The mistakes made by Duane Parnell, shorting Baidu, lost 150-200 million US dollars

Comprehensive from Qile Club.

Duan Yongping: Even someone like me, who is considered to have a lot of business experience, only felt that I had a better understanding of investment after experiencing many setbacks.

I asked Buffett, what are the things that cannot be done in investment, and he told me: do not short, do not borrow money, and most importantly, do not do things you don't understand.

Over the years, I have lost billions of US dollars in investments, each one being against the teachings of old Buffett, while the big money earned was in areas I truly understood.

Mistake 1: Shorting Baidu resulted in a loss of $150-200 million

Duan Yongping: Haha, I have made losing investments several times, most of which can be forgiven, but there was one extremely foolish time when I went short on Baidu. Previously, my investment performance was very good, feeling a bit arrogant, thinking I was very capable.

Initially, I thought it was just for fun, but later I was unwilling to admit defeat, and in the end, I was caught in a squeeze and surrendered. All the accounts combined lost a lot of money, roughly $150-200 million, with one account still unable to recover to this day.

The most regrettable part is that this mistake depleted all our cash reserves, with a huge opportunity cost. Otherwise, I could have helped everyone earn more money during the financial crisis.

And the most regrettable part is that this mistake occurred after Buffett told me not to short. Now you understand the consequences of not listening to the advice of the elderly, right?

It is gratifying that the overall performance in these 3 years has been decent. I am somewhat thankful to the financial crisis for giving me a chance to turn things around.

However, this is not actually my worst investment, because it was purely speculation. There won't be such examples in the future. The opportunity cost is high, losing some money is a small matter.

Netizen: May I ask what was the reason for Mr. Duan to short Baidu at that time? What was the thought process behind that decision? What should we learn from it?

Duan Yongping: Firstly, shorting was wrong.

At that time, I did see some things wrong with Baidu, and in fact, Baidu later dropped significantly because of those issues (if I had continued to short until then, I could have actually made a lot of money). However, I did overlook some important favorable conditions for Baidu, such as the policy environment, etc. In short, shorting was a speculative behavior, and I shouldn't have done it.

Reflection: Firstly, making mistakes when having excess cash on hand, like Buffett, should have been after making 100 times the profit at NetEase, having too much idle money on hand without good investment targets.

Secondly, feeling that investment was too boring, I wanted to try the fun of shorting, shorting is a stimulating game of mutual hunting. Perhaps it was after this incident that I remembered the principle of not shorting.

On February 4, 2022, I shorted the Nasdaq ETF-ProShares (SQQQ.US) again by 3 times, with a relatively small amount. Do not be evil for small gains, overcoming human weaknesses is not a simple matter.

Mistake 2: Natural Gas Index UNG loss of xx thousand

Duan Yongping: I have mentioned some before, here is one that I haven't mentioned. Last year, I bought an ETF called the US Natural Gas ETF (UNG.US), which is linked to natural gas.

When I bought it, the price of natural gas was only around $3, while the long-term cost of natural gas is about $6 or more. I believed that nothing could stay below cost price for the long term, so I went and bought a lot of UNG After careful research, it was found that UNG is not linearly related to natural gas, and there is a significant time loss, so I realized my mistake. However, I was a bit reluctant to sell because I had already lost money.

Later on, I remembered the principle of admitting mistakes and making corrections, no matter the cost, is the smallest cost. In the end, I made up my mind to cut my losses.

Well, all the accounts I managed ended up losing over xx thousand. But if I hadn't made up my mind to sell at that time, the total loss would have been close to 4 times the original loss by now. And the current price of natural gas is 50% higher than when I bought UNG.

This mistake was mainly due to insufficient understanding of the investment target before taking action (the overall profit situation was good at that time, and I had a lot of cash on hand). I must be more careful in the future.

Duan Yongping: Remember the words of Lao Ba: If you don't plan to hold a stock for 10 years, why would you hold it for 10 days? After understanding this, I sold all the UNG stocks I held at a loss. If I hadn't sold at that time, each share would have lost 6-7 RMB by now, totaling over 100 million RMB.

Of course, there is also a saying of my own, which is: Discover errors and correct them as soon as possible, no matter the cost, it may be the smallest cost.

Reflection: "Discover errors and correct them as soon as possible, no matter the cost, it may be the smallest cost." Identifying and rectifying issues faster than ordinary people.

