Frankie's misadventure

Frank wrote:

Here's the thing small investors have to remember. Quite often the market gets it TOTALLY wrong. There is a herd like mentality amongst investors and stock analysts that is quite extraordinary to behold. Now, of course, it does help if you understand what you are doing, but quite often all it takes is common sense to work things out.

Currently I am holding a stock, which I bought 9 months ago. I should mention that before I buy any stock I do a rigorous analysis of what I'm buying. I will not buy a pig in a poke. And I loved Decker Outdoor at $90. I'm the kind of guy that will crawl in and around the financial statements and examine a company from every conceivable perspective. They are the company that make the UGG boots that women love. Now the thing about DECK is that its a simple company with a simple business which is easy to understand. They make boots and foot-ware and have acquired a bunch of companies that sell niche footware such as sports shoes etc. But UGG is its major brand. At the moment its responsible for 87% of the company's revenues.

So you can understand my astonishment as I watched the stock plummet by some 60% over the past year. On closer examination it appears that investors (particularly analysts) are freaking out because DECKs inventories have increased substantially over previous years. Moreover, sales have slowed and input cost have risen dramatically. Because of a combination of factors, its been a Frankenstorm of a year for DECK. DECK's had its worst year in a decade. But as bad as its been, the company hasn't actually lost money. Just that this years earnings haven't been as robust as prior years.

What amazes me is that so called "sophisticated" analysts are running around like Chicken Little saying, "the sky's falling in, the sky's falling in". Analysts have been writing all sorts of nonsense that makes me wonder how they got their job in the first place. Amazingly it appears that many analysts don't have a clue how real businesses operate. I'm not going to get into the details here because you can read up on the stock on seeking alpha for yourself.

Suffice it to say, you have to take a lot of what these people say with a huge pinch of salt. So what have I been doing? I've been buying the stock all the way down.

You have to realize that just because a stock is declining is not necessarily a bad thing. The most fundamental lesson that Buffet teaches investors is that the cheaper you buy a stock the greater your return will ultimately be. I initially bought DECK at $90. Currently it is trading at under $30. Of course, I would love to have been able to look into the future and known that I could purchase the stock at under $30 just 9 months later. But that just isn't reality in the stock market. What I can do as an investor is average my price down. And that's precisely what I've done and what I will keep on doing. The lower it goes the more I will buy. Because I've examined the company very thoroughly. Ultimately I know I am going to do very well thank you very much. Because I'm not interested in buying the stock for a quick flip of 100% or 200%. I'm in it for the long haul. Over the long haul I expect DECK to increase by many multiples of my original cost. And the lower I can get my price down the greater my ultimate return will be. And sooner or later the company is its going to pay me dividends which will also increase over time.

Life's good if you're an investor. You can take advantage of other peoples stupidity. But one thing you will learn is not to take too seriously everybody else's opinion. In many respects its totally irrelevant. 

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My reply:

Hi Frank, thanks for sharing your experience. A bad one could be more important than a good one for us to learn and avoid similar problem. I will save it in my blog for future reference. Let me add my two cents and please argue whether they're valid. This is one way to learn.

* I had a similar experience with CROX. It was manipulated by shorters, It is similar here as your DECK has almost 40% (short interest as a % of outstanding sharing from Fidelity).

It is being manipulated by large hedge funds and retail investors could not be the leader of the herd. I doubled down on CROX and it lost another 25% and finally on the last double down that made more than 100%. However, the whole deal is a losing one.

* I advise not to place extra bet on a losing stock. However there are exceptions. Let's take a look.

- The P/E is 7. Quite good. However, I have not checked the expected P/E and I bet it will not be as good.

- Can it recover? Most likely so. Their main problem was due to the warm weather last year. Most likely it will not repeat unless we've a prolong global warming.

Unlike the ugly but indestructible shoes by Crox, it needs replacement every few years - a good point for DECK. It is a high-end product and you need a good economy to support it - a negative point for DECK.

- With this low price, potential to appreciate... I placed some buy orders. I put money where my mouth is.

* At one time, we said 'Crox is no Deck', and now we say 'Deck is no Crox'. The point is the stock and market changes and we have to adjust to it.

* I prefer to 'buy low and sell high' than 'buy high and sell higher'. Deck and Crox are good examples.

* Diversification should be emphasized again. If you have 20 stocks instead of 1, you still have a good sleep even losing 60% of one stock.

Hope it turns out good for you.