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JC Penney - Maximum Pessimism
Posted by: 20punches (IP Logged)
Date: April 2, 2013 09:02AM

CWR- Thanks for commenting. I agree that JCP's results have been astronomically awful, from a turnaround perspective and I'm not trying to time the bottom here. In my opinion, the JCP management team has made their mistakes and learned from most of them so it is likely that sales and profit will stabilize from here. The difference between Nokia and JCP is Nokia was, is and has been facing the headwind from disruptive technology whereas JCP's problem is certainly fixable, albeit not easy. And I'd be happy to stick with great businesses as long as the margin of safety is good enough. My investment in JC Penney is based on the favorable risk reward ratio. Of course the thesis is only as good as the assumptions behind and if I'm wrong, it will be a good bitterly laugh for me when I look back. [/color]



Guru Discussed: Bill Ackman: Current Portfolio, Stock Picks
Stocks Discussed: JCP, NOK, HPQ, BBRY, FSLR, RSH,
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JC Penney - Maximum Pessimism
Posted by: 20punches (IP Logged)
Date: April 2, 2013 09:36PM

Invisibleperson: Thanks for your insightful and quality comments. I greatly appreciate your time and effort. Special thanks for your list of videos, very helpful. I've never thought about checking them out.

I think your comments are of higher quality than my article without any doubts. I wanted to touch on a few points. First, the pricing strategy, in my opinion, they got it all wrong, not just a half mistake. Human beings are just predictably irrational and it still bothers me that RJ and the team thought they could just change the way people have been shopping for god knows for how long. The more I read predictably irrational, the more disappointing I feel about Penney's management. It's a basic and simple consumer psychology, you have to provide the consumers with an anchor that works, and the human brain is wired to buy into promotions, especially when you have an anchor that serves as a striking contrast (such as 60% sale). Thankfully they admitted it and moved on. It's hard to admit you are wrong, especially after you've shouted it out publicly.

With Leaps, it's supposed to be more volatile than the stocks, not to mention JC Penney's stock is definitely more volatile ( which creates good buying opportunity but also pushes up option prices). I'd like to quote Charlie Munger for the proper attitude: Sometimes the tides are with us and sometimes the tides are against us. Just swim as competently as you can. In the end, you get what you deserve. Therefore, I wouldn't fret about a 50% drop. You really have to think big about long call options. The only thing that matters is by Jan 2015, do you think JC Penney can be valued at more than $18 a share + the call premium you paid? The daily noises, especially the negative ones will make you uneasy but to the heck with it. If you don't think the risk rewards have changed with JC Penney, volatility would only serve you, not direct you. Your 50% unrealized loss can turn to a 100% gain when the sentiments become more neutral or less negative. Just a little bit of patience and tenacity.

Thanks again for your comment.



Guru Discussed: Bill Ackman: Current Portfolio, Stock Picks
Stocks Discussed: JCP, NOK, HPQ, BBRY, FSLR, RSH,
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JC Penney - Maximum Pessimism
Posted by: Humble Money (IP Logged)
Date: April 5, 2013 11:36AM

Hi Jianin7978,

Thank you too for taking the time to reply to my comment.
Your post 2012 - Grown From an Infant to an Baby really resonated with me by the way. Only thing is I didn't make 31%. :-)

It is surprising, in my opinion, how an intelligent hedge fund manager and an experienced retail executive could make such an elementary mistake. (In hindsight, because honestly, I didn't see it coming either. I was too busy disagreeing with all the negative media coverage.) I would argue myself that some good has been done by reducing the number of sales and price changes and not marking up vendors goods. I do think though there is way too much focus in the media on this short-term issue (which has now been addressed, and hopefully some customers will return) and not enough on shop implementation and cost-cuts. As much as sales and profits have declined awfully much, I think that's just now and in a year or so things could be looking much differently.

I haven't read Predictably Irrational, though it sounds like an interesting read. I thought Thinking Fast and Slow was a good book. I'll add your book to my pages of book recommendations. Some day I'll read them all! :-)

Your comment about the LEAPS is comforting. What makes me uncertain is especially the question, when are things going to turnaround? By buying the LEAPS, I locked myself into a time-frame during which the share price must rebound, as opposed to having essentially unlimited years to wait it out for stocks. In effect, I'm market timing, though across a longer period. The extra leverage does compensate for this but that won't matter if I end up with nothing. The AIG-WS warrant have an expiration date of 2021 and have therefore much less of this uncertainty imbedded in them (effectively they are stocks minus the dividends). Either way, I'm staying in and waiting for what happens. In a way unrealised losses on a position help because it makes you hate the idea of selling it. I'm getting the impression that looking too much at the news and the share price tends to heighten that feeling of loss and short-termism, aligns you more with the crowds (who also read this stuff) and the noise makes you see patterns that aren't, so I'm trying to cut back on it. Good luck with your position.



Guru Discussed: Bill Ackman: Current Portfolio, Stock Picks
Stocks Discussed: JCP, NOK, HPQ, BBRY, FSLR, RSH,
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JC Penney - Maximum Pessimism
Posted by: 20punches (IP Logged)
Date: April 18, 2013 10:46PM

Hi invisibleperson- First off, thanks for the compliment on my previous article. I bet luck played some role in my return last year.

I highly recommend Predictably Irrational and any book Michael Mauboussin has written. They are very good in terms of explaining the behavioral finance aspect of investing although sometime you really need to step back and think about how you can apply his concepts. Bill Ackman and Ron Johnson are both human beings, so they are prone to psychological biases as well and very often, the smarter and more accomplished you are, the more likely you will fall into psychological traps, especially the overconfidence and self-attribution biases.

I highly recommend you to read Your Money or Your Brain, and Snap Judgment. You may have already read them but it's worthwhile rereading them. Our brain is wired in a way that any financial losses triggers similar reaction in our brains as it does in a near death experience. That explains panic selling and loss aversion, both of which are just natural reaction to make ourselves feel better.

Good luck with your investment endeavors. Thanks again for your comments.



Guru Discussed: Bill Ackman: Current Portfolio, Stock Picks
Stocks Discussed: JCP, NOK, HPQ, BBRY, FSLR, RSH,
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