Kenny Rogers’ classic tune offers foundational wisdom for the investment community. I have come to appreciate it immensely during the very challenging “game” of the last 13+ months.
The song tells the story of the aged gambler who has survived the battles of a full career and, before “breakin’ even” onto the hereafter, imparts all that he has learned, all that his study needs to know, in the famed chorus. Permit me to break down said chorus into its three constituent parts and connect the wisdom that I have gained from the respective parts, to the crisis of the past 13+ months.
The first phrase, the song’s most famous, cuts to the chase –
You got to know when to hold ‘em
Know when to fold ‘em
While this has always been, and will always be, the case with investments, the lesson has been particularly more pronounced as the proverbial tide has gone out. During the frothy stage of the LBO-led bull, let’s date this from the latter half of 2006 through to when the crisis began in July of 2007, the great stalwart stocks, while more reasonably priced than their bubble levels of 1998-99, did not promise juicy returns at P/E multiples of 18-20x. I found myself reaching into lesser quality issues that made some sense and were priced better and, during this run-up froth stage, our portfolios were rewarded handsomely. The other shoe thudded when the crisis began, as the lesser quality businesses rapidly deteriorated and their balance sheets began to threaten. July of 2007, with the benefit of crystal clear hindsight, was the time to fold the speculations while, for the most part, hold the investments.
The second piece of the chorus continues –
Know when to walk away
And know when to run!
The decision to sell is never an easy one. I adhere (or try to adhere) to the discipline that sales are to be made when: a) a mistake has been made with regard to the understanding of the company or its prospects or b) the long-term industry fundamentals have materially worsened or c) management is no longer looking out for or acting in owners’ interests or d) we simply have something materially better to do with the capital.
One lesson that the crisis has provided is that if a sale is based on reason a)…run! At a point fairly early in the crisis, we bought a small community bank that had, as one of its main divisions, a book of high LTV residential loans. The company had/has two other profitable divisions, was/is run by honest management that owns a high % of the stock, and the stock price, at the time of purchase, had cratered some 70% to well below book value. As we know now, the strengths of the case simply did not overpower the single division’s weakness and the stock has plummeted another 70%...rightfully so. There simply was no need to wait and hope for the best with this one, as the facts have piled up against them (e.g. they suspended their trust preferreds!). By running when we did (at considerably less than 70% losses), we have salvaged a greater portion of our client’s capital than had we walked. And I do believe, at this point, that $0 is a likely final destination for the stock.
Sometimes, however, a sale is probably best to be a “walk away.” I am currently content with our position in Walmart. We have sold some on account of reason d) mentioned above (i.e. better deals) as the company has reached a valuation level that we no longer consider cheap-ish. We, nonetheless, are holding onto a chunk of our shares as the fundamentals are firing and the company’s stock is acting hedge-like against the languishing US consumer, which we maintain a significant exposure to through other cheaper names.
The third and final part of the chorus is my personal favorite –
You never count your money
When you’re sittin’ at the table
They’ll be time enough for countin’
When the dealin’s done
While obviously not as famous nor as catchy as the “Hold ‘em, Fold ‘em” phrase, I find the subtle lesson of this third piece to be extremely important. In normal (i.e. non-crisis) markets, we tend to go about our business with a much calmer attitude than we do in crisis markets (at some point, presumably when the crisis show strong signs of ebbing, I intend to jot down my thoughts on what I have come to term “The Madness” that pervades our thinking, our lives for that matter, during crisis markets). This third part to the gambler’s wisdom does not pertain to normal markets. Count your money, see what’s up or down, watch CNBC all you want – in normal markets, our psychologies are capable of dealing with the emotions that accompany the stimuli.
In crisis markets, however, something changes. We can consider ourselves to be at the gambler’s table and the dealin’ is not done. To count your money - routinely check and overly concern yourself with performance – in these high volatility, emotionally driven, madness contaged markets is extremely hazardous to good decisionmaking. The gambler offers that we need keep our heads in the game, know our cards and what we are trying to do with them, and the results will come. When the game is on – and, to reiterate, this game has been in play for 13+ months – there are tremendous opportunities to exploit others’ poor decisions which were driven by the satisfaction/relief of their emotional needs. When we succumb to our emotional needs, when we “count our money” or over-check our stock prices in search of some form of short-term satisfaction, we are polluting our ability to think and act clearly at exactly the time when it is most critical to do so.
The current financial crisis has presented us fundamentalists with the opportunity to truly ply our trade; and we will do so successfully only by focusing intensely on the cards on our tables – the fundamentals of the businesses that we want to own.
