If it’s a platitude, ignore it. If I hear something more than once, I know the originality has been sucked dry, and so, too, the utility.
Investing platitudes are useless beyond compare. Most are delivered as admonishments: Don’t send good money after bad. Don’t catch a falling knife. Don’t double-down on an investment. Don’t chase losers.
Platitudes are worthless not only because they lack originality and utility, they’re worthless because no blueprint for investing exists, nor will one ever exist. Every investing situation differs from every other investing situation. Investing isn’t analogous to the roll of a fair die. A sensible course of action in one situation can be ridiculously nonsensical in another.
As for all those “don’ts,” I’ll frequently do: I’ll send good money after bad (labeled “bad” only because of current investor sentiment). I’ll catch falling knives. I’ll double-down on an investment (and even triple or quadruple down). I’ll chase losers (a loser again only because of current investor sentiment).
Why will I do the “don’ts”? Because my analysis leads me to believe value exists.
I also know my timing is sometimes less than impeccable. Buying at the bottom and selling at the top every time without fail demands perfection, and perfection is of another world. That said, I’m frequently close enough to the proximity of a bottom or a top, though hitting an absolute bottom or an absolute top has so far eluded me.
Missing the Proximity
Then there are the occasions when I miss the proximity, and not by a small margin. Gerdau SA (NYSE: GGB) is a recent example.
Gerdau is a large Brazilian steel company. Sales topped $11 billion for the reported trailing 12 months. It has manufacturing facilities throughout South and North America (including the United States). Gerdau also mines iron-ore at various mines in Brazil.
Gerdau is also established. It has graced the earth since 1901; it has endured a number of commodity-price and steel-demand cycles.
I thought we were close to the bottom of one cycle in fourth quarter of 2014. Steel demand languished and hard-commodity prices had sunk to a multi-year low. Gerdau’s share price reflected the lousy business environment. Shares that had traded at $15 in early 2011 were trading at $5 heading into 2015.
Yes, things could get worse, but comparing commodity prices and steel demand to past market bottoms suggested things couldn’t get much worse. Time to buy Gerdau shares.
The valuation was reason enough. Gerdau’s price-to-book and price-to-sales ratios were well below one and near a multi-year low. The shares were depressed, even though Gerdau was running at a profit.
What was a treasure to me was still junk to other investors. Much to my consternation, Gerdau would become even more of a value through 2015.
Sinking Gerdau Shares
Global steel demand continued to shrivel; global commodity prices continued to fall in 2015. Rising political turmoil in Brazil, which lead to the impeachment of Brazil’s president, Dilma Rousseff, further weighed on Gerdau’s share price. By the time 2016 rolled around, Gerdau’s share price had sunk to under a buck. My $5 initial investment had lost 80% of its value.
Ah, but my $5 initial investment wasn’t my only investment in Gerdau. My initial timing was wrong, but I still thought that my investment analysis was right: Gerdau was a financially strong steel manufacturer and iron-ore miner enduring a down cycle that would eventually turn up. At the least, investor sentiment would turn up, if past is indeed prologue.
I continued to buy Gerdau shares through 2015. If Gerdau shares were a value at $5, they were at better value at $4, an even better value at $3, and so on. (You might read this article on the importance of maintaining cash reserves.) I continually doubled-down; I continually grabbed at the proverbial falling knife.
Gerdau Shares Finally Rally
I also continued to lower my cost basis for the eventual price recovery I was confident would occur. And occur, it did. Gerdau shares rallied from $0.79 in January 2016 to over $4 a share by the end of the year.
This week, I sold by Gerdau shares for just over $4 each. Yes, my initial purchase at $5 a share shows a loss, but by ignoring the platitudes and buying additional lots of Gerdau at a lower price, I was able to lower my cost basis to the point that when I sold my entire Gerdau position I earned a 75% return on my investment.
I’ll concede this strategy is difficult to implement and to follow through; you need cash reserves, patience, and some intestinal fortitude. But if you have the reserves and patience and can implement and follow through, the reward can more than compensate for the discomfort endured.