In the summer of 2007, Ontario Teachers Pension Plan (OTPP) led a consortium offering $42.75 per share to take BCE Inc [ BCE 0.00%↑ ] private. At the time, this was the largest private equity deal in history.
To say this was a complicated deal is an understatement. (Here’s a good article, if you’re interested in learning all the details.) I won’t get into the deal drama. Instead I will focus on my assumptions and mistakes that caused me to lose big money.
Like many corporate actions, the OTPP offer took a long time to reach a conclusion – about 1.5 years. During that time financial conditions were worsening and BCE stock price consistently traded at a discount – sometimes steep – to the offer price. In May 2008 it was trading at $33.60. If the deal closed, that implied a 27% profit!
I followed analysts covering the deal and they suggested it was well-financed with little risk of falling apart. So I bought – a lot! I was excited to make a big profit and this felt like a ‘sure thing’.
I was wrong.
As the Global Financial Crisis unfolded, the cost of financing was becoming exorbitant and business risk was skyrocketing. A condition was added to the deal: auditors needed to sign off on BCE’s solvency. By December 2008 the deal fell apart because the auditors wouldn’t do it.
The stock plummeted to $21.23. I lost a ton of money.
While this experience sucked at the time, it helped me become a better investor. Here are the lessons I learned from that trade:
- Attitude. I went into the trade feeling like I had a hot tip on a racehorse. Like I was privy to something special and needed to make the most of it. The feeling wasn’t that different from placing a heavy bet at the roulette table.
Lesson: Always second-guess, slow down and de-risk a trade that is driven by excitement and FOMO. - Confidence. I felt like the deal was a sure thing and sought opinions that confirmed my view. When I found them, this only served to feed my confidence. I thought there was no way I was wrong.
Lesson: You will be wrong many times as an investor. Consider the implications of being wrong, regardless of your confidence, and make the necessary adjustments to protect yourself from your own hubris. - Sizing. Because of my attitude and confidence, I put too much of my portfolio into this trade. Why wouldn’t I? I didn’t want to miss out and I figured there was no way I could be wrong. I placed a big bet and subsequently lost a lot of money. Had I recognized my attitude and overconfidence I would have taken a more humble position.
Lesson: Size every investment so if it drops 50% you won’t be eating cat food. - Situation. BCE’s share price recovered fully about 2.5 years after the December 2008 fallout. Even faster when you consider the dividends. Unfortunately, I sold when the deal fell apart because I wanted to rid myself of the psychological burden. I felt like this chapter of history was over and it was time to move on. Instead, what I should have done was reassess the investment based on the new situation. Did I like BCE at $21? If I wasn’t carrying the mental weight of the loss, would I have invested at this point?
Lesson: Focus on the current situation and future possibilities, instead of what has already transpired. - Make Mistakes Early. While this loss for me was significant at the time, its reverberation has weakened over the years. I was much younger and my portfolio size much smaller. While proportionally painful, in absolute terms it was a minor bump in a lifetime of wealth creation. Still, the psychological trauma at the time was acute and changed my behaviour. Regardless of education, all investors will make mistakes and it’s important to make these mistakes early so the lifetime impact is minimal.
Lesson: Encourage your kids to start investing their own hard-earned money early in life so they learn when their mistakes aren’t life-altering.