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How I Lost 50% In A Single Stock - Behavioral Value Investor - YouTube
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- I'm gonna tell you how
I lost 50% in the stock
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early in my career, and what you can learn
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from my experience.
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Hi, my name is Gary Mishuris.
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I'm the Managing Partner
and Chief Investment Officer
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of Silver Ring Value Partners.
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I also teach the Value Investing Seminar
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at the F.W. Olin Graduate
School of Business.
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So, this was very early in my career,
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I was a young analyst
at Fidelity Investments
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about 20 years ago, there were a little,
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I mean, 19 years ago.
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And I was assigned to an industry,
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the Specialty Chemical industry.
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That's how things worked.
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You basically were given
the assignment to follow
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a narrow set of companies,
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and your job was to issue, buy,
sell, hold, recommendations
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to the firm's portfolio managers.
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And there was a company
there in my coverage
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by the name of PolyOne,
the ticker, ticker was POL.
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And, now, I didn't...
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Look, I was straight out of college,
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I had just graduated from MIT.
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And I didn't know that
much about investing.
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I just finished my, the
level of one of my CFA,
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so I knew a little bit of accounting.
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But, you know, Fidelity's approach
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was to kind of hire people
they thought was smart,
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and to kind of set them loose,
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and let them reach their own conclusions.
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So here I was, and this company,
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it was statistically seem pretty decent.
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You know, this was circa 2002,
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and you know, prior to the
recession of 2001, 2002,
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they earned about a
dollar in earnings or so
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on a "pro forma basis", which
is kind of the first red flag.
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And, you know, I went
out and see, to see them,
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and the, there was a charismatic CEO,
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he went to Harvard Business School,
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he had a nice tie and suit and
he was dressed apart, right?
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Because obviously, you know, how you dress
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clearly determines, you
know, how good of a manager
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or investor and so forth, you're gonna be,
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but anyway, that's an aside.
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So, you know, he, he had the strategy.
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So what PolyOne did was,
they made a whole variety
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of different plastic-related additives
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and polymers and so forth.
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And his theory was that,
they were gonna buy
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or grow and have a plastic supermarket.
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They're gonna sell the same customers,
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whole bunch of different things.
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Now, you know, it sounds plausible.
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Like you go to the supermarket or,
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well, at least you did before
the coronavirus crisis,
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but you probably went to a
supermarket in your life,
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and it is convenient
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because if you're gonna
buy su, a sugar and salt,
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you don't wanna go to different stores
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to buy your sugar and your
salt, you buy them all there.
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So that was kind of the theory
the CEO is putting out to me
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and I thought, "Hey, that makes sense."
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So I went back to the office, you know,
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set up my cube and pulled
up my spreadsheets.
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I started modeling a way
and typing and, you know,
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saying, "Well, they
earned a dollar, and then,
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they're gonna grow with this
rate, and they're gonna get
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the benefit of cross-selling
this new product."
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so forth and so on.
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You know, "Maybe they
can make a little bit
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more than a dollar." and, you know,
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"That should be worth
about 15 times earnings."
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And, you know, "It should
be worth $20 or so."
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And the stock was at about 12, so I said,
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"Oh, we're buying something
for 60 cents and a dollar."
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You know, "Great. My
idea of value investing
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was very Ben Graham-based."
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You know, I wanna buy
statistically cheap stocks
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at the time.
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So, you know, I made the recommendation
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that we buy the stock and we did.
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And
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basically, as
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you know, the stock, you know,
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patiently waited for me to get on board
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and then started falling
slowly and slowly.
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And some of the portfolio
managers just started saying,
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"Hey, what's going on?"
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You know, "How's it going?"
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You know, "What's, what's happening here?"
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"Oh, not to worry, we're should be
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long-term value investors,
we did our analysis."
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you know, they just hold
and then for a while,
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they said, "Okay."
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And then they, and one
of the portfolio managers
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who ran the value fund said,
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"You know, okay, let's call the company.
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Let's see what's going on."
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And we talked to them,
and this was, you know,
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already after regulation of
this, so they couldn't just say,
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"Hey, we're gonna miss the quarter."
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You know, their indication,
every indication
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they gave us was that business
wasn't that great, right?
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And now, the portfolio manager
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kind of looked at me
after the call and said,
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"They're gonna miss the quarter."
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I said, "Yeah, you're
probably right, but, so what?
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We shouldn't be focused on quarters.
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We should be long-term,
multi-time-horizon."
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Anyway, the way it went, I went,
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and then, another portfolio
manager, stock kept falling,
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so I bought, you know, I
got the portfolio managers
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to buy the stock around 12,
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and the stock was going
nine, you know, eight.
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You know, this isn't a
big decline, you know,
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nine, from 12 to nine it's 25%.
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And the, another portfolio manager said,
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"Something's going on,
someone's know something
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that we don't."
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And I said, "Oh, probably
people are worried about
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the weak quarter, it's not a big deal."
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You know, we talked to them, and you know,
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"Probably it will be a
little weak, but let's focus
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on the value, let's focus on the business
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and this supermarket cross-selling
strategy." and so forth.
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And by the way, nowhere in
there did I really think deeply
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about the quality of the business,
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kind of a Porter's five forces analysis,
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think about the value chain,
who the customers were,
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who the suppliers were, all
of those types of things
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that now are second nature to me.
