You know what’s easy to do? Talk about an undervalued stock, see it run up, and then write an article gloating about what an investment genius you are (no, that link is not the best example of me gloating… only the most recent).
What’s really difficult is to write up a stock and then see it crash and burn. It’s so easy just to never mention it again. It’s actually humiliating to write about a stock that’s gone the wrong way. And it hurts to know readers may have bought based on my thoughts or positive opinions (though I stress, as always, to do your own research).
So, with all that in mind, let’s go through two of my most recent failures.
The first is a position I still hold, though in a very small amount: First Bank of Delaware (FBOD). As I mentioned in my last post, FBOD is the biggest loss I’ve ever taken… and since I wrote it up, the losses on my remaining position have only gotten bigger. The share price has basically dropped like a rock; going from ~$1.80 per share to barely over $1.00
Let’s start with what’s changed since then, and then go into the lessons I’ve learned.
What’s changed is the company put out a proxy statement for shareholders to authorize their liquidation. I’ll let you leaf through it yourself, but here’s a spoiler alert: you’re going to have to look hard to find anything positive in there!
What I’ve learned is that liquidations are tough. I always knew that FBOD had hair on it… that’s why I had avoided investing in it in the first place. But I thought that selling their assets meant that they would be able to put their problems behind them and realize some serious value.
But those problems didn’t magically go away, and the liquidation costs are running much higher than I thought.
And thus, a new rule for me: liquidations are always going to be worse than you think. Until the liquidation is literally on the verge of occurring (business sold, final distribution announced, etc.)…. beware the liquidation.
As far as how it goes from here… personally, I wouldn’t want to put new money into FBOD. I’m holding on to my position, mainly because it’s small and I guess I’m “committed” at this point, but I think there’s so much hair here that the risk of permanent loss is quite high. Even without that, I think the amount of time it will take to get the distribution presents for a very modest IRR, which is not what I’d want in something with this much hair.
(that said, I’ve had several commentators who are much smarter than I who believe the proxy is much too negative and that shares have a good deal of upside with basically no down side short of an absolute worst case scenario).
My second big mistake was Gametech (GMTCQ). I thought that there was significant upside to be had given even a small increase in bid level at their auction would result in a big return to equity due to the company’s leverage.
Unfortunately, you need competing bids to have an auction, and Gametech couldn’t find any!
The lesson here?
Well, 1) you should follow me on twitter. I tweeted last week that I was selling my shares in Gametech, as I didn’t think the risk / reward was worth it given the strong run up in price before auction results were announced.
More seriously, there are two lessons.
1) Investing in bankruptcies is risky. While it’s a great place to earn strong risk adjusted returns, it’s also a great place to earn quick impairments of your capital if you’re off on your analysis.
2) Doing some scuttlebutt when making these investments can pay off big time. Several people who I exchange ideas with told me they had talked to various people in the industry who didn’t expect anyone to bid for the company (despite what I thought was a pretty compelling case for others to bid on it!).
So, that’s it for fessing up to my most recent sins. I’m sure there will be plenty more, but hopefully there will continue to be more good stocks and strong returners!
Disclosure: Long FBOD
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