“ . . . he also felt honored to borrow ideas from Graham, Pritzker, or any useful source. He called that riding coattails and did not care whether the idea was glamorous or mundane.” (The Snowball, Schroeder, pg. 111)Although Buffett took the idea and then went on to do in-depth research, many people skip the research, leading almost every blog and investment professional to recommend the now ubiquitous “this is not a recommendation, do your own research” disclosure in an effort to cover their rears (who would be so spineless you ask? . . . ahem . . . please see my disclosures below).
In my own personal investment process I take pride in doing my own research, no matter where the idea originated. However, upon some recent post-mortem analysis of my stock selections, I have to admit my experience with taking other people’s ideas has been nothing short of abysmal (it was so bad that I honestly didn't even need to do the post-mortem analysis, it was a glaring sore thumb). With a little introspection, I chalk my poor coattailing experience up to a weakness of mine (and perhaps, arguably, a strength): Laziness.
With coattailing, I often find that my objectivity gets swayed. A stock that, after detailed independent research, might rate as average to slightly above average suddenly becomes a search for what did I miss – there must be a reason XYZ fund or great investor so-and-so is buying. This takes me from a balanced view of the company to the lazy mindset of looking for what’s good about that company (because there must be something, right?) – a subtle shift, but a devastating frame of reference for an investor.
Even the big boys can get things wrong.
No one is immune from the occasional investing mistake. Take for instance the following quote from a July 2011 investor letter that I recently ran across while researching Mosaic (MOS):
“While we were drawn to Mosaic by the catalytic event of the Cargill sale, our position is now largely sustained by two main drivers. The first is our belief that grain and corn fundamentals are extremely positive. . . . The second is our belief that potash fertilizer has yet to recover to trend-line levels of demand.”That quote comes from one of the most well known (and most successful, so don’t take this as an insult to them) hedge funds in the world. In the text, they clearly and concisely lay out their thesis for why MOS has “significant upside” at their cost of $65.
For an investor on the fence about MOS it would probably have been the push they needed to start buying. The nudge of a well respected firm/investor would move their psyche from “it’s an OK stock, but I just can’t get my hands around it” to one of “I must have missed something in my review, let’s go back again (and specifically focus on the talking points I've now heard).”
Here is what MOS has done since that letter was published:
Source: Yahoo! Finance
(Full disclosure: I have no ideas when/if the hedge fund exited the MOS position. For all I know they may have exited with a profit).
Now as a long-term investor, I’m open to the fact that $65 may still be a great entry point, and the ability to buy on this weakness may be a gift from Mr. Market (in the form of a breakdown of the BPC potash cartel). [As an aside I've put MOS in the “too hard” pile (at least for now). Even though I think the balance sheet is strong and the valuation is somewhat attractive, I don’t have a good enough grasp of the potash cartels and the global reserves and mineable resources of P & K.]
All of that aside, if you had limped into MOS on what I’m calling a “laziness coattail” – one where your objectivity was swayed by someone else’s analysis and not backed up by your own – you’d be staring at a near 30% loss on a stock that you originally would have passed on. If your objectivity was cloudy at the onset there is almost no possibility that it’s any clearer now.
This issue closely relates to money managers talking their book. I have no problem with investors highlighting their best ideas. What becomes a problem for me personally (since it clouds my objectivity) is when they become stock salesmen and women. They talk up the stock’s growth prospects, the potential size of the global market, and the whiz-bang technology the company possesses. Yet, when it comes to the company’s risks – and make no mistake, every company has multiple risks – all you hear are crickets.
Again, these are subtle shifts, but I’d much rather hear what can go wrong (and the defenses the company has in place to offset) than what can go right (and be left guessing what risk will derail the company [if Donald Rumsfeld is out there, we can talk about unknown unknown risks another time]). To me this is what competitive advantages are: defining corporate characteristics that protect the company from risks.
To offset my own laziness and stupidity (I was going to say “improve my objectivity and discipline,” but those aren't the risks; laziness and stupidity are the risks) I’m changing my coattailing routine. No more chasing down prepackaged positive leads. No more limping into mediocre ideas on the back of “gurus.” Basically, no more laziness (I wish I could say no more stupidity, but a zebra can’t change its spots).
If I can’t study a company and say “wow . . . that’s stupid cheap,” I won’t buy it. I still plan to coattail and take ideas from anywhere and everywhere I can find them, I just need to be careful in how I react to those recommendations. [As an aside, “stupid cheap” doesn't mean I only buy net-nets; quality stocks can also qualify.] If I can do a better job of remaining objective, the old axiom of “focus on the downside and the upside will take care of itself” should allow my “stupid cheap” ideas to outperform over the long-term.
Harvest Investor © 2013. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.
(Full disclosure: I have no ideas when/if the hedge fund exited the MOS position. For all I know they may have exited with a profit).
Now as a long-term investor, I’m open to the fact that $65 may still be a great entry point, and the ability to buy on this weakness may be a gift from Mr. Market (in the form of a breakdown of the BPC potash cartel). [As an aside I've put MOS in the “too hard” pile (at least for now). Even though I think the balance sheet is strong and the valuation is somewhat attractive, I don’t have a good enough grasp of the potash cartels and the global reserves and mineable resources of P & K.]
All of that aside, if you had limped into MOS on what I’m calling a “laziness coattail” – one where your objectivity was swayed by someone else’s analysis and not backed up by your own – you’d be staring at a near 30% loss on a stock that you originally would have passed on. If your objectivity was cloudy at the onset there is almost no possibility that it’s any clearer now.
This issue closely relates to money managers talking their book. I have no problem with investors highlighting their best ideas. What becomes a problem for me personally (since it clouds my objectivity) is when they become stock salesmen and women. They talk up the stock’s growth prospects, the potential size of the global market, and the whiz-bang technology the company possesses. Yet, when it comes to the company’s risks – and make no mistake, every company has multiple risks – all you hear are crickets.
Again, these are subtle shifts, but I’d much rather hear what can go wrong (and the defenses the company has in place to offset) than what can go right (and be left guessing what risk will derail the company [if Donald Rumsfeld is out there, we can talk about unknown unknown risks another time]). To me this is what competitive advantages are: defining corporate characteristics that protect the company from risks.
To offset my own laziness and stupidity (I was going to say “improve my objectivity and discipline,” but those aren't the risks; laziness and stupidity are the risks) I’m changing my coattailing routine. No more chasing down prepackaged positive leads. No more limping into mediocre ideas on the back of “gurus.” Basically, no more laziness (I wish I could say no more stupidity, but a zebra can’t change its spots).
If I can’t study a company and say “wow . . . that’s stupid cheap,” I won’t buy it. I still plan to coattail and take ideas from anywhere and everywhere I can find them, I just need to be careful in how I react to those recommendations. [As an aside, “stupid cheap” doesn't mean I only buy net-nets; quality stocks can also qualify.] If I can do a better job of remaining objective, the old axiom of “focus on the downside and the upside will take care of itself” should allow my “stupid cheap” ideas to outperform over the long-term.
Harvest Investor © 2013. All rights reserved. The content and ideas contained in this blog represents only the opinions of the author. The content in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. No content shall be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may hold positions in the securities and companies mentioned on this site. Any position disclosed on this site may be modified or reversed without notice to you. The content herein is intended solely for the entertainment of the reader, and the author.
1 comment:
Great article. I've noticed two common themes in my losing investments. 1) I trusted research or a thesis from somebody else 2) The company was outside my circle of competence.
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