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BlackBerry - I Was Lucky

January 20, 2014 | About:

More than three months ago, I wrote the following article about what I thought was a merger arbitrage play on the announced Fairfax (TSX:FFH) and BlackBerry (BBRY) deal:

Read the article here

We all know what happened afterwards. A series of unforeseeable and unknowable events took place within a relatively short period of time. The deal fell through and BlackBerry’s shares tanked to to $5.44 at one point. Thorstein Heins was ousted and John Chen was brought in. BlackBerry announced massive quarterly losses of $4.4 billion due to huge impairment charges and assets write-offs.  

However, had you bought BlackBerry at $4.15 billion at the time I wrote the article (Oct. 2, 2013) and sold it at the closing price as of Jan. 15, 2014, at $4.76 billion, you would have made 14.7% in about 14 weeks, or 66.4% annualized.

I am deeply intrigued by the outcome. How did one make money in a failed merger situation in a company that lost multi-billion dollars during a quarter? It was not my investment skill for sure. When I asked Stephen Yacktman from the Yacktman Funds (Trades, Portfolio) and Arnold Van Den Berg (Trades, Portfolio) from Century Management, neither of them was convinced that Fairfax would consummate the deal in the first place. There were regulatory concerns; Blackberry’s new operating system and handsets were not looking good; The old management team lacked execution skills. They both thought the deal did not make sense.

This is the difference between professional investors and amateur investors. My thesis largely relied upon Prem Watsa (Trades, Portfolio)’s reputation of “never walking away from a deal.” It had unconsciously made me spend less time analyzing the other factors that were all in play. Had I placed more emphasis on other factors, BlackBerry would probably fall into the “too hard” pile, as there were so many important unknowables at the time I wrote the article.  

In searching for an explanation of my BlackBerry experience, I found the following words from Howard Marks' (Trades, Portfolio) latest memo illuminating: “Sometimes, even though an investor’s projections may be far too optimistic relative to what he should have expected – a.k.a. “wrong” – the investor is bailed out by unforeseeable positive developments, or even by non-fundamentally based price appreciation.  Either way, the stock rises and the investor is applauded.  I’d say he was 'right for the wrong reason' (or 'lucky).”

I was lucky with BlackBerry and I feel blessed to make money and learn a great lesson from what could have been a bad investment. Such is the role luck plays in an investor’s investment process. Sometimes we get good luck with a poor thesis and sometimes we get bad luck with a sound thesis.  Differentiating the role of skill versus luck is essential in order to achieve consistent long-term superior returns, as luck-based results are inherently unsustainable.

Comments and constructive criticism will be warmly appreciated. 

About the author:


Rating: 4.3/5 (25 votes)

Comments

arurao7
Arurao7 - 11 months ago

I feel there is a reason why Charlie Munger emphasizes on 'buying a good business at a fair price'. I feel many managers spend too much time on companies without a moat because they are cheap. I like Donald yacktman's way of analyzing it. If he feels that a stock is cheap but there are too many possible scenarios he talks of keeping the size of those companies very small in the portfolio.

20punches
20punches - 11 months ago

Arurao7: I've certainly evolved from buying cheap businesses to buying wonderful businesses. There are certainly many money managers specialized in cheap stocks and I think if you diversify enough, you'll do fine with these cheap stocks. Yacktman's approach taught me a good lesson. They have a preference for quality businesses but they are flexible enough to bet a small percentage on companies like BBRY with assets protection and many upside scenarios. Thanks for the comments.

ecotycoon
Ecotycoon premium member - 11 months ago

Totaly true Ning once again a great article,beeing reward by luck for a bad thesis is a risky thing, cause you may make the same mistake again but with more capital with worse return the next time,  Better to be honest to recognize you were wrong even if you made money. Mohnish Pabrai , have a wall in his office with his mistake, i did the same in my appartment either if i made money or not, everytime i pass by this remember me those mistake one of them was Firstsolar i made 15% really fast but get out as fast when i realise a subsidize business was a poor business model, even if i made 15% in less than a mount it was a mistake. 

ecotycoon
Ecotycoon premium member - 11 months ago

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

Benjamin Graham 

Stock movement is quite irrevelant, bad thesis is still bad either the market participant agree with you or not. As you know i was also totaly blind over the deal too not enough about the fundamental, lucky we have been.

 

“If we are uncritical we shall always find what we want: we shall look for, and find, confirmations, and we shall look away from, and not see, whatever might be dangerous to our pet theories.

“Only critical discussion can give us the maturity to see an idea from more and more sides and to make a correct judgement of it.”

Karl Popper

 

 

SeaBud
SeaBud premium member - 11 months ago

Below your last article, I commented that I thought the arbitrage play was too risky given BBRY's weak performance. You made money, I did not!!!

I generally do not arbitrage because of the temporal and highly variable nature of the game. I truly believe you look for wonderful businesses with some kind of moat at a fair (or lower) price and then you buy a lot of it - that is the holy grail. Occassionally, I will buy a Graham cigar butt (Nokia was mine in this field), but that scares me because management can stay stupid and wasteful long enough to erode the margin of safety.

Anyway, thanks for the articles.

haoafu
Haoafu - 11 months ago
I think it's ok to make mistakes as we are all human, but we need to keep track of the progress and reevaluate the thesis from time to time(You did good job here).

I often find potential issues even from companies with moat. KO and Geico were mismanaged badly in history in extended period. One of Buffet's friends or relatives went bankcrupcy buying Geico if I remember correctly.
AlbertaSunwapta
AlbertaSunwapta - 11 months ago

I think I could find a way to live with myself if I made hugely profitable investment mistakes throughout my life.  :-)

Buffett once mentioned how investors buying into the market in past decades where the market traded below book value, could essentially do no wrong.  He has also mentioned how falling interest rates from 1981 on to 2001 (and now it seems to this day) drove the market to incredible returns.  Many an investment reasoning was likely wrong, or attributed the driver of gains, the effect, to the wrong cause - but luck of circumstance bailed them (us) out. 

