Lessons From Investor Mishaps

 | Aug 13, 2013 | 4:00 PM EDT
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The market has recently treated investors to two case studies in investor mishaps. I will quickly note that the two cases I'm about to discuss are far from over, and so in the end, they may ultimately prove successful. But even if they do, it likely won't be because of some shrewd foresight but because of the nature of today's optimistic stock market. Al vso, both of these investments have languished for years while the market has been bountiful, making the opportunity cost that much higher. 

The first case is J.C. Penney (JCP), which has been at the center of attention recently as its largest shareholder, activist Bill Ackman, has thus far been unable to make lemonade from lemons. First, it was the botched attempt by former J.C. Penney CEO Ron Johnson to transform the company into something it is not: a higher-end retailer. The idea is intriguing, and there are signs that it's working (my first signal: my 29-year-old wife's willingness to go there and browse), but the execution was terrible. In one swoop, Johnson alienated the loyal customers at J.C. Penney instead of slowly feeding them the new concept. Sales fell off a cliff, and losses mounted.

Valuable lesson No. 1: Never, ever alienate and ignore your customers.

Today, Ackman resigned from the J.C. Penney board, a clear signal that he has lost support despite being the largest shareholder. He now either has to sell his stock or watch J.C. Penney with a greatly diminished degree of influence.

The second case involves BlackBerry (BBRY) and legendary investor Prem Watsa of Fairfax Financial, who bought into the company when it was trading at about $17 a share. Here, it looks like Watsa may be saved on news that BlackBerry may go private. And because Watsa has the conviction to buy more shares when they tanked to less than $8 a share, his cost basis may allow him to generate a nice return if BlackBerry does go private. Shares are trading around $12 today, up 10% on the buyout rumors. There are some big short positions in the stock, so today's news likely includes some short-covering as well.

Valuable lesson No. 2: If you are going to invest in a struggling business, know the business inside and out, because that is the only way you will have the conviction to double down at moments of maximum pessimism.

The books aren't closed on these two names, but it looks like BlackBerry is headed toward its best and only option. In the case of J.C. Penney, at some point the price will get ridiculous enough to also spur a private buyer to look closer.

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