One of the great things about investing is that you can learn a lot from other people’s mistakes without spending any money. It’s inevitable that you are going to make mistakes yourself, but you don’t get points for reinventing the wheel. So when someone decides to do a post-mortem on a failed investment I’m all ears. Especially since you usually see investors talking about their latest idea’s: not their failed idea’s. A good blog post that I recently linked to on Twitter was this one from Glenn Chan about junior miners, doing your own homework and how some things are just too difficult.
Sometimes you also read a post-mortem, and you wonder if the author really learned anything. Today I came across this blog post from Vitaliy Katsenelson titled “What I learned from the J.C. Penny Fiasco”. In the piece he argues that the JCP investment wasn’t a bad investment: it just didn’t work out. That’s of course possible: if you bet when the odds are in your favor you will win in the long-run, but it doesn’t mean that every bet will pay off.
But if you want to review your investment thesis you can’t just assume that your initial assessment of the probabilities was correct. Vitaliy thought that the probability of a turnaround at JCP was ~70 percent (with a lot of upside) and the probability of failure around 30 percent (with ~40% downside). If that would have been true an investment in JCP would have been a fantastic bet.
I doubt that this was the case, because there is simply not a lot of logic that supports the 70/30 probability distribution. How often are declining companies able to turn around? How often do retailers turn around? How often do companies turn around by trying a radically different strategy? How much experience did Ron Johnson have in turning around a struggling retailer? I don’t know the exact answers to all those questions, but I’m pretty sure that there would be absolutely nothing in the data to support a high probability of success. When you grab some bullshit probabilities from thin air it might be a good idea to start there in your post-mortem…
No position in JCP, so far just following the story for entertainment value