I bought Time Warner (TWX, Financial) stock in 2014. At its core, Time Warner is in one of the most enduring industries around, the storytelling business. The company operates Turner Broadcasting, Home Box Office and film studio Warner Bros.
Turner Broadcasting has a variety of networks including CNN, TBS, TNT, the Cartoon Network and more. My rationale was that Time Warner’s operating segments just completed an extremely profitable year and that the company has a media library second only to Disney with such recognizable names such as DC comics (Superman, Batman, etc.), Harry Potter, the Lord of the Rings, Game of Thrones, etc.
The stock was fairly valued because of cord cutting worries. A couple of months after my purchase, Rupert Murdoch’s Twenty-First Century Fox (FOX, Financial)(FOXA, Financial) made a bid for Time Warner, and the stock shot up over 30%. I could have made a sizable gain in a short amount of time had I sold the stock then. I didn’t sell because I believed in the company’s assets and thought other companies might also make a bid for Time Warner. In August 2014, Fox withdrew its bid after Time Warner’s management refused to engage in talks. The stock quickly fell back to a level slightly above my purchase price.
I was highly frustrated with management’s refusal to engage in takeover negotiations but kept the stock because I was still optimistic about its upcoming projects including the DC Universe movies and the Harry Potter spinoffs. However, during the time between summer 2014 and the present, I witnessed a company that was the poster child for short-term thinking and one that couldn’t execute to save its life. Do you remember such films as “Pan,” “Jupiter Ascending,” “The Man From U.N.C.L.E.” and “Run All Night”? That’s because they were all Warner Bros. movies that flopped.
While Disney (DIS, Financial) was capitalizing on its Marvel films ("Ironman," "Captain America," "Avengers"), Time Warner was playing catch up and trying to rush its DC Universe films onto the big screen. Disney carefully planned out its strategy and had one person overseeing how each of the Marvel films would coherently fit together. Time Warner did not have an overarching DC Universe strategy but instead announced a number of independent projects and tried to tie them together afterward. By the summer of 2015, I was getting an itchy trigger finger to sell. I could tell management was a mess from the “Batman vs. Superman” trailers.
If you recall during the summer of 2015, Disney was hyping “Star Wars: The Force Awakens,” probably the most anticipated movie in the last 20 years. “Star Wars” was getting all of the attention and Warner Bros panicked. They released a trailer that basically gave away the entire movie’s plot. When the actual “Batman vs. Superman” film was released, critics and moviegoers slammed it. It fell well short of expectations. The next DC film, “Suicide Squad,” also flopped. What’s even more head scratching, is that Warner Bros. is still entrusting future DC comic movies to the director who just screwed up “Batman vs. Superman.”
Consumers were cutting their cable which put pressure on the Turner networks. The last operating unit, HBO, was highly dependent on the hit show, “The Game of Thrones” (GoT). The problem was that GoT was costing more to produce and margins were being squeezed. In addition, the show only has 13 episodes left which will leave a gaping hole in HBO’s lineup. Compounding the pain was that HBO also had a big flop with the show "Vinyl." It’s been reported that Vinyl’s budget was $100 million not including advertising and marketing.
With all of the missteps, I completely lost confidence in management. Not only had it demonstrated shareholder unfriendliness by refusing to negotiate with Fox but it demonstrated creative and operational incompetence. Operationally, it was blindsided by the Netflix (NFLX, Financial) and Amazon (AMZN, Financial) threat and even contributed to their ascendance by selling content to these competitors. CEO Jeff Bewkes famously compared Netflix to the Albanian army trying to take over the world.
I sold the stock after I saw “Batman vs. Superman,” which was sometime in August. I earned a slight profit. Of course I’m not thinking about the slight profit because fast forward to this past weekend and Bloomberg reports that AT&T (T, Financial) will acquire Time Warner for $85.4 billion which comes out to $107.50 a share. That’s a 35% premium to the price in August. Looking back, my mistake was not selling Time Warner after the Fox bid and taking the quick profit. There was more downside than upside with the Fox bid. I don’t regret making the decision to sell in August. With the information I had at the time, I saw a company that was screwing up big time and undermining the future profit generating ability of its assets. I haven’t looked at the details of AT&T’s offer and have no opinion on whether the combined company would make sense.
Keeping a healthy perspective
When I learned of the AT&T bid for Time Warner and figured out how much money I could have gained, I acted very grown up. I didn’t even curse or pull an Elvis and shoot the TV when the story broke. I was proud of myself.
In behavioral economics, it’s been well documented that people feel the pain of loss much more acutely than gain. What I noticed is that I was always tempted to dwell on instances when I passed on a stock that subsequently shot up in price. It’s important to revisit each situation and determine the cases where you were overly cautious. However, I’ve realized it’s equally important to remember that for every stock I buy, I reject at least 100 other stocks. I rarely go back and look at the reject pile and see which ones underperformed the market.
The stocks from the reject pile that I notice tend to be massive gainers because they make headlines like Time Warner. These are the exceptions to the rule that take up a disproportionate place in my memory. To maintain a more objective perspective and to prevent oneself from crying over spilled milk, investors should also give themselves credit for all of the low quality stocks in the reject pile that were massive losers.
Another item to remember is that I only owned Time Warner for a little over two years. That’s not a long time, but it felt really long because of the bumpy ride. In investing, it’s easy to lose perspective on time because of how your emotions can get whipsawed around.
Possibly the most important lesson on perspective is to acknowledge when dumb luck has worked out in your favor. I bought Jos. A. Bank (JOSB, Financial) a little before I bought Time Warner. The men’s formal retailer was known for its highly promotional “Buy One and Get Seven Free” commercials. I saw a company with consistently positive earnings that had a history of slow and steady growth. What I didn’t realize was that the company had peaked and would eventually head in the other direction.
Jos. A. Bank was purchased by its competitor, The Men’s Wearhouse, in March 2014. I sold my stock and made a sizable gain in a short period of time in contrast to my Time Warner experience. Today, the combined company is known as Tailored Brands (TLRD, Financial). My gain was completely fortuitous. Tailored Brands has lost money ever since the acquisition. Basically, I bought a crappy company and somehow earned money. Being honest with myself has prevented me from following the Jos. A. Bank playbook and buying retailers that may have peaked. I’ve written about Skechers (SKX, Financial) and Buckle (BKE, Financial). I passed on both stocks and they have fallen considerably.
All of the great investors will tell you that investing is hard. I’ve learned one of the hardest aspects is maintaining a suitable perspective.
Disclosure: The author does not have a position in any stocks mentioned in this article.
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