Investing is Hard

Ian Cassel Blog, Educational 5 Comments

On June 30th 1997, Amazon.com (AMZN) was trading at a split adjusted $1.50 per share and was valued at $700 million. That day the stock traded 228,900 shares in a range of $1.48 – $1.59. I’m sure someone traded in and out of a great business that day, not knowing that the stock was about to go up 1,000x.

Bernard Baruch once said, “Nobody ever lost money taking a profit.” I don’t know about that. Investing is hard.

On August 5th 2015, Valeant Pharmaceuticals (VRX) hit $262 per share and was valued at $85 billion. I’m sure someone that day thought they were buying a great business that could be held for the long-term.

Some of the smartest investors in the world were in Valeant. Investing is hard.

On April 1st 1976, Steve Jobs, Steve Wozniak, and Ronald Wayne founded Apple. Wayne drew the first Apple logo, wrote the three men’s original partnership agreement, and wrote the Apple 1 manual. Jobs and Wozniak each owned 45% and Wayne 10%. Two weeks later, he sold his 10% interest for $800. This 10% interest would be worth $90 billion today. He was closer than anyone to the visionaries of Apple, and he still sold.

It doesn’t matter how close you are to a story. Investing is hard.

In 1963, American’s smoked so many cigarettes that it was equivalent to every adult in the United States smoking over half a pack a day. 43% of American adults were active smokers. By 2014, this number dropped to 18%. Morgan Housel said it best:

Sometimes the facts mislead us. Investing is hard.

In the mid-1990’s, Masayoshi Son, founder of Softbank, set up Softbank Technology Ventures and invested heavily in internet companies. Over a three year period he invested over $2 billion across 100 internet companies. It was estimated that Softbank owned roughly 10% of the publicly traded value of all internet companies in 2000.

But when the technology bubble burst in 2001, Softbank lost 99% of its value from its peak. Masayoshi Son himself lost more money than any other person in history, his net worth declined from $76 billion to $1 billion in three years.

In 1999, Masayoshi Son and Softbank made a $20 million investment in Alibaba. This investment is considered today to be the most successful investment ever in the history of mankind. Softbank’s 30% ownership position is worth $130 billion, or a 6500x return.

Softbank’s ownership interest in Alibaba is worth more than the market cap of Softbank (high debt). Masayoshi Son made over a hundred investments, almost went bankrupt, but a few investments saved him. Investing is hard.

In 2007, Patrick Industries (PATK) issued senior subordinate notes to Tontine Capital for $14 million in cash. Tontine also purchased 980,000 shares of Patrick Industries in a private placement at $11.25 per share. This capital was used to complete an acquisition.

Patrick Industries manufactures and supplies building products to the Recreational Vehicle (RV), Manufactured Home (MH), and Industrial markets. The majority of their business is manufacturing pre-finished wall and ceiling panels, cabinet doors, cabinet components, fiber reinforced products, cement siding, interior passage doors, furniture, roofing products, lighting, flooring, electrical, wiring, plumbing, and other products to these markets. In other words, most of the stuff that goes inside an RV or manufactured home, Patrick Industries manufactures.

When Tontine Capital provided the capital in 2007 they had no idea the financial crisis was about to punch them square in the jaw. Patrick Industries business was severely impacted. In March 2008, Tontine purchased another 1.1 million shares at $7.00 per share. In May 2008, they purchased 1.7 million shares in a rights offering.

By the time Todd Cleveland took over as CEO on February 1, 2009, Tontine owned 5.1 million shares or 57% of the company. The stock collapsed to under $1 per share.

Patrick Industries was a $5 million market cap company. You couldn’t give the stock away. No one was buying RV’s during a financial crisis. Even Tontine filed a 13D stating they were looking to explore alternatives to dispose of their shares.

No one would have been surprised if Patrick Industries would have ended in bankruptcy. But it didn’t end that way. Todd Cleveland turned things around.

Patrick Industries is up over 26,000% since Cleveland became CEO. In fact, the company is the best performing stock in North America since 2009.

I estimate that Tontine Capital has taken over $200 million off the table. Source: RocketFinancial.com

Think about that. Their original investment in 2007 was down 95% by 2009. They averaged down. Since then, they’ve recouped ~10x their money, and they are still long 5% of the company. This wasn’t some private equity firm making up some valuation, “mark to make believe”, on a private business. Tontine saw the real-time market price every day. They lived through the rollercoaster.

Investing is hard.

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Comments 5

  1. Great article Ian. I especially appreciated the part about how Ronald Wayne sold his 10% interest in Apple for $800, and ” He was closer than anyone to the visionaries of Apple, and he still sold.” I imagine Jobs made him uneasy.

    For me, investing is about probabilities. Probabilities implies that a percentage of investments will result in failure. What I appreciate about your piece is that it is centered around that notion unlike most of which is written about investing, which presents black and white, hard and fast “facts” (actually conjecture) in a very uncertain game.

    Just finished Edward Thorp’s book “A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market.” He is an expert in probability theory, and thus worth reading I think, although both the beginning of the book and the end explore unrelated and not particularly interesting stuff.

  2. Brilliant article but then they always are on one of the best sites for investors out there.

    Thank you.

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