with me, as it made me think back to the first investments I made as an adult. As the top of this page indicates, I did start investing in 1998, but the first time I made investment decisions entirely on my own was in 2008:
The good news is that I avoided GM. The bad news is that’s the only good news.
About one week apart in December 2008, I purchased small stakes in Citigroup and General Electric, and cannot begin to tell you how excited I was. Citigroup had fallen all the way from around $55 in 2007; I swooped in at $7.06. GE had also cratered in the prior year, dropping from a high above $41 to the bargain price of $18.49!
A little background… I had spent the prior summer analyzing and writing about the markets while working for a Forex broker, which was great because I felt really in touch with what was happening in the markets (you can see the ‘Old Archives’ section at the bottom of this page for some of my work from that summer). This facilitated one of my finest moments: I sent an email to my family on June 28th, 2008, explaining why they needed to exit the stock market immediately. They totally ignored me, but I can always say that I told them to exit before the market crashed.
But I digress… having saved a little money in a new IRA, I was ready to pounce. By the time 2008 was winding down, investors were in full-fledged panic mode. It’s easy to forget how scared people were by the economic climate at the time, and I was no exception. But like my heroes (Buffett, Soros, Munger, etc.), I had put my fear aside and purchased two companies so ludicrously cheap that there was no way I could lose!
Except I could. And I did. I thought I had beaten the system, but instead I had forgotten one of the most important rules of investing: buy great companies!
At the time, Citi was not a great company. It was hemorrhaging money, up to its neck in bad loans, and didn’t seem to fully grasp the trouble it was in (they continued to issue dividends through Q1-2009). GE wasn’t in a great place either. In the decades prior, it had increasingly shifted its focus into finance (away from its manufacturing origins), and was subsequently hurting as the global financial system took a nosedive.
Over the next few years, it became clear I had done one thing right (investing in the market when everyone else was fleeing). Unfortunately, I had picked the wrong companies. Citi eventually declared a reverse 1:10 split, pay a meaningless 1 cent dividend each quarter, and is still 25% below my purchase price (adjusted for the split). GE fared a little better; it slashed the dividend in 2009, but since bottoming out that year the price has slowly crawled upwards. I sold both in July of 2011. In the two 2.5 years I had owned them, my Citigroup holdings lost 48%, while GE had earned me just under 4%.
As I said, it was a painful lesson. The reason it comes to mind is that when I had bought Citi and GE, my college roommate had urged me to invest in Ford as well. Granted, he was speculating along the same lines as I was on Citi, and I quickly dismissed his advice. At the time, I had a much higher opinion of the two companies I had bought, and thought I understood financial firms more thoroughly than a car manufacturer. This was also right after the CEOs of GM, Ford, and Chrysler had embarrassed themselves in front of congress. The markets expected all three to declare bankruptcy, but Ford kept insisting that it wouldn’t need to declare. Bear in mind, however, that GM was saying the same thing.
You probably know the story from here. Ford received a loan from the US government and was the only one of the “Big Three” to avoid Chapter 11. The stock price soared; I missed out on a company that has produced a 51.52% annualized total return over the past 5 years.
Looking back on it now, learning the rule of only buying great companies was a painful lesson. Examining the annualized total 5-year returns for the largest financial firms in the US, Citigroup has easily performed the worst:
As for the largest firms in the industrials sector, GE has been near the bottom for the annualized total 5-year returns:
There are numerous conclusions I can draw from my early “adventures” as an investor. The first, encouragingly, is that I had the right idea! Buying when everyone is selling is undoubtedly an amazing opportunity for long-term gains.
The lifespan for entire industries is far longer than that of individual companies. Banks, for example, will come and go. On the other hand, banking has been around for centuries, and isn’t going anywhere. This paradigm holds true even for younger industries, such as technology or telecommunications. In times of economic crisis, the most important concept becomes buying the best companies, even if they’re not the cheapest. When an industry is crashing, most/all of the companies will be available at a discount, so look for the strongest firm instead of the one trading at the greatest discount! Before deciding on Citigroup, I considered buying Goldman Sachs. Even though they appeared to be in a stronger position than Citi, I decided to pass since they were more expensive.
To illustrate the extent of my mistakes in 2008, I’ve created a chart to examine the fall and rise in share price for Ford, Goldman Sachs, Citigroup, and General Electric. The share prices for each on January 1, 2008 (blue bars) have been indexed at 100, with the subsequent values reflecting the movement in share price. The red bars indicate the month that I bought Citi and GE, and the green bars indicate the month where the markets hit their bottom. Note that the values on the y-axis are not actual stock prices; this chart is indexed to reflect the movement in the share price, rather than the actual price levels themselves.
As I said… the good news is that I didn’t buy GM. The bad news is that I bought Citi and GE, and the worst news is that I didn’t buy Ford or Goldman Sachs in December of 2008. Lesson learned.