Mistake 3: Fresh Choice

Fresh Choice is a US restaurant company that was once listed on Nasdaq. At its peak, it had 58 chain restaurants in California, Washington, and Texas, with a significant market presence in California.

In 2003, Duan Yongping noticed this company when its business performance was poor, the stock price was continuously falling, and it had a high debt ratio.

However, through research, Duan Yongping found that although Fresh Choice's stock price was only $1.5, its cash flow per share was around $0.6.

Duan Yongping believed that with this development, the company could recoup its costs in just over two years. So he gradually purchased 1.04 million shares of the company, becoming the largest shareholder with a 27% stake. In October 2013, Fresh Choice announced that Duan Yongping had become one of its seven directors.

However, after entering the board as the largest shareholder, Duan Yongping found it difficult to communicate smoothly with other directors and management. Faced with the company's declining performance, the Fresh Choice management took a series of measures, such as raising product prices and accelerating market expansion.

Having operated businesses for many years, Duan Yongping clearly knew that these measures were very foolish and would lead to rapid self-destruction, accelerating the company's decline.

He tried very hard to change these decisions but couldn't clearly explain his views to other directors, and they didn't understand Duan Yongping's profound expertise in product marketing. Additionally, some decisions had already been made before Duan Yongping joined the board Under the wrong leadership of the management, Fresh Choice's debt became heavier, and the increase in product prices led to a rapid decline in turnover. Within a few months, cash flow changed from positive to negative.

As a result, Fresh Choice went bankrupt, changed shareholders, and was delisted from Nasdaq. Duan Yongping lost over a million US dollars.

A loss of over a million US dollars is not an unbearable figure for Duan Yongping. "I donate more than this amount." He said that his expectations for this investment were not focused on making money, but just to see how American companies operate in a comprehensive manner. It can be considered as paying tuition fees.

However, this setback also made Duan Yongping realize that the investment value of a company is not only closely related to the management, but also deeply influenced by the decision-making ability of the board of directors.

Therefore, when making value investments, it is necessary to fully understand a company, not only the management but also pay attention to the background of the board of directors and their decision-making governance style.

Perhaps it was this kind of experience that made Duan Yongping's later investments focus on the leaders in the company and the corporate culture derived from the leaders.

Mistake 4: Can't sleep well investing in Delta Air Lines

Netizen: Why did you buy Delta Air Lines (DAL.US) if you are not optimistic about the aviation industry?

Duan Yongping: From the perspective of buying = holding or holding = buying, when I bought the airline company at that time, it was actually like selling Apple to buy the airline company, although I used the recently available extra cash.

From a perspective of 10 years or longer, it doesn't seem to be a good decision. But out of curiosity, I still carefully looked at the reasons why Warren Buffett bought it, and it seemed quite reasonable, so I bought 1% of Delta Air Lines, just for fun. Maybe during the pandemic, I have some time to look into it.

Compared to before the last restructuring, the major airlines now are actually somewhat monopolistic, so in the foreseeable future, the business model is still good.

Investing in airlines is significant, and it is difficult for new competitors to enter. In addition, buying also expresses my confidence in humanity overcoming the virus.

Duan Yongping: It's rare to lose sleep over an investment, holding an airline company is indeed unsettling, there are always things that are hard to figure out. The uncomfortable part of holding an airline company is not knowing which side time is on.

The feeling of holding Apple is completely different, no matter how much the stock price drops, it won't bother me. Fortunately, my major position is in Apple, not the airline company. Well, a small bet for fun, willing to accept defeat. Respecting Warren Buffett's thoughts, I will also look for an opportunity to withdraw.

Duan Yongping: Finally liquidated Delta at a certain point in time. Indeed, as Warren Buffett said, this business may have changed. Buying stocks is buying companies, and the airline business may struggle for quite a long time, which I cannot understand.

Netizen Q: Remember that the price after liquidation was $28. Time cost is the most precious cost.

Duan Yongping: Yes, we probably made several tens of millions on Delta, better luck than Warren Buffett. But I think Warren Buffett is right, when it's time to sell, you should sell decisively Reflection: Warren Buffett has been entangled in the quagmire of aviation for 30 years and finally admitted defeat by clearing his position. Even the usually calm Duan Yongping is losing sleep. It is important to recognize the boundaries of our own circle of competence.

Duan Yongping: In fact, my greatest wealth is the mistakes I have made, just like Warren Buffett.

"The only thing I can be sure of is that we will continue to make mistakes in the future."