Tracking past failuires

Investment Learning
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We all come across articles everyday, that eloquently convinces us to buy something. The good and the bad are both laid out very simply, by a sound investment manager, who has been in business for decades. Most importantly, he helps you see why it’s contrarian, and why the market is discarding it.

Sometimes it pays to look back, on the catastrophic failed picks, that seemed super convincing. One such is this, talk by Rick Rule: https://www.youtube.com/watch?v=acgLx37SbwM

He outlines, several investments, in the best way that can appeal to a value investor. Turns out, ALL of the 8 picks were failures. Not just by a little bit, but a dollar became 30 cents on this contrarian basket.

Apart from the great commodity bust (and that all stocks are commodity stocks), I wonder what else we could learn here. What would I have seen at the time of the investment, (which btw, was already a commodities bear market, buying them at > 70% off.), had I done the work. It’s easy to just say, well don’t buy commodity stocks, but I want to learn a bit more than that.

When I encounter something like this, it usually convinces one to pause all investments, before you post-mortem the smart stock picker, who was just completely killed, and learn as much as you can. Obviously he was being a good salesman, but it was quite enticing… :slight_smile:

This requires some deep work, and it’s in my TODO list, but thought of sharing it more widely.

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For the success of a company, very broadly, 2 things matter -

  1. The environment the industry it operates in
  2. The company itself - the board, management, talented employees and how they respond to suppliers, customers etc.

(1) is a necessary condition and not completely in a company’s control
(2) is sufficient

Short version – in commodities (and other highly regulated industries), (1) affects success way more than (2)

Long version –

Heroes are made in (2) and therefore the media/folk looking to pitch stocks tend to focus on (2). Also, it’s human to attribute success to factors you control and failures to factors you don’t. Hence, we don’t give (1) the attention or the credit it deserves.

Silicon Valley did not spawn success stories simply because it was filled with bright people (2) but because Internet was largely unregulated (1).

Many like to think Google succeeded because their search was technically better (2). That’s only partially true. In 1999, you could access their product simply by typing a url on any browser – open environment (1). If that didn’t exist, (2) would be very difficult. Case in point is how much Google is struggling to make their search relevant in smartphones where the environment (1) is not as open to search engines.

Amazon didn’t succeed simply because they were customer centric (2), but because they had the whole infrastructure of payments, UPS and Internet (1) that they could ride on. In fact, Bezos is one of those few individuals who himself elaborates on this here (see minutes 45 to 47 where he explains the motivation behind his space program) instead of thumping his chest like others

How does this apply to Rick’s picks? All his picks are in the commodity space where (1) matters way more than (2) for the success of your company. So, basing your thesis mostly on (2) – the entrepreneur is very experienced, the IRR > 30% is irrelevant. For these extremely complicated long term project to succeed so many things in (1) need to go well together – favorable and ethical political regime, no sudden discovery elsewhere, demand to exist 5 – 10 years down the line for that commodity etc.

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Mentioned below are my list of failures / mistakes in my 2.5 years of investing.

Thirumalai chemicals - became 10x on initial investment in 2.5 years - only if i had read the book “One Up on Wall Street”, I would not have sold.
Lessons learned - patience, in turnarounds low margin is good, even slight improvement in margin gives huge return

Piramal Enterprises - became 3x on initial investment in in 2.5 years - Sold the shares and was trying to catch the bottom price when market was falling. I could never buy it back again.
Lessons learned - never sell compounding machines even if they are overvalued (unless extremely overvalued - 50-60-100 PE multiples). Piramal Enterprises has compounded money at 29% for 29 years. It is still growing at 25% plus. Ajay Piramal is billionaire and shareholder of Warren Buffet’s company - Berkshire

Transport Corporation of India (TCI) - became 4x on initial investment in 2.5 years. I made 2x on my investment.
Lessons learned - never sell compounding machines. TCI has compounded money at 37% for last 15-20 years

Saurashtra Cement & Shree Hari Chemicals - sold at marginal loss
Lessons Learned - Cut the weeds fast (which I did) but know the management before investing, learn human biases. Shree Hari Chemicals was available below cash per share with no debt. Crony management who wants to loot minority shareholders - Value trap (you might think its value investing). Saurashtra Cement was a mistake of deprival super reactivity syndrome when the script hit UC and I jumped into it after UC (my first stock investment).

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