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What were some of the major blow ups in this sub-category?


opihiman2

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I haven't perused this space in years.  I usually just find my own ideas and run with them.  But, recently, I found out SD went bankrupt and remembered a huge long thread on here.  I also remembered FFH also bought SD.  I'm going through that thread and it's pretty interesting to read the thoughts and musings on there.  Hindsight is 20/20, but still it is entertaining to see how members' ideas and theses played out by going through some of these threads.  KMI is another thread I just finished reading.

 

But, I'm just wondering, what were some of the major blow ups here?  I see VRX, CHK, SD, the mlp's (actually, oil and energy related stocks in general), SHLD (which, at one point, I thought about trading after reading the board post but decided not to since it was outside of my normal strategy), ZINC, SUNE, TWTR...  those are the only ones I can see.  Are there any more?  Do people on here do post-mortems on these things?  I suppose it only makes sense for the ones with permanent loss of capital (bankruptcy).  But, I think it would be great to peruse them and figure out some lessons-learned.

 

Thanks for reading.

 

 

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Sorry folks, if you're confused by the "sub-category" in the topic.  I initially posted this over in the Investment Ideas.

 

I think ratiman is right.  A lot of the blow ups have had some jockey (well, SD and SHLD mostly) bent; but, mostly there was a famous investor like Watsa, Pabrai, Einhorn, Ackman, etc..., investing in the common.  I wonder, though, what their real win/loss percentages are like nowadays.  Pabrai seems mostly like a coin flipper to me nowadays.  Watsa and crew have kinda gone nowhere these past several years by hedging and betting on another major blow up.  Now they're taking hedges off (at the worst time, IMO) and going back into the markets after one of the longest bull market runs and peak market valuations.  I wonder about those guys.  Einhorn is buying things that just makes no sense to me.  Yelp?  What? 

 

Much thanks for the responses.  I'll take a look at the other threads.  But that SD thread is super long and I'm barely 1/3 of the way through it.  If I find some common themes, I'll post some lessons learned.  I might have to skip the mega threads, though, like SHLD and SD.

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Watsa and crew have kinda gone nowhere these past several years by hedging and betting on another major blow up. Now they're taking hedges off (at the worst time, IMO) and going back into the markets after one of the longest bull market runs and peak market valuations. 

 

Emphasis mine.

 

Wait what? Source for this?

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^^ Yeah, I remember reading that in the FFH sub cat.  Fairfax is now saying that after years of dismal float performance, they are now taking hedges off and looking to chase performance now.  I have a feeling they are going to blow themselves up soon with a mean reversion type event.  Seems to happen to the best of em (Sequioa, Baker Street, etc...)

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Watsa and crew have kinda gone nowhere these past several years by hedging and betting on another major blow up. Now they're taking hedges off (at the worst time, IMO) and going back into the markets after one of the longest bull market runs and peak market valuations. 

 

Emphasis mine.

 

Wait what? Source for this?

 

+1

 

Even a cursory reading of q1 results suggests this is not the case.

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^^ Yeah, I remember reading that in the FFH sub cat.  Fairfax is now saying that after years of dismal float performance, they are now taking hedges off and looking to chase performance now.  I have a feeling they are going to blow themselves up soon with a mean reversion type event.  Seems to happen to the best of em (Sequioa, Baker Street, etc...)

 

My reading of the q1 call was that they were >100% hedged, very worried about markets, and staying hedged.  What did I miss?

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ARCP?  I think a few around here were pretty enthused about it prior to the blow up, if memory serves (I'm long VER but from ~ $8).  I guess a lesson there is common to VRX; avoid debt fueled massive roll-ups with shady (well known in Schorsh's case) CEOs? 

 

Energy stocks....what are you going to do?  Its in a commodity space and that happens every decade or two.  If you don't profess to be a "quality" investor you probably knew that you could have a rough couple of years.  The P/B guys also got smoked in the financial crisis but they were all rounding back to form by 2014.

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Watsa and crew have kinda gone nowhere these past several years by hedging and betting on another major blow up. Now they're taking hedges off (at the worst time, IMO) and going back into the markets after one of the longest bull market runs and peak market valuations. 

 

Emphasis mine.

 

Wait what? Source for this?

 

+1

 

Even a cursory reading of q1 results suggests this is not the case.

 

That was my take as well. As a matter of fact, in the Q & A they were probed on how they could be down on the hedges in a quarter where the Russell index return was negative and it was because they ADDED to the hedge near the lows.

 

They're not reducing their hedges - they increased them!

