Quiet Contrarian. Ep 5: Lessons from Winners

This was a harder blog post to write, turns out, when you’re right you don’t really learn much. It doesn’t matter if your decision making was good or bad, the win covers all that up and your confirmation bias gets stronger. With respect to that I will try to reflect on some of my wins, and fully describe what I was right about, and where I just got lucky. 

Webjet (WEB:ASX) – Webjet, the online travel agency. This was an interesting one, and one of my biggest successes, though some of that was definitely luck. If you look at Webjet prior to 2015, they made good profit (RoE of about 25%), and were expensive, but not unreasonably valued. They used to take a small fee for any transaction that went through their system, and the overriding feeling was one of “how can this business model survive, when there are free alternatives?”. The truth was (and still is) that people, and especially businesses, are willing to pay for the convenience of a system that works. 

I bought in mid 2015, which was actually their last year as, what I would define as, a Quality business (i.e. highly profitable, redeployed earnings giving organic growth). After that, they switched heavily to targeting the online business travel segment, and pivoted their books to a more modern Growth business model. You can see this in their Post-tax chart below (all values are per share). Before 2015, the Earnings (profit) as a proportion of their book (company) value was quite high. After 2015, the book value skyrockets, and whilst earnings are still increasing, they’re growing at a much slower pace than the book value. This marks their transition into becoming a high growth company (i.e. high book value growth, revenue and investment to speed growth). This made them much more popular, and their PE ratio expanded, and the stock price skyrocketed. 

Lessons Learned:

• Be willing to let your winners run, but balance this with taking profit when they get too popular.
• There is no one winning business model, and different models and techniques will be more/less successful under different market conditions. Be willing to adapt and keep learning.

Integrated Research Limited (IRI:ASX) – IRI is a “sell to the winners” business. They are a provider of “Unified communications” that allows monitoring for complex multi-system companies. This seemed to be a good “sell to the winners” model, where their software was useful to big companies, and allowed them to keep running when they acquire and integrate smaller ones. 

I bought in the middle of 2018, at the time I was dabbling in a bit of Dollar Cost Averaging, but hadn’t really settled into it yet. I bought 3 stakes in IRI. 2 in the first week of June (at the height of it’s share price), and one a month later when the stock had dropped about 30% based off of a downgrade in the year’s earnings. At that point IRI was 12% of my holdings, and I was a bit worried that I had overallocated. Because of that I failed to buy in again at the final drop, when the CEO was unceremoniously removed (after being caught playing in someone else’s cookie jar), and the stock price fell another 25% or so. 

I sold out of them recently, I don’t feel like their business offering is as attractive in this post Coronavirus world, where light and adaptable seem to be the key drivers of software uptake. I don’t know if this is the right decision, and I may yet be proven wrong, but I am happy with it. 

In the end when I sold out of them I got a small amount of profit, ~8% all said and done. I could have done quite alot better if I’d managed my entrance a bit more effectively, and given things more time to play out. 

Lessons Learned:

• Be patient when getting in. DCA over time, small movements up and down shouldn’t trigger big movements in your activity. I did better entering DTL, where I bought in across 9 months rather than 1. 
• The exception to this is that you should be willing to take advantage of big changes in the stock price. If the business prospects are good, management is sound and the company is well run, then it should bounce back. These can be some of your most profitable moments. 

Buy when there’s blood in the streets, even if the blood is your own.

Baron Rothschild

Next time on the QC: EOFY Roundup