The Dangers of Holding on to Great Stocks

Someone emailed me a question about Activision (ATVI), a stock I put 100% of my portfolio into a little over 16 years ago (the stock went on to return 22% a year – but, of course, I didn’t hold on to it these last 16 years):

“Would it be fair to say that your returns would have been much better had you just put all your money into Activision at the time you initially bought it… and just sat on your butt until now? Let’s assume that this is a fair assessment for now.

So if we brought ourselves back to the year you bought it, early 2000s was it? If we looked at it with the models you currently possess but likely did not possess back then, could you have made a better allocation based on those models alone?”

The only “model” I can think of that would have improved my performance is not letting myself make any conscious sell decisions. In other words, just selling pieces of all the stocks I own in proportionately equal amounts to fund new purchases, never selling just to hold cash, etc.

I wrote an article discussing some of this. Overall, my sell decisions haven’t added much (if any) value to my investing record. My investment results are primarily a result of taking larger than normal positions in some stocks and then secondarily in picking the right stocks more often than I pick the wrong stocks.

With hindsight, I would have done as good or better while doing far less work if I’d just stuck with a stock like Activision that I once (16 years ago) had the conviction to put 100% of my net worth into it.

However, I think there is both: 1) A valuable truth and 2) A dangerous falsehood in this kind of thinking. Basically, what you’ve uncovered here is a good idea. But, a good idea can be taken to a bad extreme. And, I think the combination of 1) abusing hindsight and 2) going off the stock performance rather than the business performance can skew just how good and certain an idea Activision really was in September of 2001 (when I allocated 100% of my portfolio to it).

I couldn’t have foreseen that Activision would return something like 20% to 25% a year for the next 15-20 years. At the time, I thought I was able to foresee Activision could return 10% to 15% a year for the next 10-15 years though. Now, it’s true I thought this thought with enough “certainty” that I was willing to put 100% of my portfolio into the stock. But, I didn’t go “all in” on Activision believing I could make 20% to 25% a year. I did it believing I could make 10% to 15% a year (with greater confidence than I had in any other stocks).

Since 2001, Activision’s capital allocation has turned out to very good, or very lucky – or some combination of the two. Should …

Bought a New Stock: 50% Position

I bought a new stock today. This is the first buy order I’ve placed in about 2 years.

As of this moment, the new stock is just under 50% of my portfolio.

To fund this purchase, I had to:

·         Use my 30% cash balance

·         Sell one-third of my position in Frost (CFR)

·         Sell one-third of my position in BWX Technologies (BWXT).

I’ll reveal the name of this new position on the blog sometime within the next 30 days.…

My Portfolio as of October 2nd, 2017

Stock I Bought Today: 50%

Frost (CFR): 28%

BWX Technologies (BWXT): 15%

Natoco: 7%

Yes, I am now 100% invested.…

NACCO (NC) Spin Off Article

You can read a new article over at GuruFocus that I wrote discussing the lignite coal mining business (NACoal) that will be left over once NACCO spins off its Hamilton Beach brand of small appliances.

NACCO: Why NACoal Is Inside My Circle of Competence and Hamilton Beach Is Outside It

“The company is involved in operating lignite (again that’s “brown”) coal mines for a few major customers. These customers are usually power plants of some kind. They sit very, very near (in some cases, basically on top of) the coal deposit that NACoal is working. I was able to confirm this to my satisfaction by going online and getting satellite images of NACoal’s five biggest mines. Using those images, I can see where the customer’s plant is in relation to the surface mining activity.

I’ve never researched a coal miner before. However, I have researched two companies related to coal mining…”

NACCO: Why NACoal Is Inside My Circle of Competence and Hamilton Beach Is Outside It…

How I Read a 10-K (in 4 pictures)

Cheesecake Factory vs. The Restaurant Group

A blog reader emailed me these questions:

“With respect to CAKE and its same-restaurant sales decline, do you have any thoughts on the following:

1.       The strength / source of its economic moat?

2.       Will the cost spread between eating at home and eating away from home narrow, and if so, what will cause it to do so?

3.       Are you worried about declining foot traffic at malls, and brick and mortar stores in general, as it pertains to CAKE?

I’m also wondering if you still feel The Restaurant Group is a potentially attractive idea?”