 

More Buffett on thinking, and what's likely on his bookshelf: 

 

Excerpt (source cited below):

"And then came along a 1924 book--slim and initially unheralded, but destined to move markets as never before--written by a man named Edgar Lawrence Smith. The book, called Common Stocks as Long Term Investments, chronicled a study Smith had done of security price movements in the 56 years ended in 1922. Smith had started off his study with a hypothesis: Stocks would do better in times of inflation, and bonds would do better in times of deflation. It was a perfectly reasonable hypothesis.

But consider the first words in the book: "These studies are the record of a failure--the failure of facts to sustain a preconceived theory." Smith went on: "The facts assembled, however, seemed worthy of further examination. If they would not prove what we had hoped to have them prove, it seemed desirable to turn them loose and to follow them to whatever end they might lead."

Now, there was a smart man, who did just about the hardest thing in the world to do. Charles Darwin used to say that whenever he ran into something that contradicted a conclusion he cherished, he was obliged to write the new finding down within 30 minutes. Otherwise his mind would work to reject the discordant information, much as the body rejects transplants. Man's natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience--a flaw in our makeup that bears on what happens during secular bull markets and extended periods of stagnation. ..." - Warren Buffett 

 

Source:

http://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/

Warren Buffett On The Stock Market
What's in the future for investors--another roaring bull market or more upset stomach? Amazingly, the answer may come down to three simple factors. Here, the world's most celebrated investor talks about what really makes the market tick--and whether that ticking should make you nervous.
 
By Warren Buffett; Carol Loomis
December 10, 2001

 

kfh227
Kfh227 premium member - 10 months ago

I was right for all the wrong reasons.

BBRY is going to be fine but I thought it was because they would do well (again) in the consumer segment. Boy, was I wrong. Sad to. The new phones are awesome unless you want your smartphone to be a toy. I have a Z10 and can't wait for my 2 years to be up so I can get an even new Z##. The only thing I don't like is the smaller screen. I want a 5" screen so the Z30 would work for me .... but i am waiting to renew my contract before buying a new BB10 based phone.

It's like having a Porsche when everyone else has a Mustang.

20punches
20punches - 10 months ago

Jeff: Thanks for the great quotes. And I think it is a good idea to hang your mistakes on the wall so you can keep your ego in check.

20punches
20punches - 10 months ago

SeaBud: I was the igonrant one and you were the wise man. The fact that I made money did not mean anything to me other than I was lucky. As you rightly pointed out, it was a risky play. That was my first merger arbitrage play and I sure learned a hell out of it. It is much better to buy great businesses, totally agree. My experiences with cigar butts have not been pleasant most of the time.

Thanks again for your insightful comments.

20punches
20punches - 10 months ago

Haoafu: Thanks for the comments. And agreed it's ok to mistakes but we need to keep track of them. That's why I put my thesis in public.It forces me to keep a close eye on the companies I wrote about and reevaluate the progress and outcome along the way.

And you are probably right about one of Buffett's friends went broke by purchasing GEICO on a margin account. Any great business will have some hiccups on the way, which offers both opportunities and traps. Better judgment comes with knowledge and experience accumulation. If we can spot a great business selling cheaply due to temp problems, we'll do fine over time.

20punches
20punches - 10 months ago

AlbertaSunwapta: Great fortune article. Thanks so much for sharing the link. It does look like the interest rates during the past few years have bailed out many investors and this has certainly made luck a hidden and yet more powerful force in investment returns of some investors, who may or may not realize this.

20punches
20punches - 10 months ago

kfh227: Looks like we are on the same boat for different reasons:) Blackberry does appeal to a certain group of customers. I think different market will have a different penetration rate. It's not doing well in the U.S but may be doing very well in Canada, I don't know. There will always be Porche owners, albeit not as many as Mustang.

AlbertaSunwapta
AlbertaSunwapta - 10 months ago

It's all water under the bridge. People had written off apple not long ago so incurring losses on a stock are no reason to write off hope of future gains on that same stock.

 I'd written off BB as of last week for the lack of apparent interest in bidding for it.  However apparently I was wrong and rumour has it that a bid was being prepared.  So is there ascertainable value now? Fairfax thinks so, so I have an indirect stake in it.  BB has a huge number of patents and last year added something like 1300 more (among the top in the patents issuances. That's interesting trivia.  The management and govt angles are interesting too.  Citron wrote up a piece on its value the other day. That might be a good place to start.

20punches
20punches - 10 months ago

I read the Citron write-up. Looks like they have some good points there. With the Foxxcon Deal, BBRY has considerably cut down handset exposure so they are in the transformational phase and most of the analyst reports I've read so far are still talking about the handset business quite a bit. We'll see what happens later.

Tannor
Tannor premium member - 10 months ago
Thanks for the article Ning,


I think of the situation of being right for the wrong reasons, much like poker and a focus on the process versus the outcome.


If you are subject to a "bad beat" or when you appear to have a strong hand, say a straight, and bet accordingly but are rivered by a flush, this is not your fault. Like wise if you are the reciever of the river that strings the nuts and went all in chasing, you may double your money in the short-term but if you continually play/create those odds you will lose in the long-run.


I am not relating this to Blackberry or you specifically but the process we value investors use. Reiterating your main point and the quote Ecotycoon used,


“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” i.e. the process not the outcome.


Congrats on the outcome of Blackberry and I do think you had the right process, as does Prem Watsa (Trades, Portfolio).


Cheers.

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