Learning from Mistakes
Board: Acusphere Community
"I'd like to forget that I ever owned it"
Don't do that. There's opportunity to learn the most from your biggest mistakes.
I am a dramatically different investor today than I was when I piled into Acusphere. Here's how I look back on it...
You can't judge the outcome of a decision because the world is too non-linear/dynamic, so only the process can be judged... so was this a genuine mistake in the process or was it simply an undesirable outcome in a sound process? The answer probably varies considerably for the folks on this board, but for me... it was a genuinely bad (or lack of) process from start to finish. Here's why...
1.) I drastically under-weighted the risk involved in a binary outcome situation... the fortunes of this company (in terms of existence vs. a stock that goes to $0) were in one product and a couple of governmental regulatory decisions about that one product. To assume I had any idea what the outcome of, or even the factors involved in, those decisions is kind of silly in hindsight. There's five layers of risk and potential error here alone... a.) odds that the product works b.) and that it is safe c.) and that it eventually finds market demand d.) and that the government says it's OK to sell the product e.) and do I have enough knowledge to forecast any of these before they're fact. To be honest with myself... at the time I thought I was quite knowledgeable... I read loads of scientific papers about perfusion and echo and spect, etc. that I had my sister (a nurse practitioner in a cardiac center) get copies of for me... I read statistics books so I could understand what I was reading... I thought I was on top of it... but I was only building enough knowledge to follow along, I still had absolutely nowhere near enough practical knowledge to forecast how the trial would turn out, what the FDA would factor into a decision or whether it would find any demand int he market.
2.) Despite the fact that similar products had failed to gain regulatory approval and disappeared... and worse, existing products were pulled off the market... I still dramatically underestimated the risk. Again, I knew enough to follow the story, but not predict it, and I bought into everything that management spit out.
3.) Position size... this was a call option on success... either worth more or zero... but I looked primarily at upside, dreamed of hitting a home run, and built up way too large of a position size, adding ever more every time it dropped thinking I was such a 'value investor' buy buying more at lower prices. I neglected to consider that when a stock goes to zero it's a 100% loss no matter how cheaply you bought in.
So what are my takeaways? First, I'm a completely different investor today, so it's like apples and oranges, but I learned a lot from Acusphere, and the pain of the loss only made the lessons that much stickier. a.) I look at risk first, returns second. b.) For the most part I avoid binary outcome stocks entirely, but if I do venture into a high risk, high reward situation like that... i have a clear line of reasoning in taking the risk, and I size the position so that if/when it goes to zero I'm unscathed. In most binary situations like that, such a position size means that the upside won't contribute meaningfully anyway, so there's no point in buying in at all, but if I find a situation where the risk/reward is skewed enough that a small 1/4 of a percent position could be a meaningful contributor to future returns, I'd consider it.
I suspect there were loads of folks buying Acusphere at the time who understood the risks and sized positions accordingly... and for them, maybe this was just a call option that didn't work out... sound process, undesirable outcome... for me it was 100% dreadful process, but I figure it was a valuable lesson, and now that my savings is considerably larger than it was 5 years ago or whenever we were all cheerleading this thing, I'm glad to have the lesson behind me so I'm a better steward of my current savings.
Anyway, that's my thinking... and I say "never forget!" Be thankful for the lesson if nothing else.