Coach, you sly dog you. For a long time you hid under that “affordable luxury” tag and really pulled it off. People were buying your stuff and you held your pricing power because your stuff was exclusive. Until it wasn’t. I bought a decent sized position in early 2013 at around $48 and sold off some of those shares as it crept up in order to reallocate those funds elsewhere. But I kept a small core position as I often like to do because I felt like this was a business that had plenty left to do.
Today Coach shares are sitting at a measly $30.47. Now to be clear, the handful of shares that I do own today are at a very minimal cost basis thanks to the gains I realized from the original position, but in hindsight I should have sold them all. The mistake I made was not seeing what was unfolding in front of my very eyes. More competition thanks to businesses like Michael Kors* (KORS) resulted in discounting and a move towards a “lifestyle” brand. Margins started falling and the brand went from “affordable luxury” to just plain “affordable.” Will Coach ever get back to its glory days? Possibly, but I doubt it. Does it mean that Coach shares are doomed? Maybe not. But it certainly changes the thesis for investors as now it’s just another retailer.
Lessons learned: Investing in retail (particularly fashion) is tricky and the landscape can change quickly. Valuation really matters and investors should not look at most retail stocks as buy-and-hold indefinitely. Price cuts and promotional offers are big red flags and by this time the market has usually caught on.
*Based on what I learned with Coach, I gave Kors the thumb down in Caps in July 2014 at $81.24. Today Kors shares trade for $43.68.
China Digital TV (STV) and Sina (SINA)
I’m lumping these two together because the lessons learned are very similar. I bought China Digital on the recommendation of a friend back in 2008 and even averaged down on the position because Chinese small caps were the big thing at that point. Fast forward to today and China Digital is sitting at a whopping $1.92. My cost basis is about $5 because management has been super kind to pay out some special dividends along the way. But it’s a loser for me regardless.
I bought shares of Sina later on in 2011 thinking I had figured out how to invest in China after China Digital and while I only bought a handful of shares, my position has still been cut in half. Again, it’s such a small position that it’s meaningless, but it’s still a loser.
Lessons learned: Even boots on the ground research in a country like China can offer a false sense of security. Investing in a country/culture so different from ours yields risks that we can’t even come close to quantifying. If you must invest, buy the obvious market leaders (Baidu, etc.), and keep direct exposure minimal and well-diversified. Consider multinational options that offer exposure to such economies as alternatives (Starbucks, Apple, etc.). And remember when it’s a big headline, it’s no longer a secret.
Higher One (ONE)
I bought shares of Higher One back in late 2011 after having done enough research on the business to believe it worthy of a small position. I liked what the company was trying to do in tackling a specific market in apparent need and taking it a step further with helping students better control their finances. But what I really liked more than anything was the story of Higher One. Friends in college (Yale no less) co-founding a business, high insider ownership, an excellent balance sheet, doing something potentially disruptive, building a business with a focus on the people and the culture. I mean these are all great qualities, there’s no question. I even got to interview one of the co-founders and COO of the business.
The problem is that these qualities don’t make the business (or investment idea) great. There were bigger risks to the underlying business than I cared to see at the time because these qualities and the story clouded my vision. Today Higher One shares sit at $2 and I’ve lost a significant amount of my (albeit very small) investment.
Lessons learned: The qualities we look for in a good business don’t necessarily make it a good investment. Never fall in love with the story and make sure to have checks in place to keep from becoming too enamored with management. Their job is to paint a positive picture for investors.
The Bottom Line
At the end of the day none of these positions is going to bankrupt me; they all together represent only a very small amount of my overall portfolio. Three of the four are in an IRA so losses helping the tax bill at the end of the year would be minimal anyway. I’m sure at some point I’ll sell them and just move on, but I actually find that they serve a small purpose. Seeing them in my portfolio is a stark reminder of what I got wrong and how I can get better. We may not win ‘em all, but I’m sure as heck going to try.