Compounding Life

Recently two stocks I sold have had been on a tear. I sold Value Vision (VVTV) and IGO (IGOI) for some pretty substantial gains. I sold IGOI for a %120 gain after holding it for 5 months in a tax deferred account. I unwound VVTV in lots ranging from %870 to %300 gains in taxable and tax deferred accounts. The proceeds were re-invested in other positions which have performed well but in the short term I left some money on the table by not keeping the positions I had. Keyword here being short term.

I spend a lot of time thinking about my actions trying to determine if I made the right or wrong decision and if I made wrong decision, what lesson I need to take from the experience to apply to future endeavors. So of course one of the questions I asked myself is did I sell too early?

One thing I try to remind myself of in situations like this is “What the market does after you open or close a position really has no bearing on the quality of your decision.” While I would like to take credit for that thought, I imagine it was probably inspired by something I read from someone much wiser and with more experience under their belt. In essence what I am trying to say is that especially in the short term you should not use the market to judge your decisions. Even though the market values VVTV at over $7 and IGOI at over $4, that is not an indication on the quality of my decision to sell at cheaper prices.

Why? The answer really boils down to my investment philosophy. I started investing because I felt I strongly identified with the value investing framework. It makes sense to me and I feel confident that if applied with discipline it can lead to superior performance. While there are many interpretations of the value investing framework, one of the core tenets of value investing is the “Margin of Safety”. Buffett’s early investment style was influenced by his mentor Ben Graham. His style today is probably influenced by many people, two of which are Phil Fisher and his long time partner at Berkshire Charlie Munger. As his style has evolved the margin of safety is still a key component.

I entered both of these positions because I felt they provided adequate margins of safety trading at good discounts to their liquidation value and in both cases the companies had the chance turn around their business as an ongoing concern. So far they have both been making good progress and the market is treating them nicely for that progress. However lets not forget that these are not fantastic businesses with strong moats. So in my case, I bought them at discount to their value dead and got a premium because things worked out well. If only all situations could work out that way!

Both of these companies have a chance of success however once the margin of safety is gone there is nothing to backstop the value. Both of these companies have to execute with little or no error to continue on the upward path they are on. In this case the value the market puts on their progress is of no concern to me, what is of concern is the companies strength and the margin of safety I have if I hold.

Buffett has said that the best businesses are ones that can be run by a ham sandwich, because someday a ham sandwich will run them. I did not enter these positions because of their great business, I entered them because the market was selling them a large discount. They were Graham style cigar butts.

In the event that they enjoy great success long term the shares will appreciate accordingly, however in the event that they fail there is a higher risk of capital loss than I am comfortable with. Unlike companies with strong moats they can’t afford to make mistakes for a year or two. They must do a lot of things right.

So in conclusion when thinking about selling stocks do not think about the market. Think about the business and the margin of safety it offers at its current price. If you do that you will probably be right more often than you are wrong.

Disclosure: No positions in the stocks mentioned in this article.

The past year has been an interesting one thats for sure. I started seriously investing in August of 2008, meaning I started managing my own investments in stocks and bonds where as previously I had only invested in employer retirement accounts with some choices limited to a few funds.

It has been exciting times since then and while I really wish I had started earlier, to be honest I feel very lucky to have started in a time when stocks are cheap and Mr. Market is manic.

I figured I would disclose a few of the positions I have which have done pretty well. Of course I also have some positions which have been flat or lost value to date, but the gains out pace the losses and I think in the long run most of the losers will be winners.

Value Vision (VVTV): Multiple entries with an average price of $0.563
Current gain of 428.27%

I initially discovered VVTV by reading OldSchoolValue, there was some concern about the off balance sheet commitments they had which no longer made it a net-net, but the stock was so beaten down that I actually increased my position even after that news. So far that has paid off but Value Vision is far from out of the woods. I have been seriously considering exiting this position lately.

Ford Preferred Series S (F.PR.S or F-S): Purchase price of $6.17 current gain of 353.91%

These are shares of a trust that holds Ford bonds. While they are preferred shares, the shares are of the trust not Ford. So in the event of liquidation you are essentially a bond holder. The coupon is 6.5% on $50 face value. The coupon payment is in arrears, meaning they are currently not paying it and previous coupon payments are owed with interest. Who ever holds the shares when they pay the owed coupons will get all payments regardless of how long you have owned it. Upon maturity (2032) the holder would get face value $50. When I first found these they were trading at $4 a share but I had already invested all my excess cash. By the time I was ready they were up to about $6.
I decided I would stop buying if the price went over $10 which it did very quickly after it was obvious Ford was not going bankrupt in the near future. Today they are trading at $29 which is little over 0.50 cents on the dollar.