I was supposed to be studying for Criminal Law. It was a tough class. I had all the intentions of studying when I walked over to the law school that evening. Instead Fooling Some of the People All of the Time by David Einhorn looked so interesting. It was investigative work, finance, and good storytelling all wrapped up in one. I didn’t crack the Crim Law book that night.
Einhorn’s book is fascinating. It was one of the first books I read about investing. But you have to kill your investing gurus at some point.
A few months back I wrote about Conn’s. Their stock fell over 40% this week. I discussed how the fictional character Wimpy was similar to Conn’s customers, always agreeing to pay for their goods the next Tuesday. Cash flow was/is something lacking at the company. Cash flow continues to escape them, despite increasing sales. Sales growth can always be achieved by “selling” goods at higher prices. Wimpy is willing to pay any price for a hamburger if he doesn’t have to pay until the next time he visits (wink, wink). Borrow, The History of American Debt, is a great historical read on consumer-facing retail companies and how they use debt to boost their sales. Spoiler: It doesn’t end well.
Back to Conn’s. Conn’s provides a great lesson on the following two points.
1. Following 13Fs.
2. Tracking Insider Purchases.
Following 13Fs. Einhorn invested heavily in Conn’s, purchasing roughly 10% of the company at an average price of roughly $35. The current stock price is around $18, so down almost 50%. A lot of investors track 13Fs, which are filings made by large investors with over $100m in assets disclosing their positions every quarter. Despite enjoying Einhorn’s book, I truly disagree with looking for ideas in 13Fs. It is a shortcut that short-circuits the thinking process. Akin to copying off your neighbor’s test and then making up your work product to get the answer you copied.
Insider Purchases: I previously discussed that insider purchases can sometimes be suspect. People ascribe a lot of weight to insider purchases. The oft-repeated phrase: “There are a variety of reasons for executives to sell (buying a home, building a yacht, divorce), but only one reason to buy.” This is another shortcut that does a disservice to building out an investment case for yourself.
Insiders have purchased quite a bit of stock at Conn’s, ranging in price from $28-$32 per share. These purchases are significantly underwater now. In the long-run, they may turn out to be shrewd purchases, but I have my doubts.
The key takeaway from Conn’s for me is to do your own work. There are a variety of shortcuts out there, 13Fs, insider purchases, but nothing beats doing your own work. I would much rather be wrong with my own work than realize my neighbor made an error in thought that I mindlessly copied.