I’ve been debating for a while whether I should post about this, since it probably seems disingenuous of me to claim that I actually picked out the best performing stock of the year to date but “didn’t invest” (and have not blogged about it since these were picks from the pre-blog era and have no cold-hard proof that I even looked at it save a few notes I took) but I decided the lesson to be learned is more important than whether someone reading this believes me or not. So with that said, I understand if you think I’m full of it, but for those who are interested in learning from my costly error, read on.
What were the stocks? Well, the baby blunder (130% opportunity cost) is a well known electronic retail outlet called RadioShack that when I was looking at it about a year ago was experiencing problems with same store sales, stiff competition from big box outlets, and on top of it all, had a CEO who lied about his college education and ultimately had to resign. The stock was pummeled to a dirt cheap price, but what I noticed looking at it was that it still generated heaps of cash and great returns on capital. When the company announced a restructuring plan, I figured that its still respectable store footprint, cash generation, and new leadership would make for a moderately easy improvement in the business, which would translate into huge returns on the stock given that it traded at what I considered 50% of its intrinsic value (something like 9X free cash for a multiple analysis).
I ultimately didn’t invest for two reasons: First, I thought I didn’t know enough about the business’ restructuring plans or the new management to make an extremely confident decision. I felt that my chances were good (90%+ that this would make a great investment), but I wanted certainty where there was none. Second, I felt the price (then around $16/share) would drop more in the short-run due to investor worries. I was right (it fell to around $14/15-ish), but that was plainly stupid of me to think that way and I continued loafing, waiting to understand more about the plans and for the share price to drop. But it didn’t. It went up. And up. And up. And deservedly, I missed the boat.
The second and major blunder (450%) was a little licorice manufacturer with a relatively long history of throwing off cash in a boring business. I read the annual report, liked the simplicity and steady cash generation of the company, saw some decent growth potential, noticed a guy by the name of Ronald Perelman had been involved for some time, looked at the cheap price after using conservative inputs in my valuation and, then, sat on my ass. I felt I didn’t know the future of licorice (probably the dumbest thought I’ve ever had) and I thought the price would stagnate for a while I could take time to wait before I acted. What happened? Well, look at this chart of, you guessed it, M&F Worldwide.
So I’m substantially poorer than I could have been if I didn’t give up my thumb sucking habit. What’s the lesson, then? Simple, but not easy for many investors, and it’s something I’ve had to work very hard on:
You must be prepared to act quickly and under conditions of imperfect imformation or opportunities will pass you by.
There exist diminishing marginal returns to heavy research, and one needn’t be ultra-precise or certain before making the plunge. Of course, I’m a believer in a focus portfolio, so one must be careful of foolish, large bets without doing homework. But that’s what a margin of safety is for. That’s why I look for the no-brainers. To get the big picture quickly, and understand that a competitive market often means returns don’t come to those who wait, is vitally important.
This may seem paradoxical to many value investors, since patience and thoroughness are at the core of the discipline. But we should distinguish between patience after making an investment and patience going into one. We’ll never be able to predict exactly when prices come in line with value, but it doesn’t matter so long as we first get into the stock quickly. This enables us to capture the returns on both sudden readjustments/catalysts and more slowly moving changes. Thoroughness can also be accomplished without thumb-sucking. If you get the big picture, size up your risk and understand your probabilities, act quickly, and then continue learning the more minute details of the business after you’ve bought it, you’re probably better off than if you wait to understand minor details.