How to Invest in 2014 by Learning from 2013's Mistakes

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I've been investing for more than a decade, and have made plenty of mistakes along the way. Most of those were kept pretty quiet, as I'm not sure my wife would appreciate to learn of any whoppers in our portfolio. However, after becoming a full-time Foolish writer this past year, my investing mistakes have become much more public. I thought it would be a good idea to reflect on a few of my biggest errors over the past year so that others can avoid those mistakes in the year ahead.

Mistake No. 1: Don't be quick to double down on a loser
The Motley Fool holds a monthly roundtable for Foolish writers to discuss their top buy for that period. I've contributed to several sessions, and if you removed just one bad pick my selections would have combined to beat the market by an average of 6.6%. Unfortunately, I tabbed that one loser, Nuverra Environmental Solutions not once, but twice. That double dose of awful brought down my score to minus 17.7% against the market. Ouch!

Nuverra Environmental Services did nothing but struggle in 2013. The company missed earnings estimates all three times, and its last quarter was downright ugly. The problem is that the Nuverra story is so compelling. It's pursuing an environmental solution that has the potential to make fracking more palpable by treating and recycling frack water so that producers don't need to use so much freshwater. Unfortunately, the company isn't making much money off that process.

My big mistake here was going back to the well so soon on this losing pick. Not only did I recommend it twice, but I followed my own advice and doubled down on Nuverra. Instead, I should have waited to see if the company could actually make a decent buck or if it's just a compelling story that has no real substance.

Mistake No. 2: Be greedy when others are fearful
Another mistake from this past year, though not quite as costly, was to pound the table on BreitBurn Energy Partners when it came under attack, but not actually buy units myself. Short-sellers started to pile into the company after a research firm said that its distribution to investors was "largely a mirage." Skeptics suggested the company's value was just a few dollars per unit. However, that claim was only a headline-making boast, as the value of the company's oil and gas reserves were worth $10 per unit in a worst-case scenario -- with a value twice that more than reasonable.

As BreitBurn Energy Partners fell to roughly $15 per unit in July I knew it was an unbelievable bargain, yet I did not buy. It is one thing to know Warren Buffett's advice to be greedy when others were being fearful. However, it is much easier said than done. 

Over the course of the year BreitBurn Energy Partners has only improved. It drilled its way out of a scenario that had the company earning less than it was paying investors. It made several smart deals that boosted its future prospects and finally, it waited until the time was right to fix its balance sheet. As fear faded investors eventually did come back; unfortunately, I wasn't profiting off of the return of greed. 

Mistake No. 3: Watching winners keep running
The final major mistake I made last year was to see a winning stock, but not buy because it wasn't as cheap as when I first came across it. When I first discovered Core Laboratories its stock cost about $100 per share. I watched and waited even though I really wanted to buy on a pullback when it hit $130. That pullback never came and the stock is now trading at close to $190 per share. 

If nothing else I should have considered starting with a small position in Core Laboratories and added on iif it pulled back with the market or the price of oil. Instead, I just stood by as shares kept running higher. I should have known better, as Core had already been tabbed as the Motley Fool's top stock for 2013

Final thoughts
Investors will make mistakes. The key is to learn from those mistakes and not make it a habit of repeating them each year. That's why I don't plan on doubling down on a losing position until it's clear that the company in question is really turning the corner. I'm also going to work on being greedier when other investors are fearful. Finally, I'm not going to make the mistake of not buying a great business just because its price was cheaper in the past, especially when it has been tabbed as our top stock of that year.

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Fool contributor Matt DiLallo owns shares of Nuverra Environmental Solutions. The Motley Fool recommends BreitBurn Energy Partners L.P.. The Motley Fool owns shares of Nuverra Environmental Solutions and has the following options: long January 2014 $4 calls on Nuverra Environmental Solutions and short January 2014 $3 puts on Nuverra Environmental Solutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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