My Ups and Downs in Stock Picking
I’ve been fascinated with stocks since I was twelve years old and my best friend at the time, picked up the newspaper on our kitchen table and flipped to the stock tables. Up until that point, the only section of the newspaper I had ever looked at was the sports section to check on my favorite team’s standings and my favorite player’s latest performance. However, looking back at that day when my friend opened the stock tables, I had no idea it would send me on a lifelong quest to understand stocks.
I bought my first 3 stocks when I was 14 years old and they were Bank of America, Grossmans (a lumber company) and Local Federal (a savings and loan in the state of Oklahoma). These stocks had been given to me as tips for various reasons and their performance after I owned them was mixed. Bank of America was a turnaround play at the time and performed the best for me. I almost doubled my money in a year so I quickly sold it. Boy, I missed that one. If I had real foresight and patience, I could have held that one for over 1,000% gain over the next 10 years. Oh well. Grossman’s (the lumber yard) was supposed to be an asset play as they owned all the land under their lumber yards, but I missed the fact that a new and larger competitor was entering the market and they eventually went bankrupt. Lastly, Local Federal turned out to be mostly dead money as it oscillated up and down after my purchase price before eventually getting bought out at a price which was just about break even for me.
When I began to invest in those early years, the stock market was considered the playground for only the wealthy or those who had extra money to lose. After all, I can remember that the commissions I paid on those 3 stocks mentioned above were $70 a piece or $210 for my small odd lot purchases!! In addition to high commissions, access to information was difficult as the only place you could access information on the stock market was on television and radio lunchtime broadcasts or the next day in the local newspaper’s stock tables. However, there was a cable television program from California called FNN, that had news on the economy and stock market and also a stock ticker tape running on the bottom of their channel. The catch was that the ticker tape was on a 15 min delay so you really never knew exactly what your stock was worth at any given time.
I contrast those early experiences of my investing career to now when information on stocks is everywhere and you can get excellent stock market commentary for free. Back then, research was done solely on the ground by physically going to the company, meeting its suppliers and talking to their competitors. Now, we use satellite images of parking lots to determine how many customers are visiting Walmart or Whole Foods. In addition, the actual execution and trading of stocks has gone from slow and labor intensive to virtually completely automated and done in milliseconds. The stock market is not alone as an industry being washed over with massive technology improvements, but I’m not totally convinced that this wave of technology has necessarily made it easier to select securities.
Surely the boom in technology capex has improved the retail investor’s ability to research companies, trade quicker and more efficiently. In a similar light, you can’t deny that the adoption of powerful technology has also given institutional investors a massive edge in their businesses as well. If you read Lloyd Blankfein’s last shareholder letter in the annual report, he outlines in detail why he views Goldman’s investment in technology as a MAJOR differentiator of his firm. Likewise, Abby Johnson of Fidelity, is now placing a large bet on the rise of crypto currencies and block chain technology.
On the flip side, I do believe that technology has also made it more difficult to pick stocks. For example, the rise of technology also created a tailwind for globalization and this is obvious with institutional investors. In other words, institutional investors in other countries used to have to put boots on the ground or hire teams of analysts to produce research for the US market, they can now do those tasks in a fraction of the time and use a fraction of the effort that was previously needed. This has caused more investors to now capture alpha from the marketplace.
The transformation of the capital markets during my lifetime is not new news and in theory, good stock picking criteria should withstand the test of time. For example, Warren Buffet hasn’t seemed to sweat the technology revolution, nor have the hundreds of successful hedge funds, who have made many of their founders, billionaires.
With that said, I haven’t had such an easy time with my own stock picking. When I first began investing I was introduced and drawn to the momentum style. One thing I like about momentum investing is that you tend to get instant gratification about your stock picking. In other words, after you a buy a stock, you will likely know within a week or even possibly within a day, if you have timed your purchase correctly and have latched on to a potential winner. Some people also characterize momentum investing as “trying to catch a wave,” to use surfer lingo. Momentum investing has gotten a bad rap as many people in the “value investing” camp seem to pooh pooh its merits. To those people, I would just recommend that you visit professor Kenneth French’s website and familiarize yourself with his work on momentum investing.
One of my first investments using momentum investing was in the late 90s and I bought Lucent Technologies. Lucent was a spinoff from AT&T and made telecom gear, which was seen as the backbone to the internet. At the time, they were benefitting from the huge internet capex spend that was taking place and the stock made an astounding move higher. I bought Lucent and the stock quickly jumped higher and I was immediately in the green. It continued to skyrocket higher over the next few months and I was feeling flush. I was proud to mention that I owned Lucent and that I would never sell it (famous last words!). As you can imagine, it ended it tears as I was completely ignorant to the slowdown in telecom capex and refused to sell it while the stock eventually came down to $3 per share from $150 per share! My lesson from the experience was that I must take at least some profits off the table when I’m lucky enough to “catch a wave.”
I was beaten after my Lucent experience, but not unbowed. I then regrouped and bought another high flyer of the time, Internet Capital Group. This company invested in pre-IPO dot com companies and once they went public, reaped huge windfall gains. They were essentially like a private equity firm of the dot com age. I bought this stock and it promptly started to fall. I think I purchased it around $145 per share and when it reached $135 per share, I cried uncle and sold my position. Boy was that a good move. The stock collapsed in relatively short order and hit $1 per share in about a year. The lesson I learned here was to sell quickly if you made a mistake.
