It is not by accident that I wrote about my paper loss and hardly mentioned the stocks with a paper gain. The reason for the disproportionate attention is that there is nothing to be learned when a stock is purchased less than year ago and is now randomly trading at a higher price. To hold such positions does not take any mental energy.

Written by:

Noam Ganel is the Managing Director of Pen & Paper, a value-oriented stock research publication. Subscriptions are now available. He also serves as  Vice President in Capital Markets at Silvergate Bank and holds the Chartered Financial Analyst (CFA) credential. Click here for frequently asked questions.

No Pain No Gain?

An update on my largest positions

February 23, 2019

Frontier Communications

I bought the stock of Frontier in March of last year. In that article, I smugly wrote that, "sometimes, all we really need is one good investment idea."

But a year passed and I am not as confident. When I bought the stock, Frontier's valuation was low, I thought, compared to prior years. But I did not study the telecommunication industry enough to understand what an appropriate valuation would be.

I own 8,000 shares in Frontier and my cost basis is about $5 per share. The stock now trades at $2.55, which results in a 50% loss in market value or $20,000.

Orchid Paper Company

When I bought the stock of Orchid I overlooked important information. One example is that Orchid had only four customers. More so, Benjamin Graham would find it disgraceful that I utterly ignored the right side of Orchid’s balance sheet.

I did learn about securities lending by investing in Orchid. A few months after I had purchased the stock, a Charles Schwab representative called and inquired whether I would lend my Orchid shares to short sellers at a rate of over 52%. Sure, I replied, and you can read about it in “The Time Charles Schwab Asked for a Loan From Me”.

I own 10,000 shares in Orchid; my cost basis is about $3 and the stock trades at $1, an $18,000 paper loss and almost a 40% loss in market value.  

Lifeway Food

Lifeway's management is highly invested in the company, the company carries little debt obligations, generates ample after-tax cash flow and I consume their product on a weekly basis.

In August of last year I described the normalized earnings for the business - my opinion of the company did not change.

I own 10,000 shares in Lifeway, which I bought for $3 a share; the stock trades for $2.36, a $6,300 or 21% paper loss.

Tupperware Brands  

I learned about Tupperware from Guy Spier who described his purchase of the company in The Education of a Value Investor. But what Spier hated about Tupperware when the stock traded at $45, I did not mind as much as when it was trading at $36.

So, I bought 600 shares in August of last year and comically wrote to Tupperware's management about its ill use of leverage.

My cost basis is $36 and the stock trades at $31, a 14% paper loss or $3,024.  

Diversified Restaurant

I bought 17,000 shares of Diversified at a cost of $1.25. I estimated the value of the stock to be roughly $2 per share. In A Senseless Market Capitalization I explained my investment thesis; mainly, that the cost of buying shares in SAUC was much less than developing similar restaurants. And that I was confident that Paul Brown, who had revamped Arby's, is an excellent manager. The stock price is $0.93 which results in a paper loss of $4,446 and the stock is down 25% from my cost basis.  

L Brands

Not the lure of attractive women walking down an aisle while wearing laundry convinced me of buying shares in the L Brands - it was the accounting profession. In September of last year,  I wrote about the deficit in the equity account that was related to the company buying its own shares.

I had bought 1,000 shares, at $30 per share, and the stock trades for $27, a paper loss of $2,921 or 10% per share.  

The remaining companies

I have a paper gain on the remaining 6 stocks. I will write more on each stock when I sell them. Purchased in May of last year, Patterson Companies, which I wrote about in One Advantage of Short Term Thinking? A Cheap Stock Price is worth slightly more than when I bought it.

Stericycle, which I bought last month, is trading at roughly the same price and so is the common stock of Voxx International, which I wrote about in January of this year

I purchased in that month, too, the stock of Carriage Services which is up 19% and so is the stock of Seritage Growth Properties, which is up 10% and ARC Documents Solutions, which is up 15%.

It is not by accident that I write about my paper loss and hardly mention the stocks with a paper gain. The reason for the disproportionate attention is that there is nothing to be learned when a stock is purchased less than year ago and is now randomly trading at a higher price. To hold such positions does not take any mental energy.

But that it is different when positions are trading at 50% - and even 60% - below the cost basis. Such paper loss forces me to reflect on why I had bought the stock in the first place; to observe why the stock market is bearish on the future of the company, and to assess whether I was wrong in buying the shares in the first place. 

Most of all: a paper loss requires the attributes of patience and conviction. The last two are not easily attained.