Yesterday, I sold two of my positions completely – BABA and AAP. I had been thinking about liquidating BABA for a long time, but AAP had just come up on my radar. It is important to make these decisions with the least emotion possible. Optimally, making the decision with no emotion is best, but I’m not Spock. Once the decision is made, you have got to just do it. Charlie Munger calls it “thumb sucking” when the damage is done, but people HOPE the outcome will get better and stall. Bad idea!
Having a solid and well-reasoned purpose for selling is critical in the sales process. Evaluating the sale based upon that information is essential. Personal reflection on the process of owning the security and understanding where decisions were made that didn’t pan out are also important to re-evaluate. In other words, what lessons were learned? This is key to improving the purchase and sales process for future stock positions to be taken.
I am a fundamentalist and contrarian by nature. When I looked at BABA originally, their metrics looked great. Where I mis assessed BABA was the degree of government intervention in their business. When investing internationally, it is critical to have the right political, cultural, accounting, and legal support. This is especially so when relying on the fundamental metrics since they mean nothing if other factors totally override them.
AAP was different. I held them for 15 years and they provided a very small and steady dividend for a long time. In the last several years, they increased the dividend significantly. I was happy about that aspect but didn’t dig into the ramifications. Although I track their payout ratio, I failed to look at a quickly rising ratio that was eating all their free cash flow. Sometimes the answer is right in front of us.
With AAP, I determined that I need to pay closer attention to the balance sheet and cash flow statement on a quarterly basis. Previously, I was focusing more on the income statement during the quarters and reviewing the balance sheet more closely annually. From their 2022 year end to their first quarter of 2023, CFO went significantly negative, LTD increased by a large amount without any acquisitions, accounts payable was paid down by a significant amount and inventory continued its excessive growth. Days in inventory had been growing for a number of quarters, but I failed to track it.
So with this information in mind, I will adjust my future analytical approach. Everyone makes a lot of errors in the investing business (Although few will admit to it!). Some people ignore their errors and consequently, never improve, but my objective is to ALWAYS improve and avoid “thumb sucking”!
Be smart, be well-read, be aware and be successful.
It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.
Charlie Munger
