Citi Buys Wachovia Bank, I Made a Bad Invesment Decision

As regular readers know, I started investing in Wachovia after its stock price started falling significantly back in Demember. I continued investing more money into the company as the stock price continued to decline because I still felt the company was a good value. Now that the dust has settled and Citigroup snatched the bank from the company for ~$2 billion its clear this was a series of dumb investment decisions on my part.

I underestimated the amount of impact the housing crisis would have on Wachovia's mortgage loan portfolio. Perhaps more acurately, I underestimated how the market would react to the perceived impact of the housing crisis on Wachovia's mortgage loan portfolio and the inability of the business to raise capital at a reasonable cost.

The market has become so pessimistic that it has crippled many of the largest financial instituitions. Wachovia had its problems (chiefly the Pick-A-Payment portfolio), but the market has become so fearful and pessimistic that people are now assuming the worst case scenario.

The market may be right - its appears to be on a straight ride into a serious recession (maybe depression-era) environment. If thats the case Wachovia would have never survived and they did the right thing by selling the bank for a fraction of its intrinstic value. However its still unclear to me why Wachovia's management team made the decision to sell the bank, especially if things begin to turn around or at least level off.

Related in Stocks:

Chairmen Letters to Shareholders (Mar 09, 2014) Its that time of year again --the close of fiscal years means an overload of annual reports including Letters to Shareholders. Two annual letters that I read each year are those from Berkshire Hathaway (Warren Buffet) and Fairfax Financial (Prem...

Investment Performance January 2014 (-2.94%) (Feb 23, 2014) January 2014 Investment Report: January Highlights: January was a bad way to start out the year, but our portfolio performed slightly better thank our benchmark (-2.94% vs -3.17%). We made our regular monthly investments in our Roth IRAs, and some...

Investment Performance December 2013 (+2.20%) (Jan 10, 2014) December 2013 Investment Report: December Highlights: December was another subpar for us as our portfolio performed poorly compared to our benchmark (+2.20% vs +2.58%). We made our regular monthly investments in our Roth IRAs, and some dividends & dividend reinvestments....

Comments (15)

Don't feel lonely. I did the same exact thing. I broke one of my fundamental rules. Always sell on a dividend cut.

I had no clue the housing crisis would keep going this long. I have said it before in my blog, I just don't know why these companies didn't come clean a year ago and try to implement stabilization themselves before the credit markets froze to this extent.

One thing that really irks me is why Wachovia couldn't wait another week or so to see how the bailout legislation moves.

Posted by Jake (DIB) | September 30, 2008 11:46 AM

I like your blog, but I think you are lying to yourself. My guess is that you didn't really understand their business (who could in this environment) and just saw the falling price. Not being negative here, but I think you can learn from this if you dig deep and get honest with yourself. It may help you avoid a mistake like this in the future.

Posted by Joe | September 30, 2008 1:10 PM

2Mil,
The bank mgmt had no choice. Liquidity was drying up and the FDIC was forcing their hand. Basically FDIC said to the failing banks "either raise more equity or sell or we will shut you down in a few days". They already shut down WaMu and made it clear they were going to protect depositors at the expense of shareholders. My funds are getting killed but I'm thankful the FDIC is finally acting. The banks that make it through this crisis will be in great shape five+ years from now because there will be much less competition.

Posted by dd lang | September 30, 2008 2:35 PM

We all make good and bad investment decisions, but I have to agree with Joe's assessment.

I remember a post about how you bought WB because "Warren Buffet just purchased more shares". Seriously? Buying anything because someone else did is the worst investment decision one can make.

You need to get into the habit of doing tons of due diligence and also learning how to sell...

Hopefully this is a lesson that will pay dividends later in your life. You don't need to be an active day trader, but you definitely need to be looking at your stocks every week examining a whole host of factors before you decided to "buy and hold" forever.

This is why I think you should spend some money to have a professional evaluate your portfolio and help you.