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Ah, ok.  Memory might be iffy right now.  I actually had their 2015 shareholder letter opened for awhile and remember this part:

 

"As the table shows, there have been two five-year periods when our annual book value growth was below 5%: 2001 – 2005, which was part of our seven lean years, and recently, 2011 – 2015, due to the defensive measures we adopted because  of  our  concern  about  financial  markets.  You  can  see  that  our  average  combined  ratios  for  the  last  two five-year periods have been excellent (i.e., float at no cost) but the average total return on our investment portfolio in the last five years has been the lowest in 30 years. This has been by design as we worried about the speculation in financial markets and the potential for a 50-100 year financial storm. And we wanted to be sure to survive that! We expect to make up (in a hurry!) for the low average total return on our investment portfolio over the past five years

and,  combined  with  disciplined  underwriting  results,  return  to  average  annual  growth  in  book  value  per  share of 15%.

 

In spite of poor book value growth over the past five years, the intrinsic value of our company has increased verycsignificantly even though it is not shown in the book value numbers"

 

I took that to mean they were going to take the hedges off and chase performance.  Seems like they are, at the very least, going to chase performance!  I hope they don't plan on doing that in the US equity markets. 

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Ah, ok.  Memory might be iffy right now.  I actually had their 2015 shareholder letter opened for awhile and remember this part:

 

"As the table shows, there have been two five-year periods when our annual book value growth was below 5%: 2001 – 2005, which was part of our seven lean years, and recently, 2011 – 2015, due to the defensive measures we adopted because  of  our  concern  about  financial  markets.  You  can  see  that  our  average  combined  ratios  for  the  last  two five-year periods have been excellent (i.e., float at no cost) but the average total return on our investment portfolio in the last five years has been the lowest in 30 years. This has been by design as we worried about the speculation in financial markets and the potential for a 50-100 year financial storm. And we wanted to be sure to survive that! We expect to make up (in a hurry!) for the low average total return on our investment portfolio over the past five years

and,  combined  with  disciplined  underwriting  results,  return  to  average  annual  growth  in  book  value  per  share of 15%.

 

In spite of poor book value growth over the past five years, the intrinsic value of our company has increased verycsignificantly even though it is not shown in the book value numbers"

 

I took that to mean they were going to take the hedges off and chase performance.  Seems like they are, at the very least, going to chase performance!  I hope they don't plan on doing that in the US equity markets.

 

I see what you mean but I think what they are saying is they expect the hedges (and deflation swaps) to work!  Every indication I have is that they are getting more bearish, not less.

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Most of those stocks are associated with a famous investor, so maybe the lesson is "don't follow a famous investor into a stock."

 

This is a lesson I've had to learn the hard way.  Fortunately I haven't been wiped out, but the results have been very sub-par. 

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Most of those stocks are associated with a famous investor, so maybe the lesson is "don't follow a famous investor into a stock."

 

I am currently reading a book called "The Art of Execution". The author managed a "best ideas" portfolio where he had several prominent investors manage a portion of the portfolio. 50% of ideas lost money. The key to successful investment wasn't the "ideas", it was execution.

 

This wasn't a scientific study, but I think the conclusions are reasonably accurate. This is why cloning can be dangerous. If you blindly follow an famous investor into an idea, you won't be able to make key execution decisions. Zinc is down 30%. Do I sell or double down? Valeant is up 120% in a year. Do I sell or buy on strength?

 

The interesting thing about the high-profile blow-ups this year is that most of the failures were execution failures:

- Pabrai made a great bet on ZINC (if he sold in 2014). Or he could have cut losses as the risk of bankruptcy became apparent

- Sequoia would have had one of the greatest investments of all time, if they had sold Valeant in August when it was clearly over-priced. Instead, Goldfarb's career is over.

- Ackman should have sold Valeant in October/November. It is very clear that he sensed the risk of a death spiral.

 

This isn't to criticize any of those investors. They simply fell prey to human biases. But stock "Ideas" are a commodity. Good execution is rare, challenging, and valuable.

 

 

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Erbey's investments OCN, ASPS. Greek banks.

 

Yes. One of the major blowups is the Greek banks. I kept saying in the Greek banks thread that the investment made no sense, especially when compared with Bank of Cyprus, and people told me that they don't actually understand either, but they felt like Wilbur Ross and Watsa and both in Greek banks, so that must be a better vote of confidence than Bank of Cyprus, which only Ross invested but not Watsa.

 

2 years later, Greek bank investors have been wiped out by the recap. Bank of Cyprus is down 20%. We will see.

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