Another one of my earlier investments was in an advertising company called Ackerly Communications. Ackerly was a prominent owner of billboards and I can remember seeing their huge billboards with advertisements all around the suburbs of Boston. One day I was reading the sports pages and learned that the owner of the Seattle Supersonics basketball team was Ackerly Communications. I then dug deeper into Ackerly and learned that in addition to the Seattle Supersonics, they also owned several TV and radio stations as well as the billboard business.
Since I was a sports fan, I was familiar with the value of sports teams and especially the Boston basketball team, which was estimated at that time to be worth around $250 million dollars. I knew the Seattle team was not worth anything near $250 mil, but I did know it was worth at least $100 mil since they had a competitive team. At that time, Ackerly was trading for $16/share and had 10 mil shares outstanding. Thus, the stock was worth $10/share just from the basketball business alone. Although, I wasn’t sure exactly how much the billboard business, TV and radio stations were worth, I knew that collectively they were worth more than $60 million usd. This was pre-internet so all advertising was done by television, radio, billboard and newspapers. This was one of the best investments I’ve ever made because my analysis was sound and this allowed me to invest with confidence. The problem was that I was still in college and I could only afford a few hundred shares. I forgot how long I owned it for, but I was able to sell it for a double, which still gives the bug to always hunt for asset plays.
One of my next memorable investments was in a closed end China fund. These closed end funds actually trade on the stock exchange and have a fixed number of share available to buy. This contrasts with open end mutual funds, which don’t trade on any stock exchange (you buy the fund directly from the Investment company) and they have an unlimited amount of shares that they can issue. In any event, I had just moved to Japan and while the Japanese stock market was stagnant at that time, I began to research about China and decided I want to have some exposure to Chinese equities.
The closed end fund I bought traded at a discount to its NAV (as do most closed end funds) and was managed by JP Morgan. My reasoning to buy at the time was that I wanted to participate in China’s high GDP growth rate and felt that exposure to this fund would provide me with it. However, the fund actually owned mostly HK stocks so it wasn’t a pure play China fund, but I convinced myself that was just a small detail. This closed end fund did rise a bit after I bought it and at the time, I believed it would be a long term holding for me so I just sat with it.
My initial plan was to buy more on dips, but I never got that chance as it slowly climbed higher from where I first purchased it. However, in 2007 lightning struck and the Chinese and HK markets became the rage of investors all over the world and my closed end fund was now trading at a price 300% higher from my first purchase. After my previous Lucent and Internet Capital experiences, I decided to take the money and run. That was the right decision as the price slowly went lower over the next few years. Looking back, I just got lucky. My initial thesis to buy the fund as a proxy of China’s GDP was complete nonsense and I have since learned that you should never buy any equity or a fund simply because its home country will experience high GDP growth. My reasoning was wrong, but I made money.
These are just a few of my more memorable individual stock investments and I think it highlights just how hard it is to be a successful investor investing in individual securities. Peter Lynch says that people only need one or two good stocks in their lifetime to make a lot of money. He cites how many people who worked in the auto industry, but never invested in the turnaround at Chrysler or how doctors and nurses missed the boom in stocks like Glaxo, when they launched their new ulcer medicine called Zantac. Lynch is exactly right that it makes sense to invest in things you know. However, in a lot of Lynch’s speeches and even in his books, he does oversimplify investing by saying that if you just get the earnings right, the stock will follow the earnings higher.
Unfortunately, this is not exactly true. In my own experience, I remember buying Microsoft in 2010 because Steve Ballmer was doing a good a job of cutting expenses and as a result, the company began to beat on their quarterly earnings. In addition, Ballmer was also investing very smartly in their new cloud offering, which was called Azure. Overall, it seemed like a no brainer to buy the stock. As expected, Microsoft kept beating earnings estimates as I thought they would, but the stock just stagnated. It turned out to be completely dead money despite the earnings surprises. Ironically, once Steve Ballmer stepped down as CEO, the stock began to take off again. Unfortunately, by that time, my patience had run out and I was out of the stock.
Why this Microsoft investment left a very bad taste in my mouth is that not only did the stock just stagnate after good earnings, but Microsoft was never “expensive” or “over-valued” when I owned it. It traded at a very modest p/e ratio, had a sterling balance sheet and an excellent management team. My guess is that if I talked to Peter Lynch he would have told me that I wasn’t patient enough and that if the story on the stock isn’t changing, don’t just simply exit the stock. Indeed, if I had simply just held on, the stock did begin to climb again under the new CEO and on Friday actually surpassed Apple in market cap!!!
I’ll continue to be fascinated by stocks and what factors drive them higher and lower. For example, I’m always on the lookout for a good asset play, but I find they are getting harder and harder to find as technology allows for faster information dissemination and analysis. There will also always be a soft spot in my heart for momentum stocks as that was the first discipline of stock selection that I learned. Boy, I wish I applied that recently and had owned the FAANG stocks!! Value investing is probably the most common method for selecting stocks in the institutional world, but it can take many years (and lots of ulcers) before these stocks eventually pay off.
In sum, I’m always on the hunt for a great investment no matter what bucket it falls under (momentum, value, asset play, turnaround, etc.). On one hand, I sometimes think that this may be my downfall and I should just focus on one style. However, on the other hand, I think it is silly to limit myself and not be able to take advantage of a good opportunity no matter how it presents itself. As a result of all my ups and downs in individual stocks, I think the best course of action for me is index funds and then try to supplement them with individual stocks picks, which maybe someday will finally give me that “big wave” to ride!
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