Ever hear someone say their worst mistake was selling a stock and then it went up tenfold? Harvey Migotti, Portfolio Manager of the Forager International Shares Fund, and Steve Johnson, Chief Investment Officer, flag the psychological barrier that’s an even bigger mistake. Not recognising re-entry points along the way and being willing to pay a higher price than you originally paid might be more ego than sense. Energy drink Celsius (Nasdaq: CELH) returned to the International portfolio after a substantial pull back in share price. Harvey and Steve talk through the valuation process and considerations as to why they bought back in.
Hi, it’s Harvey Migotti here from the Forger International Fund here with Steve, who you all know very well by now. We’re here to talk about recycling ideas and how important valuation is to us at Forager.
We talked about one of these in our last monthly report in terms of Celsius. We actually had a bit of grief from a couple of investors who really liked the stock story there when we sold it at 70 or 80, but it’s been a perfect case study of what you’re talking about here that very, very often in investment markets, you get the opportunity to recycle ideas.
It’s all about overshooting and undershooting. That’s what the markets do all the time and stocks do it, and especially in volatile environments such as this. What we saw is the stock ran ahead of itself we thought relative to where the growth was and what the data points were we’re seeing. So we got out of the position. Low and behold, you’ve got a bit of a wobble, a lot of the growth things sold down and all of a sudden the stock that were selling at 70, 75 came back to 50.
That’s the perfect bucket and they’re often the easy one for value investors that you sold it at a high price, and you get a chance to buy again at a low price.
I think the mistake a lot of people make in that bucket is waiting. I bought it at 10, in this case we bought it for less than 10, it ended up going to 80 and people sit there and think, oh, I’ll buy it if it gets back to 15 and you never actually get there. And I think one, one thing you’ve done very well over the past year for us is re-entering these investments sometimes in a small way but after that initial fall.
I think not just buying back when something’s cheaper, but it’s also important if you know a company well and you have that discipline and you have a thesis around, we’ll make this appreciate 100%, 200% from now, and that thesis starts to come into place and the riskiness of the investment goes down. You’re willing to pay a higher price for that. It’s just obvious because the discount rate you should be using is lower. I think it’s important to do that as well. I can’t imagine how many people have owned Google at some point over their careers over the last 20 years and then sold out.
The right thing was at various points, buying it back, and people just seem to not do it because they’re sometimes stubborn and we are too, obviously, but we’re trying not to be.
I think Daniel Kahneman in ‘Thinking fast and slow’ would call this anchoring. You’ve seen a price and you’ve got that price in your head and you’re not updating the information that you’re seeing.
And I personally find that second bucket of the price hasn’t fallen, it may have even gone up from the point where I was selling the stock and I’m changing my mind here and saying, you know what? I made a mistake and I’m going to buy it, even though the price has gone up because I think the probabilities have changed. I would say Celsius is a good example of something that we maybe put a 10% chance of this being the next Monster into our initial valuation of the business. That probability has quite clearly changed. It’s already the next Red Bull on Amazon. If you look at the statistics, they’re the second biggest energy drink company on Amazon, which if you think about it, is an open playing field.
As you get to distribution across the rest of the channels, like convenience stores, there’s no doubt that this company is going to continue to grow for a number of years. It was a great time to buy it back and we’re thankful for the market to give us these opportunities.
I see a lot of people when they talk about their worst mistakes, they sold stock XYZ it at such and such a price, and it went up 10 fold and okay, maybe selling the stock was a mistake, but I think the bigger mistake was not recognizing those re-entry points along the way and being willing to pay higher, but it’s something I’ve seen you be very, very good at it. Have you got any tools or tricks that you use to help you overcome those psychological difficulties?
It feels like it’s as much an art as a science, so there are no tools per se. I’m firmly grounded in valuation and data points and if the data points get better than I expected or the price goes down and it’s just a confluence of all of these various factors and I happen to be looking at it. Then you get to pull the trigger. Obviously you can’t be looking at everything all at once. And we’re looking at a lot of ideas all the time here at Forager and a lot of new stock ideas. So it’s difficult to keep track of everything and all the various data points and so forth.
But I think it’s just not letting your ego or the fact that you did X get in the way of doing Y which is the right thing at that point in time.
‘I was wrong’, some of the most important words in investing and change your mind and get on with it.
And learning, I think that’s also an important factor.
Performance report coming up for 30 June. You’ll see plenty of these stocks in that and a few of these examples, I think of us reentering stocks, where we either got the decision to sell wrong, or we’ve got another great entry point along the way. Thanks for tuning in.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.