The money we haven’t lost
In the investment profession, we spend a lot of time thinking about the money we’ve made (bragging rights), more time thinking about the money we wish we’d made (a source of fear of missing out), and almost no time on the money we haven’t lost. But it’s the last of these that’s the silent, invisible essence of successful investing.
If I give you a million dollars to invest, how many times can you lose my million? Ten times? Five times? No — only once! It takes only one trip from 1 to zero to successfully wipe out a million. How about $2 billion dollars? That sounds a little harder, but is that the case?
If you ever venture to the dairy aisle of your local supermarket, you’ve probably encountered products from Dean Foods. They distributed diverse brands including Dairy Pure, Friendly’s, Tuscan and PET. Over the last three years, Dean Foods shareholders went through the painful experience of watching their stock drop from a $2 billion dollar market capitalization to effectively zero as the company filed for bankruptcy six years short of its 100-year anniversary. Why did those investors stick around all the way to the end, like a helpless polar bear on a melting ice floe? A quick look at the filings reveals that among the biggest shareholders were all the major passive index fund sponsors – Blackrock, Vanguard, State Street. To make the situation more interesting, Dean Foods was offered to the public at different times, by none other than Lehman Brothers and Bear Stearns, 10 and 20 years ago. (Neither of those underwriters is still in business.)
We at Sicart have nothing against index funds, and they can play a useful role in many an investment strategy. The fact that they are passive is their strength in good times — but their weakness in bad times and with disastrous holdings.
Dean Foods as a potential stock investment crossed my desk on a few occasions. It was cheap, and it was easy to mistake it for a compelling value stock. Each time, though, I saw it as a two-second decision: no, thank you. Too much debt, cost pressures, no pricing power, competition, no customer loyalty, the list of flaws went on. It looked to me like a bankruptcy in the making.
So we never invested in Dean Foods, and didn’t lose a single dollar on it. It’s just one of the hundreds of investments we’ve chosen not to make over the years. Another way to look at that is to see it as a small part of the millions — if not billions — that we haven’t lost over the years.
Sometimes I envision them as an iceberg: the tip you see above the water represents the money we’ve made. But the underwater part, usually many times bigger, is the money we have not lost. The above-water tip can’t exist without the much larger underwater foundation.
Warren Buffett, famously, has two rules of investing: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” They are quoted frequently, but not followed often enough.
To return to Dean Foods: bankruptcies don’t happen every day, and a 100% loss is a rare occurrence. To us, though, a 70%-90% permanent loss of capital in any individual investment is equally unacceptable, and there are plenty of those ready to snap precious dollars from unaware investors’ pockets. They are also not that obvious to spot in a rising market, but it doesn’t mean they aren’t there.
It might be a forgotten and a rare practice in the investment profession, but we never forget the large sums that we haven’t lost… as much as we may celebrate all the successful investments we’ve chosen over the years, and the money we’ve made.
Published: January 8th, 2020
This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.