In Part 1 of this two-part series, David shares his five biggest losers. (And next week, he’ll talk about what we can learn from them.)
Rule Breaker Investing
David's Biggest Losers - Part 1
It's the Rule Breaker Investing Podcast with Motley Fool Co-Founder, David Gardner. And welcome back to Rule Breaker Investing. I'm David Gardner. What a pleasure to have you join with me this week. I've enjoyed getting some listener feedback and in fact, we're going to touch off a two week series. So part one is going to be this week and it's all touched off by a note I received from a longtime fool named Darren Hoke. Darren, who I've gotten to know a little bit via our community over the years, an absolutely wonderful fool. And Darren said, you know, David, if at all possible, it would be helpful for you to go through some of the instances where you picked a few stocks that were complete fails. Like your highly successful ones, of which Darren says he's owned many for years, and I'm glad to know that, he wrote, "It would be very educational for you to explain to us what went wrong in the business or your thesis and what you learned from it." And that's end quote, because that's exactly what Darren wrote and Darren, thank you. Let's do that. In fact, two weeks ago, I did one of my favorite podcasts ever, I think, because I got to talk about how Rule Breakers and Stock Advisor, my two services, had under-recommendation of five top performers among the Fortune 500 companies over the past 10 years. We didn't have all five for all 10 years, but we had all five, and we actually even had number six and number seven, and if you haven't listened to that, please go back and listen two weeks ago to that podcast, because I think it was a really important one. I drew five lessons from what we can learn from those companies, but it's natural if you're a long-time fool to go, "Hey, hold on, fools!" Part of what makes you guys listenable, maybe even in your own way charming, is that you talk about your losers, and that's what we fools do all the time. And indeed, from day one, when I picked my first losing stock, and Tom and I named our company, The Motley Fool, a big part of what we do is talk about the mistakes that we've made, and we are all fools, and I have more bad stock picks than anybody in Motley Fool history. As I've often said in the past, I have more bad stock picks. After all, I've now made 456 picks in Motley Fool services over more than a dozen years. I've picked 284 rulebreakers and 172 stocks for Motley Fool's stock advisor, so 456 picks I assure you, therefore, as the most prolific stock picker in Motley Fool history, I have more bad stock picks than anybody else at our company. And I also want to mention, and this is particularly apropos for our kick-off Part 1 series today. By the way, the name of the series is Losers. So welcome. We're going to be talking about Losers today. I have more bad stock picks, like really bad stock picks. The five companies I'm going to go over today all lost 90% or more for us in rulebreakers or stock advisor. So I have more bad losers, more bad losers than anyone else at our company, and I hope that's instructive. So we love talking about our winners. It's very natural for us to go back and look at which companies have multiplied over the course of time, Netflix, Priceline, companies, amazon.com that we've had long-term recommendations in because that's where all of our numbers, that's where the great performance that we've generated comes from. But the performance, anytime you ever hear Motley Fool's stock advisor or rulebreaker's performance, it's always net and inclusive of all of the bad stock picks that we make as well. And it's important to talk about those and reflect on them. So in part one, Losers this week, I'm going to talk about the five worst picks that I've ever made. And then in part two, next week, I'm going to reflect on the lessons that I think we can take away from those. So thank you, Darren Hoke, and thank you, thank you Fool's Everywhere for being willing to listen to somebody who, by the way, loses four times out of 10. So that's just how I want to kick this off. Four times out of 10, I'm going to be wrong. And when I say four times out of 10, that means my picks on average lose to the stock market averages four times out of 10. I wish it were zero times out of 10. I don't think it'll ever be much lower than four times out of 10 because the game of investing is much more, I think, about volume and making commitments and creating diverse portfolios and being willing to lose than it will ever be about highly focused and don't make any mistakes. Everything learning about investing is more like learning how to ice skate, where you're fallen all over the ice and you need to be totally prepared for that, especially if you're a new listener to rule breaker investing, this podcast, or new to the Motley Fool. You need to be very comfortable along with us, capital F as Fool's, feeling Foolish small F as you make really dumb picks. And I'm going to continue to do that my whole life long and I apologize ahead of time for it. But four times out of 10, the good news is six times out of 10, we do beat the market. But as Fool's, we don't shy away from these. So with that said, let's talk about my five worst losers of all time. Number one, the very worst stock I've ever picked was Satyam Computer Services for Motley Fool Stock Advisor. I picked it in May of 2007 and when we closed that position in January of 2009, less than two years later, Satyam had lost 94% of its value. So what happened? Well, you might remember the headlines, investor types may well