We chose to exit our entire stock and total return swap position in J.C. Penney (JCP) at the end of August and incurred a loss of approximately 50% of our original investment. We did so because of a disagreement with the board about the timing and necessity for a CEO change at the Company, the valuation implied by the then stock price, and the risk of a successful turnaround.Turnarounds are inherently risky and require a totally aligned board of directors, a CEO with substantial turnaround experience, and the support and confidence of all stakeholders. Without all of these ingredients, we are bearish on J.C. Penney's prospects.
I have said before that investing requires the confidence and conviction to believe that one is right even when the whole world, including other smart, high-profile investors, tells you that you are wrong. Buying 25% of General Growth for pennies per share during the financial crisis and shortly before its bankruptcy required detailed analysis, execution, and confidence. Staying short MBIA stock, when Warburg Pincus, with access to inside information, invested a billion dollars of capital into MBIA, and Marty Whitman, a famous distressed investor, invested hundreds of millions in capital, required a similar degree of analysis, confidence and conviction.But confidence and conviction without humility can be dangerous in the investment business.
When one shares an investment thesis publicly, it can be more difficult to change one's mind because the human mind has a tendency to ignore data that are inconsistent with a firmly held view, and particularly so, when that view is aired publicly. That is likely why Wall Street analysts continued to rate MBIA a buy until it nearly went bankrupt. And, I believe it is why analysts will likely keep their buy ratings until Herbalife is shut down by regulators or the company faces substantial distributor defections.I have learned that the key to long-term success in investing is to balance confidence with the humility to recognize when the facts are no longer consistent with one's original investment thesis. It is critically important not to let psychological factors interfere with economic rationality in investment decision making.We and the other members of the J.C. Penney board were extremely enthusiastic about the Company's prospects under Ron Johnson's leadership in light of his track record at Mervyn's, Target, and Apple, and his creativity and vision for the Company. However, when the results continued to underperform our expectations, we and the rest of the board elected to changecourse.While earlier this year we believed that J.C. Penney could be turned around with adequate capital – we believed the $2.25 billion Goldman financing would suffice – this was only the case if the capital were spent extremely judiciously and an experienced turnaround retail operating team was at the helm. When we became concerned about the board's and management's decision making, we voiced our concerns publicly in an open letter to the board and then exited in a block transaction as promptly as we could. While we were criticized in the press for airing our concerns, we did so because of our fiduciary duty to the Company's shareholders. Our candor likely contributed to our ability to exit at a modest discount to the last trade, as investors were made aware of our concerns and could form their own assessment of our views when we sold.Our willingness to change our mind and exit at a substantial loss on a high-profile investment should give you comfort that we will make rational investment decisions without regard to emotional, personal or other considerations. This approach will likely serve to mitigate losses in failed investments and is a critical component of our long-term approach.