The web is littered with lists, boasts from every corner, each claiming to be the penultimate collection of tips, tricks, lessons, and laws. Smart investment is driven by experience and data, and you often have to navigate through the digital debris to find good advice. But mistakes are just as instructive. Smart people are never entirely immune to bad judgment. So we are offering a new monthly series—My Best, My Worst, My Next—which offers three personal anecdotes from world-class investors. We hope to guide you towards success, warn you away from failure, and provide an advanced peek at the future.Confused by market-timing gurus divided over whether we are in for a major correction or the bull has further to run? Value investor Ian Lapey, a protégé of legendary investor Marty Whitman and co-manager of Whitman’s flagship Third Avenue Value Fund, looks solely at company balance sheets. Here are his best, worst and next picks.
MY BEST: Tripling the Money
Cimarex Energy, (XEC), a Denver-based oil and gas exploration and production company, was just the kind of investment they like at Third Avenue—safe and cheap. The company used no leverage, yet its net asset value had been growing by double digits. Lapey first learned of the company’s sound financials and the conservative, long-term outlook of its debt-averse chief executive, F.H. Merelli, back in 2004. But he waited to buy till 2007, when Cimarex was trading in the low $30s, at a slight discount to net asset value.
Good timing. The financial crisis of 2008, and the plunge in oil and gas prices it brought, validated Lapey’s approach. Cash-rich Cimarex was able to pick up valuable acreage on the cheap from its financially strained competitor, Chesapeake Energy Corp.
Earlier this year, when Cimarex traded in the low $100s, Third Avenue sold its stake, tripling its money.
The rationale for selling? Cimarex stock rose at a rate of 30%, while the net asset value appreciated at about a 15% rate over the same period. “We would love to be shareholders again one day,” Lapey says.
When the price is right, that is.
MY WORST : The Day the Music Died