Self flagellation – An art worth your learning.

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It’s been said that traders rarely remember their big scores but can recall the details of their greatest defeats with alarming alacrity. Except my mate Ron, who named his yacht ‘September Wheat’. I think he moors it in Gibraltar. Bastard.

If Morpheus had walked up to me on the street and said “What if I told you you’ll own an investment that will produce free cash flow after 7 years and return more than 15x your capital in a little over a decade” I’d rightly think that he’d been hitting the crack pipe with Rob Ford. That’s assuming I’d stopped for long enough to listen to what was actually being said. Sadly enough, turns out he was speaking the truth.

Sometimes we simply don’t know the true value of opportunities that we hold in our hands. The following is a true story. It’s taken me thirteen years to be able to forensically examine the details of what I am about to tell you. More painful than an armbar in the octagon. There were many years where I couldn’t even look at the stock price of this bad boy. At times my only solace could be found in the story about the guy who threw a disk drive full of Bitcoins into the trash and never found it again. (Come on, a little Schadenfreude is good for the soul every now and then.)

It’s been a long and painful road coming to grips with this calamity.

That which hurts, teaches.

You had me at 'Radioactive Tank Busters'
You had me at ‘Radioactive Tank Busters’

Time to power up the Delorean, set the time circuits for 2003, and hope that when we hit 88 mp/h the flux capacitor is, well, fluxing. Want to come for a ride with me? Jump in, sit down and shut up. I intend to beat the crap out of my younger self with a very big stick. At the very least it will be entertaining. Who knows, you just might learn a thing or two.

What can you remember about ’03?

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  • George W Bush was the prez, Belgium legally recognized same-sex marriage (pioneers!) and the Concorde made its last commercial flight.
  • Jack Black nailed it in ‘School of Rock’ and 50 Cent had a few bucks to his name.

  • On the sports field the New Jersey Devils won the Stanley Cup, Tampa Bay Buccaneers took the Super Bowl and the Marlins upset the Yankees to win the World Series. (I don’t care much for basketball, sorry.)
  • The appropriately named Chris Moneymaker flopped two pair in the final hand and felted Sammy Farha to take down the WSOP and collect a fat stack of Benjis.
  • In case you were wondering, spot gold was trading in the low 400s. That ties in quite nicely with the point I’m trying to make in this article.

On a personal note, I was in my early 30’s and at or near my financial zenith. Pulling down a six-figure salary during the week still left me plenty of time to flip real estate on the side. Having just closed a sweet deal, I celebrated by firing up a Cohiba and knocking the top off another bottle of Penfolds Grange.

A nice drop .. if you have the means, I highly recommend it.
A nice drop .. if you have the means, I highly recommend it.

Then the phone rang. As luck had it, my broker at the time was handling the IPO of a music and electronics retailer- JB Hi Fi (AX.JBH). Did I want any, he asked? “Sure”, I said, and promptly pulled a crisp forty thousand dollar note out of my wallet.

With the IPO price set at a buck eighty, a few days later I was the proud owner of 22,857 shares that were set to list on the ASX the following week. I was nervously nursing two phones and a stiff single malt in the moments before the shares ‘came on’ with an opening price of $2.20 flashing across my screen. Having instructed my broker to sell on the open, I opted to take the stag profit which came out to just over 9 grand. Easy money. As close to risk free as you can get. High fives all around. It was a nice profit that paid for a six week European vacation with wife 1.0.

“Hang on a minute Amos. That isn’t even a losing trade!”. Yeah I hear you, but before you say anything else just take a look at the chart. Look what time has magically accomplished, turning this grain of sand into a pearl. Even during the nadir of the GFC this puppy didn’t stick it’s nose below 8 bucks.

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What I failed to see, of course, was how I had made some luck for myself. I was in the right place at the right time. The right broker. A decent chunk of change at hand when it was needed. This was a company that I knew. I shopped there every weekend. The stores were quirky and different from the competition, and always packed with punters lining up at the registers. Speaks volumes – but I wasn’t listening.

Blinded by the quick bucks, I couldn’t see the forest for the trees.

Back to the future

When did you last check the brakes?
When did you last check the brakes?

Time to pile back in the Delorean and fast forward to twenty sixteen. I trust you didn’t disturb the fabric of time in any way. Like Emit did when he married that chick in 1885 and had a couple of kids with her.

Today JBH released their latest profit results. A beneficiary of the corporate pillaging of Dick Smith Electronics at the hands of private equity, it’s been a good 6 months for them. Pick your superlative, the stock up 8% tells you all you need to know. Tell ’em the price, son. Last trade was $29.75. I got them for $1.80. The folks I sold them to in those first flurries of trades paid $2.20. At just under thirty bucks that’s a 16 bagger. Imagine how good that 679,000 dollars would look in my brokerage account. That’s real money. Life changing money. FU money. I would finally be able to get that Wu-Tang Clan neck tattoo.

But it ain’t mine because I blew my wad too early. Couldn’t wait to cash in those chips. A story that, looking back, was repeated time and time again without learning from my mistakes. You never go broke taking a profit, right? Bullshit! That’s exactly how professionals in the financial arena tend to go broke. You’ll never make a big profit by taking a small one. Never.

It doesn’t stop there. JBH have paid dividends every year since listing, starting pretty much from the get-go. Initially the amounts were minuscule, just over 6 cents a year. As the profits grew, however, so did the dividends. To date they have paid out a total of $6.20 in dividends. That would have been another $140K in my pocket. Had I stayed the course I would have received my initial investment back in 7.5 years. A rough calculation using the ‘Rule of 72’ yields a back of the envelope return of around 10% per annum. Pretty decent.

Opportunities like this don’t come along too often. Half the battle is recognizing them, the other half is acting on them. All that’s left to do then is stay the course. That, by far, is the hardest part. As they say, no place worth going is ever easy.

Here’s the takeaway, kids.

Making the big money takes time. That’s one of the hardest lessons to learn with investing.

It’s difficult to practice patience and delayed gratification. They are skills which, when applied to investing, make a huge difference to the final outcome.

The older you get, the less time you have. The less time you have the fewer opportunites will come your way. You’ll likely have more responsibilities and want to take less risk with the money that you are able to put into the market.

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You don’t want to end up on the wrong side of forty with your bank balance resembling the GDP of South Sudan, spending your days watching endless repeats of Pacino’s speech from “Any Given Sunday”.

What’s the answer? Learn to ride a trend. If something’s going your way, let it ride. Better still, try and forget you even own it. Stop looking at it every day – take a weekly market reading instead. Make a trading rule that Mr T has to sign off on any ‘sell order’ before it can be placed in the market.

If you find a reason to sell an appreciating asset, make sure it’s a good one. Like the story of why you invested has changed – not any of the ‘I need the money for ..’ variety. I’ll make an exception if a close family member needs an organ transplant.

Listen to your gut, but don’t fool yourself. Give time a chance to work it’s magic. Then come back and tell me that you took some solid coin out of the market. I will be the first to applaud you, I promise.

I wish you every success in mastering these dark arts. Bonne chance à tous.

PS: I got the ball rolling. Let’s keep the conversation going. Feel free to ‘share’ with the group and tell us about your market battles. It’s OK, you’re amongst friends.

–// Craig Amos

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