I think you have TOO many positions and that makes it hard to follow...Diversification has diminishing returns because it's impossible to stay on top of many companies. You really ought not have more than 7 core positions with the money you are throwing around. It just makes it too difficult to keep track of everything and has no better long term rate of return in the long run anyway.

Live and learn to invest because you will never get rich from a job unless you start your own business.

Practice your core skills and get some more discipline!

Posted by concerned | September 30, 2008 6:01 PM

2mill:

as an ex-wamu shareholder, i hear you and share your pain. misery does, indeed, love company!

what is weird is, in my case, i saw it coming, and it was as if i was daring wamu to go bust though i was not as much as you were on wb.

- s.b.

Posted by some body | September 30, 2008 7:22 PM

Banks fail when depositors pull out their money...They had no choice but sell--they did not have cash to survive. Same story with WAMU..something like $4 billion deposits withdrawn in week before its seizure and sale.
and then my iron clad investment rule: Don't try to catch a falling knife!

Posted by jj | September 30, 2008 9:06 PM

You are still way better off financially than most people so don't let this recent stock loss get to you. We all lost money this week.

Posted by tayson | October 1, 2008 1:52 AM

2Million, Wachovia's nosedive is yet another example of why it makes no sense for investors like us to spend time analyzing individual companies. There was no way to know this crisis would get worse and that Wachovia would have to throw in the towel. Most investors who try to pick stocks end up doing WORSE than the market as a whole. It is a much safer bet to invest in broad market index funds or ETFs with low fees. You are guaranteed the market return, which will be better than 80% of stock pickers out there. Plus, you don't have to spend any time worrying about which stocks to pick, when to buy/sell, or trying to calculate your investment returns. You have a promising career, a marriage, real estate, and cash management to tend to -- your time is too valuable to waste on an activity that will most likely yield poorer results than if you simply go with a passive indexing approach. You can satisfy your (correct) instincts to buy low by rebalancing -- selling the index funds that are doing relatively well and buying more of those that have underperformed. I know I am repeating wisdom that we have all heard before, but this financial crisis has made it all the more relevant. Sell the stocks and buy the market.

Posted by Financial Expat | October 1, 2008 9:37 AM

Hey don't be too hard on yourself. Hindsight is 20:20 and if they had turned things around you would be laughing all the way to the bank (pardon the pun).

But seriously we all make crazy mistakes when we invest - if it was easy everyone would be a millionaire or a 2 millionaire as the case may be. The only way to learn is to make mistakes. Don't look on this as money lost rather look on it as an expensive but valuable lesson.

Posted by Until Debt Do US Part | October 2, 2008 11:15 AM

All I can say is OUCH! I was sorely tempted to buy into Washington Mutual since I've banked there for so long and figured it was a good value. The morning I woke up and saw the stock at $0.16 I was very happy I resisted the urge.

Posted by LiveWellSimply | October 2, 2008 11:58 AM

We all make bad decisions over stocks in our lives; I have made way too many. That being said, I told myself two years ago that I would not buy a single stock just for this reason. I am actually invested in physical commodities at the moment and I feel pretty good about it!

http://jwojdylo.wordpress.com

Posted by Jesse Wojdylo | October 2, 2008 3:18 PM

Hey, looks like the deal might not go through... and Wells Fargo might buy them... Wachovia stock is up 60% as I type this...
NCN

Posted by NCN | October 3, 2008 12:28 PM

I know this month has been rough, but one positive thing is that you had over $100,000 in cash. That should help to buffer losses for September.

Posted by Nate | October 4, 2008 1:39 AM

Perhaps you should also write down your real estate holdings....take one big hit and then move on....figure they are down 20% from your purchase price.

Posted by tom swanson | October 4, 2008 10:57 PM

I think banks are just trying to merge to get bigger in hopes of government help, like an insurance policy. The worst is yet to be seen in the stock market, it will be a painful ride down, sideways, slowly and deep.

Posted by Peter Holm | October 5, 2008 10:30 PM