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But back then, you know, look,
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I was 21 and that was just learning.
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I mean, at least that's my
excuse, you know, you know,
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that's not a good excuse.
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I should've tried harder.
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So I'm not trying to come up with excuses,
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I, I own my mistakes, but
nonetheless, you know,
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I didn't know to do
those things back then.
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And then, Christmas of, right
before Christmas of 2002,
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the company pre-announced results.
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And as you know, like this
was literally December 23rd,
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you can look it up in the, you know...
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I remember it to this day.
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And almost nobody would
ever, ever pre-announce
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the week of the, you know,
the, the holiday week, right?
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It would be insane.
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Why would you pre-announce?
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Because you can just pre-announce,
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you know, in January or
this week, pre-quarter.
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Well, you know, they pre-announced
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because they weren't
missing by a little bit.
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Their demand was falling,
you know, you know,
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through, through the floor,
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and they, they suspended their dividend,
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and the stock literally, in that one day,
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in that one day from already kind of a,
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that stock had already
crab down to the six.
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Remember, I started at 12, here,
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you know, with, with buying a little bit
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as the stock was going down,
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and now from six, in one day,
it went from six to three.
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I literally wanted to throw up.
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I'm not saying this for a,
to embellish or for effect.
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I literally felt nauseous.
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And in Fidelity, you
have to go and kind of,
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you know, update the portfolio
managers and analysts,
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and tell them what to do next.
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That's the last thing I wanted to do.
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I wanted to crawl under my desk and cry.
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'Cause I've basically, we
got a hundred million dollars
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invest in this company, and
the stock just collapsed.
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They've suspended dividend
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and they didn't know
what's gonna happen next.
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And obviously, my faith in my
own analysis, in the company,
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and everything, was shaking, right?
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I remember going around
with one portfolio manager
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who wasn't particularly kind, said,
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"You know what?
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I think you should've go back home
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and then reread Warren Buffet road.
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I don't think you gotta, just
take the rest of the day off."
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No, I actually have finished my rounds,
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talked to everyone, finished
my analysis of what to do next,
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which is unhealthy, you know.
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I'll give myself partial credit.
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You know, at that point,
the only way this company
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was worth as little as $3 per share,
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was if they were going to go bankrupt.
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And I had the presence of
mind to do the analysis,
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and it was extremely unlikely
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that they were going to go bankrupt.
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And we held onto the stock, and the stock
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eventually recovered,
but it took some time.
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But, their act, took
the rest of the day off
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after I did all that work.
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And I did not feel very good, you know.
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You know, that's it for
the rest of that year,
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for the rest of that week.
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Anyway, the reason I'm
telling you the story is,
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you know, now that I'm 20 years in the,
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in the mentoring a lot of young investors,
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and I've been teaching my seminar,
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and just interacting a lot of people,
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I see this a lot, you know.
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Someone is excited about some story.
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You know, their gon, this
company is gonna earn a dollar
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and then multiply this by some number
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and you get the stock price and voila.
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And I think I made a number
of mistakes, you know?
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So think, if I were to
think about mistakes
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that I would have you
learn from, you know,
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number one, I really didn't
think deeply about the business.
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Is this a good business?
Or base a good business?
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Who has more power, you know,
them or their suppliers?
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Who has more power,
them or their customers?
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You know, how, where
the barriers do entry?
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You know, was it easy to
go and build this stuff?
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You know, so I think of
that as a big mistake.
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Next, I kind of, I think, you know,
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decided to value the business,
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not based on what they've
done historically,
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but based on hopes and dreams.
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Yeah, so on the performer
basis, they, in their peak year,
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they made a dollar.
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And I was thinking, growing
that for a few years
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and assuming $1.25,
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but on average, they never made a dollar.
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And this is a mature business.
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It's not like, this is not the 70s.
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Plastics is not a growth
industry at that point anymore.
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So, now if they, their average
earnings were maybe 25, 30,
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40 cents, I forget, but some lower number,
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so that should have
been kind of a red flag.
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'Cause if the average
earnings from mature company,
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especially if the average
cashflow, pre-cashflow for the,
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over some economic cycle is pretty low,
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then how realistic are your hopes
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for a very different future?
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That's the second mistake.
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And I would say the
third mistake I made is
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listening to kind of a management story,
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and believing in kind of
a hook, line and sinker,
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swallowing that whole thing
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'cause no, I didn't talk to any customers.
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Sure, it made sense that
customers might wanna buy
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multiple things from the same provider,
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but what if these guys weren't the best
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in each of those things?
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Maybe let's say they were
really good at product A and B,
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but not as good as in C, D and E.
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Would a big client care
about buying in one place?
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They have buyers, they
have a big organization.
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Why not buy from the best of breed?
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Buy A and B from them, and C,
D and E from whoever is best
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or has the best combination
of price and quality
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at C, D and E.
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So I didn't really vet that thesis.
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I kind of took management's word for it.
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So those were the three mistakes.
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I, I would hope you would
learn from my experience,
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and I hope this story, you know,
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which is, you know, it's
funny now at 20 years later,
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but I can assure you it was not
funny at that point of time.
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I hope it'll save you from
some mistakes you might make
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in your investing life and practice.
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If this video has been helpful
to you, please hit like,
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and subscribe to my YouTube channel.
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Thank you guys.
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...
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