Mea Culpa

I’ve been meaning to write this for awhile, but I think now is a good time to write this.

I have been very wrong the past year. I’ve been wrong on specific stocks and the direction of the market. I’ve lost my investors and others lots of money despite my hard work and research. After 10 years of never having a down year, I was crushed last year. I apologize if you listened to my advice or stock research and lost money. However, you should always do your own research and never rely upon someone’s advice without doing your own due diligence.

So with that being said, what have I learned and gleaned from the past 12 months?

1) Financial meltdowns crush microcap valuations no matter what the fundamentals are.

Two holdings of mine are of public record as I own more than 5% of each through my firm. Those two positions have both continued to grow are both profitable, where they were losing money in the past and have bright futures with a lot less risk than when I found them 2-3 years ago. Yet, both have lost more than half their values. Why?

Liquidity evaporated and many colleagues and fund managers had to go out of business, were fired or lost their clients and assets they managed. There is significantly less money floating in the microcap and small cap space than there was 12-18 months ago. So, when the selling came and crushed these stocks, there has been little rebound or buyers to cushion the fall. These stocks have started to form a bottom, but a substantial recovery has yet to happen. It is starting to happen, but it may take time. Liquidity is a risk and a valuation discount should be applied to any microcap position. I plan to incorporate this into my analysis in the future.

2) I did not assess the risks to some of my positions well enough

On at least one position, I did not appreciate how the psychology of the economic collapse would affect this traditionally non-correlated part of the economy. Further, this position did not have as robust a distribution network as competitors and was directly exposed to a fall-off in orders.

In the future, I plan to do a lot better job of focusing and highlighting the risks in any position I buy or recommend.

3) I did not fully appreciate the severity of the crisis in October

I had a naive approach and thought that this would be a bad recession, but it wouldn’t be a depression. I did not pay attention to how bad things were and how severe the situation was. More importantly, I tried to call the market bottom instead of managing risk and focusing on individual positions. Anytime I have done this in the past I have lost money. The fall of 2008 was no different.

4) Relative valuation does not help when everything is plummeting

A few positions were “value” because of relative valuation. The problem with this approach is that if the comparisons to your investment start collapsing, there goes your “value.” Relative valuation should be used but only in concert with other valuation metrics proved throughout time, such as low price to book, low price to earnings, etc.

5) Research Recommendations Need Less Enthusiasm and More Negatives

I get very excited about many things. Great food, friends, music, stocks, etc. I need to make sure that people understand that my enthusiasm for things is not hype or pump and dump activity, but just my regular way of expressing things. In the future, I plan to add a lot more caveats for downside, negativity and pitfalls in future recommendations in any report.

Those are just some of what I’ve learned in the past year and I have a few more that I’m ruminating on. I’m really thankful for my wonderful clients who continue to support me despite last year’s debacle. I’m glad that I know each of them and that they know me and how I think. And I’m really glad about my long term performance, which despite last year’s performance is still excellent.

I will make mistakes in the future and I will learn from this and I hope to become a better investor in the future.