First, an aside: For those who don’t know, what he’s talking about in #2 is the fact that food prices in U.S. supermarkets have been falling for about 2 years even while food prices in U.S. restaurants have been rising. That’s historically rare. In fact, the recent rate of change in the relative price of food in supermarkets versus food in restaurants may be historically unprecedented.  Other things equal, such a relative price change obviously causes restaurant traffic to fall and supermarket traffic to rise.

Back to the questions…

1) I don’t think Cheesecake Factory (CAKE) has a moat. Everyone goes to multiple restaurants. The most successful restaurant chains do a good job of compounding wealth for shareholders and earning high returns on capital. But, no restaurant is insulated from competition with others. So: no moat.

2) Yes. At some point, prices of food in supermarkets will rise faster than prices of food in restaurants. Several publicly traded supermarkets had EPS declines of 10% to 20% this year. That won’t continue indefinitely. At some point, they will have to open fewer new stores, close some existing stores, and raise prices. Food at home prices have fallen because retailers have accepted pricing that earns them less money. What’s happened is not that food costs are down. It’s that supermarket profits are down. The cycle will get worse as long as rivalry in food retail gets more intense and then it will get better only once rivalry in food retail gets less intense. Right now, food retailers are more intense rivals than restaurants. I haven’t seen anything that changes costs in food. I’ve just seen supermarkets and other retailers lowering prices without lowering costs – and thereby lowering profits for themselves and their competitors.

3) Yes. Declining traffic to malls is the biggest risk for Cheesecake Factory. Management thinks it can grow from about 200 locations in the U.S. to about 300 locations. That means finding another 100 good locations for a Cheesecake Factory where there isn’t already a Cheesecake Factory. If there is a societal shift away from visiting malls, I’m not sure it’ll ever be possible to add 100 more Cheesecake locations in the U.S. It’s true that Cheesecake is in better malls and what I’ve seen anecdotally is the very best malls I’ve been to in New Jersey and Texas show no signs of any traffic decline while the very worst malls I’ve been …

An Email from a Weight Watchers (WTW) Investor

“Geoff,

I know you already published your WTW post-mortem post but I have been an intermittent reader and after WTW’s recent run, decided to check in on your blog.

I first heard about WTW as an investment thesis from your blog. I got the free sample of Avid Hog recommending WTW. I bought my first shares on 9/9/13 and in less than six months, my WTW position occupied 30% of my retirement portfolio. I proceeded to keep buying sporadically and even had the courage to pick up 300 more shares when it hit $6.18 on 5/26/15 – my only purchase of WTW that year. My holdings had an average purchase price of $24.52.

I believe in what WTW is about. Obesity is a systems problem. It is complex…I’m a pastor and I work with substance abuse addicts. Besides behavioral modification, a huge part of recovery is community support, peer reinforcement, and mindset change – all elements of what WTW groups do. Obesity has elements of addiction and disease. I view WTW as a kind of 12-step recovery for obesity. Because of the nature of obesity and addiction, WTW’s program will not be successful for even a majority of people but it will be successful for many. Oprah’s first ad was also incredible…

I sold 14% of my shares in November and December of 2015 after the Oprah announcement. I wanted to free up some capital for other purposes and re-coup some losses. I sold another 38% in gradual increments this year. I made a modest 5% total gain on all the sales (FIFO). I still have just under 50% of what I originally purchased, at a paper gain of 146%. 

My total return (paper + actual) from 12/6/13 to 9/22/17 is 52.67%, besting the S&P500’s 38.53% rise for the same period.

I often felt terrible about pouring more money into WTW as I watched it decline in 2014 and 2015. It was rough. I kicked myself for not considering the impact of debt. I told my wife about my decision and she shook her head. Those were difficult times but I quickly learned not to base my mood off WTW swings. Many days, I would look at the stock price, shake my head, and just laugh. There was no rhyme or reason for the price changes. 

I definitely hated your advice but was reassured that you had skin in the game. I also thought the market was undervaluing everything about the company. It was kind of ridiculous. I stopped reading your blog this past year and I’m glad I didn’t read about you selling. It might have influenced me to do the same.

Lessons learned: 

1) I won’t make any company 30% of my portfolio again. WTW is currently 20% and I’m gradually taking that down.

2) I’ll take a company’s debt more seriously before jumping in.

3) Belief in the underlying premise of the company is what drove me not to sell completely. I had hope this company …