Use Your Eyes

 | Mar 26, 2012 | 10:30 AM EDT
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For years, I was fascinated by the Lindbergh kidnapping case, which occurred just a couple of miles from where I grew up in Hopewell, N.J. I read all that I could on the case, visited the crime scene and other relevant locations, and I came to the same conclusion as many others: The crime may not have been committed by the man, a carpenter, who was ultimately found guilty and executed. One of the many questionable aspects of the case was the ladder found at the crime scene. It was said to be poorly constructed, and not the work that you'd expect from a carpenter. Well, a couple of months ago, I finally saw the ladder in person. It was not what I'd expected -- its design was brilliant and it was well constructed. Seeing this crucial piece of evidence for myself erased many of my doubts about this case. That's where I should have started, not ended.

Seeing is sometimes believing, and from an investment perspective, it's wise to get a look at what you are buying -- before you buy it. That's not always possible, but it can help you to either confirm or question an investment thesis you may have on a particular name.

Walk past Madison Square Garden (MSG), go inside and have a look around. Check out Saks' (SKS) Fifth Avenue store. Eat at several different locations of the restaurant name you are thinking of taking a position in. I think I've eaten at Cracker Barrels (CBRL) in at least five different states, and that was all prior to taking my first position in the name. Seeing is just part of the drill, and goes hand-in-hand with a careful review of the fundamentals.

It wasn't until I actually visited a Cabela's (CAB) store that I was truly able to process the cult-like loyalty that its customers have. When I witnessed people standing eight-deep at the gun counter, the notion that a credit card and retail operation could actually work together made more sense. Cabela's' customers pay their bills, which is borne out by the level of charge-offs the company reported through the recession. A pilgrimage to the company's hometown of Sidney, Neb., with stops at a couple more stores along the way, solidified the belief that this name was underappreciated and misunderstood.

My first trip to Florida after the real estate collapse was an eye-opener. It was so far beyond what I expected to see: an incredible number of beautiful but vacant homes, well in excess of what a real-estate bust looked like in my mind. Later, David Einhorn painted an even bleaker picture with his presentation on St. Joe's (JOE) at the 2010 New York Value Investing Congress. Ultimately, there will be some opportunity again in Florida land, but actually seeing the real state of affairs pushed the recovery much farther into the future in my mind.

It is also important not to be fooled by appearances when they just don't jibe with the numbers. Cosi (COSI) has great food, but that was never good enough reason to buy. A look at the numbers would have told you a story that the taste of the food could not -- years of operating losses, and a difficult road to profitability. This was a name that I wanted to like, but not until there was some action by an activist did I believe the name could actually be saved.

I once visited Callaway Golf's (ELY) headquarters, wandered around the place, and spoke with some employees. While I liked what I saw and heard, that didn't help the company move any golf clubs. But it did, perhaps, give me a bit of ownership bias -- not a positive when it comes to investing. I ended up being too early on this one; one of many lessons learned.

Take the opportunities that you have to see what you are buying. Ask questions; visit the stores, headquarters, properties owned; taste the food. But that's just part of the drill. There's no substitute for the 10K.



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