News

I hate losing money because of bad decisions, so this article is a hard one for me. But losing money is exactly the outcome of my decision to buy Leggett & Platt (NYSE: LEG) not too long ago. Now is the time for me to assess what went wrong so I can learn from my mistake. Here are the key takeaways from my big loss following my decision to buy (and sell) Leggett & Platt.

1. Investment diaries work

While I don't have an official diary per se, I do track all of my important investment decisions in a spreadsheet. The main goal of the sheet is to keep tabs on my dividend payments, but there are two important cells on the sheet not related in any way to dividends: "reason for buying" and "success/failure." This is the diary of my logic and the outcome of the trade. I wouldn't be able to properly track my results if I didn't keep this simple record. If you don't do something similar, I highly recommend that you start. It helps keep me honest and provides insights that my all-too-human mind would prefer to ignore.

2. Everybody makes mistakes

It was just a coincidence, but at around the same time I decided I would sell Leggett & Platt, Warren Buffett, the CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), admitted to his own big mistake. To sum it up quickly, Buffett made the decision to buy Paramount Global (NASDAQ: PARA) and then later sell it, recognizing the loss of quite a bit of money. He didn't exactly say how much, but I'm sure it was orders of magnitude more than I lost on Leggett & Platt.

The real point of this particular lesson is that I'm only human (and I assume you are, too). Humans make mistakes and it's OK. Buffett is important to the story because he is such a famous and respected investor. If the Oracle of Omaha errs on occasion, what chance do we mere mortals have? Try not to beat yourself up for making investment mistakes. Instead, focus on holding yourself accountable by learning from them.

3. Diversification saves the day

"Don't put all of your eggs in one basket" is an age-old saying about the benefits of diversification. I love diversification, and it saved me once again. Yes, I lost a lot of money on one particular trade. But because I have a diversified portfolio, the overall loss wasn't that material to my wealth. And I even added a second tranche to the Leggett & Platt trade as the company's shares fell (I guess that makes two mistakes in one). Because I stayed within my diversification guidelines, however, the blow was more severe for my ego than for my finances.

4. The story changed and I missed it

So what did I get wrong? Leggett & Platt makes pretty basic products that everyone buys, including beds and furniture. Frankly, the company has similarities to some of the companies contained within Berkshire Hathaway's own portfolio. That said, Leggett & Platt has long made heavy use of leverage. I knew that, but given its status as a Dividend King, I figured Leggett & Platt was prepared to handle the downside of the cyclical business in which it operates. After all, the company had done so many times before.

Only this time was actually different. Over the last few years, the technology behind beds (40% of first-quarter 2024 sales) changed, with a significant increase in the use of foam. Leggett & Platt invested in foam to keep pace with the industry and even supplied some of the up-and-coming bedding companies, such as bedding upstart Purple. (Leggett & Platt also counts Berkshire Hathaway as a customer, by the way.)

New entrants into the bedding space, often selling products online, shifted the industry dynamics. During the coronavirus pandemic, when people were asked to socially distance themselves, there was a big jump in sales of home goods like beds that appears to have pulled demand forward. It was driven at least partly by the aggressive expansion of industry upstarts selling beds on the internet. In the end, nobody really won when demand fell and pushed the bedding sector into a deeper rut than was perhaps expected. Leggett & Platt will likely survive the downturn, but its heavy use of leverage left it in a financially weak position.

I watched as the company maneuvered to temporarily support cash flow and did nothing even though I knew it was a sign of financial weakness. I gave the Dividend King the benefit of the doubt, not really appreciating how its most important business had changed. To keep muddling along, the board cut the dividend, which was the right move for the company but terrible for me, a dividend investor. In the future, I'll pay more attention to shifting business dynamics and how they interplay with a company's business model and -- importantly -- use of debt. I might even get a bit more conservative with debt altogether, favoring businesses with lower leverage.

5. Make lemonade

While the biggest benefit of this mistake is going to be the lessons I am (re)learning, there's one more bit of wisdom to be gleaned here: When life gives you lemons, make lemonade. I sold some stock earlier in the year and booked a big profit. Harvesting the loss from my Leggett & Platt trade will allow me to offset the capital gains impact from that profit. That's not exactly the best consolation prize, but it softens the blow a little.

Be kind to yourself when you invest

I have had many successes with my overall approach of buying companies with long histories of dividend increases while their stocks are trading with historically high yields. I do not believe that strategy is wrong or broken. What I need to do is be more discerning in my final selections. And, perhaps most importantly, I need to accept the lessons from my failed Leggett & Platt trade with humility and kindness to myself. I'm just as human as Warren Buffett, and it is OK to make mistakes, as long as I do my best to learn from them.

Should you invest $1,000 in Berkshire Hathaway right now?

Before you buy stock in Berkshire Hathaway, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Berkshire Hathaway wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $652,342!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

*Stock Advisor returns as of May 13, 2024

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.