remember Satyam Computer as a massive fraud, a company, an Indian company that was the global leader for sort of outsourcing your software development, your tech to India. And Satyam was working with many of the Fortune 500 companies. It was a big, large company that was real, doing real business with many corporations around the world, but as the CEO admitted, we were cooking the books. And we as Motley Fool Stock Advisor members didn't realize that, didn't know that. In fact, most of the rest of the world didn't. And so that massive accounting fraud brought down a tech giant in India and one that we were invested in. I like to see how these play out so you should know that subsequently the assets of this company were acquired by another large Indian company called Tech Mahindra today. So if you're wondering where Satyam is today. So over the course of that year and a half, Satyam lost 94% for us in Motley Fool Stock Advisor. By the way, the S&P during that time, the S&P 500, the 500 largest companies in America, was down 40%, 41% over that time. It was a really bad time for the stock market overall. So that's worst loser of all time. Let's go with number two. Number two is a company called Headwaters, and I picked it for rule breakers in March of 2006. And we closed it out three and a half years later, down 92%. The stock was at 38 when I picked it. We closed it out at about three. Headwaters was an alternative energy company, synthetic fuels, taking coal waste and reusing it as more coal that you can burn. So it was a positive environment story. It was about making and reusing coal in a more efficient way. The company was an amazing growth story. From 1999, it had 7 million in revenues for this product line of its overall business, 7 million in 1999. By 2009, 10 years later, $1.1 billion they were doing in that business. And it was an incredible growth story, very attractive to me at the time, a weakness to it. It was very tax policy dependent. The actual business of synthetic fuels, the alternative energy story of headwaters, was very reliant on government, on tax benefits to companies that use this technology. And when that started getting yanked out from underneath American business, headwaters was badly hurt. So at its core businesses, it wasn't a really profitable business to run. It needed government policy to make it work. Using the loop on headwaters now, looking back, the stock we sold at 3, today it's at 19. So if you didn't listen to us and just stock with headwaters, it's up actually about six times in value since we sold it in 2009. Of course, 2009 represented a major market low across all stocks anyway. So a lot of things have more than doubled since 2009. Looking back though, this is a company that even if you'd bought when we first recommended it and held it through today, you still wouldn't be very happy. It was a losing pick all the way. But happy to note that headwaters is still in business. Worst all time loser number three was Afometrics. Afometrics was a stock I picked for Motley Fool Rule Breakers in February 2006. And two and a half years later, we'd bought it at 36. That was our recommendation price. We closed it at about three. So again, a 92% loss for Afometrics. Just to fast forward to where it is today, a company still in business. It's gone from about three to about 10 cents. So again, a stock that since 2008 has tripled, but it was a bad recommendation no matter how you look at it. If you'd bought when we first said in February 2006 and still held it today, you would be down 70%. The stock market up 60% over that time. So Afometrics, a completely different business from the first two we opened up with an Indian outsourcing tech company and an alternative energy company, Afometrics is a biotech company and they continued to make what they call gene chips, which is basically, this is dipping back into my undergraduate memory of biology. But if you take adenine, cytosine, thiamine and guanine, those four, what makes up our DNA building blocks, and you put them as little strings of letters on little probes on a chip. Researchers could then use those probes against a portion of your genome or against the entire human genome and let those little probes find where those exact very sequences occur in your DNA and my DNA. This is a very innovative company. At the time, we felt like it was very much a rule breaker. It had done quite well as a company. But reflecting back on this one, as we looked at the 92% loss, what we wrote at the time, this is my compadre Carl Thiel at Motley Fool Rule Breakers. He closed out, and this is the conclusion we drew from this one, he wrote quote, "In some ways Afometrics was a textbook rule breaker. It invented the microarray market and dominated it for years. But being top dog and first mover wasn't enough. Clever rival Illumina," which is a Motley Fool Stock Advisor's stock pick, by the way. "Took advantage of Afometrics' stumbles and management couldn't keep its dominant position or deliver on the promise of genetic diagnostics. Evaluating management is difficult," Carl wrote. And Afometrics always had scientifically competent leaders. But they'd never been tested in a truly competitive market, and they've failed miserably. "I do, AFI," as we call it back then, "I can't say," Carl wrote, "I'll miss ya." So there it was, our third worst performing pick of all time, down 92% for rule breakers. And let's keep moving. Our fourth worst pick of all time was also in rule breakers. A theme might be emerging here, but we'll talk about that more next week. This is a company called Force Protection, and we picked it in June of 