I have a Dust Bin watchlist. It’s a hodgepodge of companies I have looked at and passed on for one reason or the other. Mainly, I didn’t like the business model, the people running it or the competitive environment. I maintain it because I want to see where I am wrong, understand why I was wrong and see if I can figure out how to fix it when I look at companies in the future.
My first lesson is from Tucows (TCX). They run a few different business lines, none of which have any real competitive advantages. They buy domains from Verisign and sell the to the retail, a simple spread business, the most famous and big competitor in this space is Go Daddy. Second, they have a mobile post-paid service, which is effectively a spread business, buying mobile “minutes” wholesale and selling them retail. They compete here with Verizon, T-Mobile, AT&T, etc. Finally, they have recently started a fiber-optic internet business, putting last mile internet in household in specific geographic regions. They are basically David (vs. Goliath) in each of these businesses. It’s one thing to be David once, but to keeping starting businesses where you start off with just a slingshot and some rocks?
The company is well-known to the value investor community. Write-ups about this company and its CEO, Elliot Noss have been passed around since the stock was under $1 in 2011. The stock is around $59 today (don’t do the math here, it’s too painful). The lesson I have learned from this company is how impactful the culture of the company can be to its success. Noss built each of the business lines on the company’s unique approach to its customers. Each business unit did well because the teams knew they had to serve the customers better than their well-known competitors. This is a funny commercial that represents their approach to customer service (here). These things don’t show up in the numbers and the inability to theoretically understand how a company’s culture can impact its competitive advantage is something I am learning. The opportunity cost on TCX was an expensive lesson.
Another great lesson (and this is the main focus of the post) is how much a stock can fluctuate over the course of 1 day to 2 years after it goes on my list. The famous line, “In the short term, the market is a voting machine, but over the long-term the market is a weighing machine” rings completely true when you follow companies from a distance over a long period of time. I mention 2 years because eventually rationality does seem to kick in, but it can take quite some time, on both the undervaluation and overvaluation side.
This presents a few very important lessons. I have been waiting for the right example to highlight this situation and I think this past month presented a good one.
I have written about this company before, Altisource, (ASPS). ASPS is a mortgage servicing platform, mainly for a related company called Ocwen. I follow ASPS because I want to see how it turns out. My initial thesis on ASPS boiled down to the idea that ASPS was extremely reliant on Ocwen’s for its source of revenue and profits and all attempts to diversify away had been failures. Furthermore, ASPS has a checkered ethical past with a practice called Lender-Placed Insurance. ASPS agreed to discontinue this practice, but its initial business model derived significant profits from this practice. This practice reminded me of the idea that “there is never just one cockroach in the kitchen…he has friends.”
And here is the buried lead: Over the past month, ASPS’s stock had climbed from around $22 per share to over $45. The stock was at $22 after earnings (a 52-week low), which it hit shortly after the latest results showed continued run-off from Ocwen and an inability to profitably grow elsewhere. If you look back at the Slack channel #asps, Amir pointed out this situation very early on. The stock went from $22 to $45 per share in about 45 days. The technical reason for this is the shareholder base is very concentrated among a few holders and I believe one shareholder pushed openly (he even wrote an article about it on Seeking Alpha) and encouraged these shareholders to remove their shares from the lending pool, forcing “shorts” to cover, i.e. buy back the borrowed shares. This caused a temporary short squeeze (45-day short squeeze is actually pretty long) in the stock, but eventually ended when the CFPB and 20 states filed a lawsuit against Ocwen detailing some misdeeds. ASPS’s stock is back under $22, talk about a round-trip.
I wanted to highlight this situation for two reasons. First, I firmly believe you will do better with your investments over the long-term by focusing on the underlying businesses of your investments and ignore the “stock market analysis” that is associated with short-term movements in the stock prices. This “short squeeze” may have made some people a few quick bucks, but over the long-term, I do not think it is a winning strategy (ASPS’s stock fell 40% in a matter of minutes, so unless you were staring at your screen when this happened, you probably lost almost all the money you “made” as the stock went up). This is the perfect example of where it pays to be a “business analyst” instead of a “stock market analyst.”
Second, the problem with the gyrations in the stock market is that you can sometimes make money on these gyrations. Yes, you read that correctly, this is a problem. The problem here is that it is very hard to see that you were wrong if you ended up making so much money. One of my favorite investors had a slide in his investor deck that discussed the business performance of his investments even after he had sold them. His measurement for success wasn’t whether he had adeptly “traded” a position, but instead whether he had bought good businesses that grew in value over the years.
Trading is one game, but it’s not a game that I think anyone can win over the long-term. However, I do think that you can patiently wait for great companies at reasonable prices and grow wealth over a long-term over time with very low risk. I don’t want to be right for the wrong reasons. ASPS is a great example of being right (making money) for the wrong reasons. I call this the roller-coaster version of investing, always trying to buy at the bottom of the ride and selling near the top. Everyone knows you will end up at the bottom again, so buying and selling have to be timed well. That’s just too hard for me. I prefer the mountain climbing version of investing, where it is a continual and slow climb to the top of a peak (and I assume you camp there for the rest of your life to make my metaphor make sense?).