Last week, I posted an article on Lakeland (LAKE, Financial) suggesting it was awfully undervalued. If you believe in the article’s hypothesis, then, in theory, it should be easy to back up the truck and put a huge amount of your portfolio into the stock. Sure, the underlying business isn’t Coke, but it’s decent, there’s huge asset protection, and the company would be an attractive acquisition candidate.
Despite the fact that I did all of the work to untangle the underlying business’s strength and I saw multiple levels of asset protection, I was too terrified to put more than 5% of my portfolio into the stock. That’s basically an average position for me, but I saw LAKE as an above average stock. Why didn’t I feel comfortable putting more into it? The answer’s simple: the headlines were negatives, and I was out in left field doing all the work by myself.
All of that changed last week. Suddenly I wanted to get more of my portfolio in the stock. Why? It wasn’t the 10% rise in the shares… it was the fact that, at almost exactly the same time I published my article,barelkarsan published an article that made almost exactly the same points as I did. The two articles were written completely independently and published at the same time completely coincidentally, but the fact that his analysis reaffirmed mine made me much more comfortable in my investment.
The fact is, value investing is hardest when the greatest bargains are present. Sure, it’d be nice if you could invest in super brands with great growth at the value of their cash, but the fact is those situations don’t happen. Sometimes you can find them in micro-caps, but often times those micro caps have other issues- mainly, a controlling shareholder who will never sell or do anything, so while your investment likely does well over time, it doesn’t result in an amazing return. Huge bargains with rapid, big upside potential are present when the headlines for a stock are at their most negative. But when headlines are at their most negative, it’s hard to find fellow investors who are writing bullish arguments for a stock.
In this light, consider just how impressive Buffett putting 40% of his partnerships assets into American Express was. People were crying that the company was going bankrupt, or that the brand was decimated. And that would mean an absolute zero for the business. While American Express is certainly a better business than Lakeland, it also doesn’t have the asset protection. If my analysis of a net net having upside / turnaround potential is wrong, I can still get something in liquidation. If Buffett’s was wrong, 40% of his assets are going to zero. And someone can correct me if I’m wrong, but I haven’t seen anything suggesting that there were a bunch of people who shared Buffett’s view and were backing the truck up on American Express.
Obviously, Buffett wasn’t wrong. In hindsight, it looks so easy to do: who wouldn’t put their nest egg into a world class company at a discount? But when you’re thinking of Buffett and envying his riches, consider the confidence he had in his analysis to put that much of his wealth into American Express at those levels. Imagine if you were in Buffett’s situation: could you have put 40% of your assets into the company? Could you have handled the volatility on your own without someone telling you “Hey, you’re right. Great analysis!”, or would you have sold in panic if the stock was down 5% a week later?
So how can you get better at avoiding headlines and making profitable investments? I’ve mentioned this before, but I think one key is developing mental models from experience. To put it in practical terms, if you’ve seen the negative headlines from American Express and learned from that experience, maybe next year you’ll have the opportunity to invest into a panic in Discover when they have a security breach. Obviously, you need to be sure that the situation is similar in terms of no underlying business impairment (as I like to put it, smoke but no fire), but developing a mental model that gives you the comfort to know how the situation plays out is the key to being able to take that outsized position.
Disclosure: Long LAKE
Despite the fact that I did all of the work to untangle the underlying business’s strength and I saw multiple levels of asset protection, I was too terrified to put more than 5% of my portfolio into the stock. That’s basically an average position for me, but I saw LAKE as an above average stock. Why didn’t I feel comfortable putting more into it? The answer’s simple: the headlines were negatives, and I was out in left field doing all the work by myself.
All of that changed last week. Suddenly I wanted to get more of my portfolio in the stock. Why? It wasn’t the 10% rise in the shares… it was the fact that, at almost exactly the same time I published my article,barelkarsan published an article that made almost exactly the same points as I did. The two articles were written completely independently and published at the same time completely coincidentally, but the fact that his analysis reaffirmed mine made me much more comfortable in my investment.
The fact is, value investing is hardest when the greatest bargains are present. Sure, it’d be nice if you could invest in super brands with great growth at the value of their cash, but the fact is those situations don’t happen. Sometimes you can find them in micro-caps, but often times those micro caps have other issues- mainly, a controlling shareholder who will never sell or do anything, so while your investment likely does well over time, it doesn’t result in an amazing return. Huge bargains with rapid, big upside potential are present when the headlines for a stock are at their most negative. But when headlines are at their most negative, it’s hard to find fellow investors who are writing bullish arguments for a stock.
In this light, consider just how impressive Buffett putting 40% of his partnerships assets into American Express was. People were crying that the company was going bankrupt, or that the brand was decimated. And that would mean an absolute zero for the business. While American Express is certainly a better business than Lakeland, it also doesn’t have the asset protection. If my analysis of a net net having upside / turnaround potential is wrong, I can still get something in liquidation. If Buffett’s was wrong, 40% of his assets are going to zero. And someone can correct me if I’m wrong, but I haven’t seen anything suggesting that there were a bunch of people who shared Buffett’s view and were backing the truck up on American Express.
Obviously, Buffett wasn’t wrong. In hindsight, it looks so easy to do: who wouldn’t put their nest egg into a world class company at a discount? But when you’re thinking of Buffett and envying his riches, consider the confidence he had in his analysis to put that much of his wealth into American Express at those levels. Imagine if you were in Buffett’s situation: could you have put 40% of your assets into the company? Could you have handled the volatility on your own without someone telling you “Hey, you’re right. Great analysis!”, or would you have sold in panic if the stock was down 5% a week later?
So how can you get better at avoiding headlines and making profitable investments? I’ve mentioned this before, but I think one key is developing mental models from experience. To put it in practical terms, if you’ve seen the negative headlines from American Express and learned from that experience, maybe next year you’ll have the opportunity to invest into a panic in Discover when they have a security breach. Obviously, you need to be sure that the situation is similar in terms of no underlying business impairment (as I like to put it, smoke but no fire), but developing a mental model that gives you the comfort to know how the situation plays out is the key to being able to take that outsized position.
Disclosure: Long LAKE
