Don't overstay your welcome. Don't dig in your heels and ignore change just because you had one set of facts that you want to stick to even as that narrative has changed, for the worse or for the better.
This isn't original thinking. It was the legendary economist John Maynard Keynes, when asked why he flip-flopped on an issue, allegedly said, "When the facts change, I change my mind. What do you do, sir?" I say allegedly because no historian has ever been able to precisely pin down Keynes' words, but the sentiment certainly rings true.
Take today. The stock of American Express (AXP) is the biggest winner in the S&P 500 and it deserves to be because the facts changed. American Express had been a serial guider-downer, meaning that almost every quarter produced a disappointment and analysts had to cut numbers. Your stock doesn't drop from $95 to $60 in a two-year period because you're doing well.
This particular quarter announced last night was set up to be a truly horrendous one because not only did we expect the usual excuse-making and alibi-mongering for the lack of operational growth, the company also let the lucrative Costco (COST) contract go to Visa (V) and Citigroup (C) . I know I was asked what to expect of American Express several times this last week, and all I could think of was I expect another disappointment. (Costco and Citigroup are part of TheStreet's Action Alerts PLUS portfolio.)
Instead, we got a solid quarter with excellent growth and a re-acceleration of spending to get more customers, not the usual cost cutting that would shrink the base and make the company less competitive.
When I saw the number I realized, OK, I had overstayed my welcome on the negative side of the story and it was time to switch directions.
I know that in this YouTube world, it is incredibly easy to dial up a contradictory clip. I have slagged American Express repeatedly. I couldn't see the value proposition anymore, but I had gotten a card out of school more than 35 years ago and I was keeping it almost for sentimental reasons. It just seemed atavistic.
Then a few weeks ago, I was flying up to see my daughter in Oregon and I wanted to use the United lounge while I killed time to get some work done. Even though I was flying United, I didn't have a card, so they wouldn't let me in. I was visibly upset but the nice woman at the counter asked if I had a platinum American Express card. I said yes, and she said why not go to the Centurion Lounge. I asked what the heck that was. She said it's a fabulous place that American Express has provided to platinum members.
Next thing I know, I am in the equivalent of my own office replete with some darned good food, excellent libations and, lo and behold, my own power outlet. It was heavenly.
I should have changed my mind right then, but it's not that simple. A serial underperformer doesn't get out of the doghouse that easily, especially when I thought giving up the Costco business was just plain dumb, no matter how much it costs.
Now, I know, after this quarter, where the company said on its call that it had bought back 7% of its shares year to date, that the story has changed. American Express is back on track because it is giving members a bargain that beats the other guys.
It's a buy.
You see, narratives do change and you do need to keep up with the changes. Take Netflix (NFLX) . Three days ago, it was at $99. Today it's at $123. Why? Because the whole story changed. Netflix trades on sign-ups. The sign-ups had been weaker of late even as the company had repeatedly told you not to look at its growth on a quarter-to-quarter basis. You need to think long term.
How long term? How about the timeframe of a smart director, Jay Hoag, who bought 900,000 shares in the open market this summer at $89. Insiders can't flip stock. They have to be in for the long term.
I had been wavering on Netflix, even taking its letter out of FANG, changing the acronym to FAA as Google had changed its name to Alphabet. I liked it because FAA, as we know from Sound of Music, means there's a long, long way to run, and I didn't know if Netflix would hold FANG back. But I know Hoag, he used to be on the board of TheStreet and his venture capital company, Technology Crossover Ventures, the largest shareholder in TheStreet, had put a lot of money into Netflix at much lower levels. If you are real smart like Hoag and you plunk down that much change, you aren't doing it idly, so I caveated my negativity because of my family's love of the Netflix programming and Hoag's savvy style.
Some of the so-called smartest money on Wall Street bet against Netflix, though, assuming it just had to screw up. You see what happens when the short-sellers are the ones to screw up. You get three straight days of gains.
Or how about Snap-On Tools (SNA) , an old Mad Money favorite. Lately, the shorts had circled around the stock of Snap-On, saying it had made too much money on its finance arm and not enough on its operations. Today it reported a stellar operations number and another strong finance number, but what the shorts have now been schooled on is the idea that the incredible collection rate of Snap-On is because the company knows its customers. That's how Snap-On's stock jumps 10 points on an otherwise soggy day.
Or as I talked about yesterday, the stock of United Airlines (UAL) , once the worst performer of the airlines, has leapfrogged over its compadres even as its numbers ahead simply aren't as bad as they used to be. The market has valued this company as the worst operator and therefore judged it far more harshly than the others, as witnessed by its well-below-average price to earnings multiple. What people didn't realize is that Oscar Munoz, the new CEO, is simply a much wiser, better operator than the old team. If you don't believe me, go ask any United employee. I poll all of them because, as I said earlier, I fly United a ton, and I keep hearing the same thing: We're treated much better and the on-time ratio and complaint ratio are much better than they used to be.
Again, I know, those are intangibles, but they are intangibles that lead to a changed narrative, a much more positive one, so the market's willing to pay more for its numbers. I think that, like Snap-On and American Express and Netflix, you aren't going to flick a switch back and reverse the process.
Every day we see stories that change. Every day we have to challenge our assumptions. Don't be so negative on Mattel (MAT) , Barbie's growing again. Better get a little more negative on the rails as Union Pacific's (UNP) stock plunge signals too much excitement.
But the most important thing you need to be thinking about is that you have to be flexible. For me, with clips that can be run about anything I might have said at one time even if I have changed my mind, this world can be a challenging one, demanding thick skin. But if I dig in my heels and say, "Just you wait, the stock of American Express shouldn't be up because, well, I don't know, it just shouldn't be," then I may be consistent; however, I would also be wrong.
This isn't politics. It's not flip-flopping. The facts have changed, you have to change your view, too. Unless, of course, you care more about being consistent and losing money than you do about being right and making some.
