Jesse Felder – Don’t Rationalize a Lousy Trade

BIO: After starting his career at Bear Stearns and then co-founding a multi-billion-dollar hedge fund firm, Jesse Felder left Wall Street to focus his energies on research and writing. Today he publishes The Felder Report and hosts the Superinvestors podcast.

STORY: Jesse found a cigar butt stock that was cheap and performed extraordinarily well in just a few months after he took a pretty sizable position. A friend convinced him to hold the stock long-term instead of short-term as he had planned. Government legislation affected the business, and Jesse lost about 50% of his investment.

LEARNING: Don’t rationalize a bad trade; get out. Be very careful when you’re in a situation that’s being primed by the government.

“When you’re in a situation that’s not working out as you would hope, rather than dig the hole deeper, move on and find something different.”

Jesse Felder

Guest profile

After starting his career at Bear Stearns and then co-founding a multi-billion-dollar hedge fund firm, Jesse Felder left Wall Street to focus his energies on research and writing. Today he publishes The Felder Report and hosts the Superinvestors podcast.

Worst investment ever

About 10 years ago, Jesse came across an idea that seemed to tick all the boxes for a cheap stock. It looked really compelling. The company was Corinthian College, a for-profit college in the US. The company was a reputable business and had excellent profit margins. The stock was trading about three times the cash flow.

From a technical standpoint, the stock seemed like it would turn around positively, so Jesse took a pretty sizable position. The stock did nothing for the next couple of months. However, it took off the following year and doubled in a very short period. In fact, it went 150-200% up. All along, Jesse knew this was a cigar butt stock, and the plan was to hold it short-term.

One of Jesse’s friends, whom he was managing money for at the time, called him and said he’d never owned a stock that performed so well in such a short period. The friend asked Jesse to hold the stock for at least a year. Initially, Jesse wanted to take the profits. After his friend’s call, he rationalized why he should keep it longer. Jesse held on to it and kept monitoring it.

As time passed, it became clear that the Obama administration would limit for-profit colleges’ ability to offer government-subsidized student loans. This was essentially a death knell for these companies. If their students couldn’t get debt financing to pay tuition, they would go out of business because that was 90% of the people borrowing money to pay tuition. Jesse naively thought there was no way the government would put an entire industry segment out of business.

Jesse kept holding on to the stock and reinvested all of the gains. The stock went down about 50% below Jesse’s purchase price. He finally sold the stock before the company went out of business. This ended up being one of the worst losses that Jesse has taken as an investor.

Lessons learned

• Don’t let your thesis migrate. You need to remember why you bought something and always ask yourself if it’s working out how you anticipated it.
• Don’t rationalize a lousy trade; get out.
• Never underestimate the government’s willingness to put an entire industry out of business if it serves a political or economic purpose.
• Ego has no place in investing. It can be very dangerous.

Andrew’s takeaways

• Be very careful when you’re in a situation primed by the government, particularly in an industry where the potential customers are poor.
• Tax is not a good