Good playing to all!
The song tells the story of the aged gambler who has survived the battles of a full career and, before “breakin’ even” onto the hereafter, imparts all that he has learned, all that his study needs to know, in the famed chorus. Permit me to break down said chorus into its three constituent parts and connect the wisdom that I have gained from the respective parts, to the crisis of the past 13+ months.
The first phrase, the song’s most famous, cuts to the chase –
You got to know when to hold ‘em
Know when to fold ‘em
While this has always been, and will always be, the case with investments, the lesson has been particularly more pronounced as the proverbial tide has gone out. During the frothy stage of the LBO-led bull, let’s date this from the latter half of 2006 through to when the crisis began in July of 2007, the great stalwart stocks, while more reasonably priced than their bubble levels of 1998-99, did not promise juicy returns at P/E multiples of 18-20x. I found myself reaching into lesser quality issues that made some sense and were priced better and, during this run-up froth stage, our portfolios were rewarded handsomely. The other shoe thudded when the crisis began, as the lesser quality businesses rapidly deteriorated and their balance sheets began to threaten. July of 2007, with the benefit of crystal clear hindsight, was the time to fold the speculations while, for the most part, hold the investments.
The second piece of the chorus continues –
Know when to walk away
And know when to run!
The decision to sell is never an easy one. I adhere (or try to adhere) to the discipline that sales are to be made when: a) a mistake has been made with regard to the understanding of the company or its prospects or b) the long-term industry fundamentals have materially worsened or c) management is no longer looking out for or acting in owners’ interests or d) we simply have something materially better to do with the capital.
One lesson that the crisis has provided is that if a sale is based on reason a)…run! At a point fairly early in the crisis, we bought a small community bank that had, as one of its main divisions, a book of high LTV residential loans. The company had/has two other profitable divisions, was/is run by honest management that owns a high % of the stock, and the stock price, at the time of purchase, had cratered some 70% to well below book value. As we know now, the strengths of the case simply did not overpower the single division’s weakness and the stock has plummeted another 70%...rightfully so. There simply was no need to wait and hope for the best with this one, as the facts have piled up against them (e.g. they suspended their trust preferreds!). By running when we did (at considerably less than 70% losses), we have salvaged a greater portion of our client’s capital than had we walked. And I do believe, at this point, that $0 is a likely final destination for the stock.
Sometimes, however, a sale is probably best to be a “walk away.” I am currently content with our position in Walmart. We have sold some on account of reason d) mentioned above (i.e. better deals) as the company has reached a valuation level that we no longer consider cheap-ish. We, nonetheless, are holding onto a chunk of our shares as the fundamentals are firing and the company’s stock is acting hedge-like against the languishing US consumer, which we maintain a significant exposure to through other cheaper names.
The third and final part of the chorus is my personal favorite –
You never count your money
When you’re sittin’ at the table
They’ll be time enough for countin’
When the dealin’s done
While obviously not as famous nor as catchy as the “Hold ‘em, Fold ‘em” phrase, I find the subtle lesson of this third piece to be extremely important. In normal (i.e. non-crisis) markets, we tend to go about our business with a much calmer attitude than we do in crisis markets (at some point, presumably when the crisis show strong signs of ebbing, I intend to jot down my thoughts on what I have come to term “The Madness” that pervades our thinking, our lives for that matter, during crisis markets). This third part to the gambler’s wisdom does not pertain to normal markets. Count your money, see what’s up or down, watch CNBC all you want – in normal markets, our psychologies are capable of dealing with the emotions that accompany the stimuli.
In crisis markets, however, something changes. We can consider ourselves to be at the gambler’s table and the dealin’ is not done. To count your money - routinely check and overly concern yourself with performance – in these high volatility, emotionally driven, madness contaged markets is extremely hazardous to good decisionmaking. The gambler offers that we need keep our heads in the game, know our cards and what we are trying to do with them, and the results will come. When the game is on – and, to reiterate, this game has been in play for 13+ months – there are tremendous opportunities to exploit others’ poor decisions which were driven by the satisfaction/relief of their emotional needs. When we succumb to our emotional needs, when we “count our money” or over-check our stock prices in search of some form of short-term satisfaction, we are polluting our ability to think and act clearly at exactly the time when it is most critical to do so.
The current financial crisis has presented us fundamentalists with the opportunity to truly ply our trade; and we will do so successfully only by focusing intensely on the cards on our tables – the fundamentals of the businesses that we want to own.
Good playing to all!
