As an investor you spend most of the time researching and evaluating the stocks you own or want to buy. Less time, or even no time, is spent analyzing the stocks you didn’t buy, or the stocks you have sold. This is also for me the case. To rectify the situation a bit I decided to look back at the stocks I researched and wrote up on this blog, but didn’t buy for various reasons. I haven’t included returns from dividends in the table below because I’m lazy, but I don’t think that would materially alter the picture. Only the stocks profiled in 2012 and earlier are included to the give market some time to deliver a judgement.
Most of the stocks in this list got on my research list because they looked cheap so it shouldn’t be a surprise that the performance of the group is on average pretty good. But results are just one part of the equation, what really matters are the reasons why I didn’t buy. Not buying a stock because it’s just to complicated to understand the value is in my opinion always a good reason no matter how it performs afterwards. GKK falls in this category: I thought it looked cheap, but I simply didn’t understand the CDO assets.
Some other names on this list, IMOS for example, were also put in my “too hard” basket, although I feel like I maybe should have been able to see the value. RSE was my first encounter with a commercial property company. Knowing what I know now I think I would have bought it, but if you are for example unsure about how much leverage is prudent I don’t think it’s a bad decision to walk away. But maybe I should have worked harder at figuring out how much it’s worth.
For some stocks it’s even with hindsight hard to know if you made a mistake by not buying it. CMMCY was a sketchy Chinese stock, but also one with a lot of hints that it could be real. I knew that if it would be real the return would be great and I even anticipated how likely it was that the CEO would take it private. I honestly have no idea if this was a mistake or not. It could have gone to zero in an alternative universe, but I might also have been a pussy.
More sketchy companies
I’m very glad that every single stock that performed terrible is in this list, and not in my portfolio. DSM.V and AAB.TO are resource companies, and I didn’t buy these because I thought management couldn’t be trusted despite the big discount to NAV. Obviously the decline in precious metal prices didn’t help these businesses, but it seems that some sketchy transactions didn’t help either. SND.V is another name in the resource sector were I saw at best and average company with a very promotional management while others thought it could be the next big thing.
LFI.L has done pretty well to my surprise. Didn’t really think this was a viable company, but I was probably wrong. Haven’t followed it, so not sure if anything has changed the past year, but it’s certainly up a decent amount. CTLE was never a serious idea. It is/was an obvious pump-and-dump and predicting that it would go to zero didn’t take much, if any, skill.
I think my biggest mistake was probably not buying AAA.AS. This was a private equity fund trading at a big discount that was liquidating and buying back large amounts of cheap shares. I thought I would be able to pick it up at a 50% discount because it often had traded in that range in the past, but it never became that cheap again. I guess that in a sense it’s positive that one of the stocks on this list that I wanted to own the most is also one of the best performers, but that’s not going to buy me anything… It would have been a great deal at a 40% discount too, but I was anchored too much at the higher historical discount.
This list is obviously a very limited sample, but I do think it’s encouraging that the average performance of these stocks is lower than my portfolio while the variance in the results is a lot higher. A lot of names on this list didn’t make it in my portfolio because of concerns about leverage or the quality of the business, and that’s reflected in the results. And the big question is how this group would have performed if we would have had another 2008 instead of gradually rising markets: that would have been the real test.
It also shows that sometimes the best returns can be found when the stock is so ugly that even for me it’s too hard to buy, and that’s a though balancing act. As a value investor you often buy ugly companies, but you also have to be able to sleep at night. I know there has been some research in net-nets that suggest that buying companies that are actually losing money generates higher long-term results than buying profitable net-nets. MEAD might be a good example. I thought it was a melting ice-cube, and it seemed that this was true, until multiple bidders emerged to take it over. It would have been a roller-coaster ride though.
I think that one of the most important things in investing is having the conviction to stay with your strategy when things go bad, and that’s why having a certain level of quality in your portfolio is a good idea. I know that things will probably turn out alright if I buy something cheap with a long track record of profitability, and I don’t know if I will be able to do that if I’m basically just buying the biggest pile of crap I can find.
Not long anything mentioned in this post