Know What You Own

Andrew Rangeley recently wrote about sharing his investment ideas. The full post can be found at http://yetanothervalueblog.com/2019/07/some-things-and-ideas-july-2019.html. In the post, Andrew wrote “…the longer I invest, the more I think the most important part of this job / doing the work around this job is developing the conviction to hold an investment thesis.” I couldn’t agree more.

When I started investing I would look at what other people were doing and try to back into why they owned what they owned. I still think that’s a useful, and interesting, exercise. However, you must make sure you don’t rely on the conclusion of the person you are researching. Instead, research the idea in order to determine whether that particular asset is right for your portfolio.

The world has many potential outcomes. Unless you know why you own a position how will you know when to sell? Which path of outcomes bothers you and which paths are you OK with? I guess you can follow some famous investor’s SEC filings and sell when they sell. But, if you implement that strategy I would strongly advise against checking stock prices in between filings.

What happens if you follow your favorite blogger/Twitter account into a position? How will you know if they’ve changed their minds? You probably won’t. And they probably won’t think to tell you when they exit. You have to know what you own and why.

A recent example from this blog is Ryanair (RYAAY). I highlighted RYAAY as an interesting investment idea on May 22, 2019. As a quick aside, this is a good time to remind everyone reading this post that nothing here is investment advice. Anything SCG writes about is meant to highlight interesting things to research and/or look into for learning purposes only.

Anyway, the stock traded at ~$68/sh when we wrote about it. A mere 3 months later the stock traded at ~$57/sh. A 17% “loss” in 3 months (aka -68% annualized return). Impeccable market timing! Was I concerned? Not even a little. Would I have been concerned if I followed someone else into the position? Heck yes! SCG probably would have sold.

Furthermore, I worry that someone may have followed us into the position and sold at the wrong time. I implore anyone reading this not to buy anything I write about. If it interests you then please do your own research. Develop your own conviction so you know when to worry and when not to. Otherwise, you’re just donating money to people that did their work.

Unexpected Lessons

This site’s goal is to become a resource for people interested in investments. Therefore, almost all posts will be investment specific. However, there are exceptions to the rule. Arnold Van Den Berg’s life lessons are one of those exceptions.

Last week I attended an investment event organized by MOI Global. I enjoy those events because the community of investors is a truly amazing group of people. Therefore, I was intrigued when I saw a group of people gathered around a table at a cocktail hour. I figured some investing legend was waxing poetic about the merits of his/her investments. Naturally, I went to the table.

When I got to the table I saw Arnold Van Den Berg. I liked Mr. Van Den Berg’s talk at Google so I was excited to hear what he had to say. I was mesmorized the minute I sat down.

Mr. Van Den Berg was telling stories about his parents surviving Auschwitz. The most memorable story described his father surviving death marches. A death march was a 24 hour hike through deep snow. The participants had “normal” clothes on. If someone’s knee touched the snow, the Nazis beat them. If the person didn’t get up, the Nazis killed them.

Mr. Van Den Berg said his dad survived by focusing on locking his knee the second his foot touched the ground. Why? Because that was the only way to:

  • keep his knee high enough out of the snow, and
  • support his body weight given how depleted his body was.

His father attributed his survival on his ability to singularly focus on that task. His ability to focus was driven by his will to survive. And, his will to survive existed because of his family. Regardless of his circumstances, he focused on his wife and children.

Throughout his time at Auschwitz Mr. Van Den Berg’s father would see young, able bodied men come into the camp. Almost all of them withered away within 6 months. Arnold’s father said many of them lost the will to live because they didn’t have a larger purpose. Once they lost the will to live, death was inevitable.

I tried to absorb everything I could from Mr. Van Den Berg. Some lessons include:

  • When your life is more important than your principles, you sacrifice your principles. When your principles are more important than your life, you sacrifice your life. Mr. Van Den Berg is alive today because a young woman valued her principles enough to risk her life in order to smuggle him out of Amsterdam.
  • Never underestimate the power of the subconscious mind.
  • Focus is key to success.
  • Never give up. Whatever failure brought you to the point where you’re considering giving up also took you closer to success.
  • In order to be successful you must:
    • (a) be totally honest with yourself,
    • (b) repeat the actions necessary to become who you want to be,
    • (c) do good (the universe rewards those that legitimately add value),
    • (d) believe in yourself and your life direction.

Some of this advice may sound like self help BS. But, it’s coming from a man that grew up with a father and mother that survived the Holocaust. Moreover, he survived being in an orphanage while his parents were in Auschwitz. He lost 39 family members over that period. Therefore, I think his perspective on life is one worth taking seriously.

This post isn’t going to help anyone outperform the market. It won’t bring anyone back from sizing a position too big or making some analytical mistake. But, hopefully it keeps the world in perspective and helps someone realize how lucky they are. There’s a lot to be grateful for. Take a moment, remember that, call your loved ones, then get back to trying to outperform.

Recommended Reading/Viewing:

Mr. Van Den Berg at Google

https://www.barnesandnoble.com/w/think-and-grow-rich-napoleon-hill/1116671906#/

https://www.barnesandnoble.com/w/mans-search-for-meaning-with-new-foreward-viktor-e-frankl/1028813627#/ – Haven’t read this but @jerrycap recommended it and his book choices are pretty solid.

FB, AAPL, GOOG – SHAME

The spirit of Henry Singleton cried a little this earnings season. If you don’t know who he is see https://25iq.com/2014/11/08/a-dozen-things-ive-learned-from-henry-singleton-about-value-investing-venture-capital/. In short, he was one of the best capital allocators of all time. He issued shares when Mr. Market loved his company and bought them back when Mr. Market didn’t like his company. Dr. Singleton didn’t care about Mr. Market’s opinion. He used Mr. Market to his advantage.

Today, corporate share buybacks are all over the news. On December 21, 2018 Barron’s ran an article about corporate buybacks setting a record in 2018. https://www.barrons.com/articles/2018-record-stock-buybacks-51545361596. This excerpt was particularly exciting for long term oriented investors:

Why? Because in December there was carnage in the market. Everyone was selling everything indiscriminately. The selling offered up some very interesting opportunities in certain companies. That’s when management teams should pounce.

So what did Facebook, Apple, and Google all do with their cash hoards at that time? Nothing. At least nothing meaningful. And that is a disgraceful outcome given the amount of talent that is at these companies. In retrospect, it’s pretty clear that December was not a fundamentally driven sell off. It was fear based (though Apple actually had a meaningful slowdown in China).

Moreover, these companies had internal data that showed they were healthy. The CFOs knew the businesses were not deteriorating like the stock price. That is the exact time a corporate finance department should increase their buying activity. Especially in a cash generative company! Instead, they sat on their hands.

And that lack of action demonstrates why corporations, in aggregate, are not very good at share repurchases. Corporate buybacks decrease share count and shares historically tend to increase in price. So, for the long term investor buybacks at most prices are better than nothing. But, buybacks have immense potential power and even today’s best companies don’t understand how (or are too scared) to use them properly.

In the interest of disclosure, SCG reduced its cash position from 33% in October to just under 20% by the end of December. This isn’t a promotional statement. In fact, it’s way too early to determine whether that was the right long term decision. But, why in the world were the best companies not meaningfully deploying capital when SCG was? The answer lies in the institutional imperative. And that is a sad realization considering who those companies supposedly employ.