2007, and in less than a year it went from about 30, where we picked it in less than a year to three. So we lost 91.6%, the S&P over the same time was down only 10%. This is a company that you might remember. They were in the news because they were making what was known then as MRAPS. That's an acronym for mine resistant, ambush protected, AMRAP mine resistant, ambush protected vehicles that were being used in Iraq and Afghanistan that were being used abroad in war zones when mines were going off because the Iraqis had mined their fields and then left them, American soldiers were being blown up. And so AMRAPs, this product was a hero product at the time because you could go in these large vehicles and they could run right over a land mine and blow up and the people inside the vehicle would be safe. So AMRAPs were a huge business, but what happened to this company, and again, the one year that we happened, that I happen to recommend it and that we held it, is that a spending boom that was fueled by major orders from the military, more than a billion dollars in orders. And this was a small cap company at the time struggling to crank out enough AMRAPs to get out to the Middle East, more than a billion dollars in orders as the war in Iraq subsided. For example, the Marine Corps cut its number of orders from 3,700 vehicles to just 1,300 vehicles. So for a small cap company trying to do big things, that was absolutely devastating. I mean, it's great news because the war in Iraq at that time and that place was subsiding, but what it meant for this company, this defense contractor, is that its financials and its management was completely flummoxed by what happened at the time and the stock lost 9/10 of its value. One quick reflection that I have on this company is that force protection was a very small company, very reliant on very large company. In this case, General Dynamics, its big partner for its business and, of course, on the military and contracts from the military. So you were buying into a company that was very vulnerable. Its destiny was truly not in its own hands. And that's something to watch out for. But again, we'll talk about that more next week. I do want to note in closing that force protection was bought out in 2011 for about $360 million by General Dynamics, which had been its much larger partner. So that's where that company is today. And now finally closing out our Hall of Shame, the fifth worst pick I've ever made in Motley Full Services, was first solar. Again, another rule breakers pick, I picked it, at about $150 a share in June of 2009. And it dropped over the next three years, June of 2012 from 150 to about 15. So that's the 90% loss. It particularly hurt because the S&P 500 at the time did so well over those three years from 2009 to 2012. The S&P 500 was up 55% or so. So the stock was a real dog. I will mention, and this is true of a few others we've talked about this week, the stock has about tripled from where we did sell it in 2012. But nevertheless, it was a bad investment, even if you bought with us and held all the way through, you're still down 75% with the market having more than doubled over the course of that time. We wrote when selling for solar, first solar by the way, making thin film solar panels. So a superior technology, a cheaper way to do solar panels. We wrote when selling this one, quote, "For a while it seemed like the solar panel manufacturer could manage the loss of generous European feed-in tariffs," again, government support for this one, "by changing its focus from rooftop installations to utility scale plants. But massively overbuilt manufacturing capacity, technical and warranty problems, bad investments that the company made, and restructuring charges have turned profits into losses. Most important for the future, the company's sales and margins have eroded right along with its cost advantages over conventional polysilicon panels. We wrote in closing, "While a turnaround remains a possibility, we've lost confidence that this company can outperform the market in the coming years." So that is our final word on our fifth worst loser of all time, first solar company that is still in business today, it was a $15 billion company, a large, a mid to large cap when we recommended it, and it's still a multi-billion, about a $5 billion company today. But a reflection that I have is that we didn't catch them right in the hype cycle. The hype cycle is a phrase I'm just tossing out briefly in this podcast, but it's a topic that we'll talk about in a future podcast. I think it's a good framework coming from Gartner, the research company. If you've already heard about hype cycle, it's a framework that I use to think about technology and the companies we're talking about in Rule Breaker Investing, our podcast from time to time. So we'll cover that another time. So there we are. Darren Hoke and anybody who thought, "Dave, two weeks ago you bragged a whole lot." The truth is that four out of 10 of our picks are losers, and I think you have to be absolutely ready for that as an investor, but especially as a Rule Breaker investor. And next week, we're going to come back with five or so lessons that I think are really important takeaways when we think about these losers, and just losers in general for your investing. And until then, I'll see you on the boards and at our website, rbi.fool.com. Thank you for listening to this week's Hall of Shame Rule Breaker podcast, full on. As always, people on this program may have interest in the stocks they talk about, and the Molly Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at rbi.fool.com. [music] [BLANK_AUDIO]