Mistakes and Triumphs

NEW YORK (TheStreet) -- It's easy for investors to share their greatest stock trades, but somewhat difficult to admit the big mistakes. Frankly, I learn much more from the mistakes than from the triumphs, but there are sometimes lessons in those, too. Most investors will have several of both, and can build on their knowledge with each success and failure.

A well-known fund manager once told me that he had a board outside his office plastered with the stock certificates of the companies he'd taken positions in that turned out to be mistakes. Rather than burying his worst ideas, this manager was reminded of them each day as he entered his office. That, to me, is a brilliant way to reinforce what you have learned from the ideas that went bad.

With that said, I'd rather start this column off with a mistake. It's a fairly recent example, and the company in question is Green Mountain Coffee Roasters ( GMCR), purveyor of Keurig machines and the infamous single brew K-cups that have taken the hot beverage industry by storm over the past several years.

What a stupid, expensive idea, I thought, especially as the stock rose higher and higher, and the multiples soared to ridiculous heights. Fifty cents or so for a cup of coffee in my own home seemed a bit crazy to me, when I could brew a whole pot for the same amount or less.

I did believe this was a fad, and even if I was wrong about that, at the very least, the stock was not worth 60, 70, or 100 times earnings. I did something I rarely do, initiating a short position in late 2010, when the stock was around $35 or so.

By March, the shares had risen to $65, and already underwater, I shorted a bit more. By June, Green Mountain hit $90, and I was still short, and questioning my theory. By August, I came to the conclusion that my short thesis was dreadfully wrong, and began covering. I recouped some of the losses via shorting and covering, shorting and covering, but by mid-August, I was done with Green Mountain.

Less than two months later, Green Mountain was a $43 stock, as the company's accounting came into question, as did growth prospects. I was a day late and a dime short, somewhat correct in my investment thesis, but with very bad timing.

Although I didn't have a huge position, I realized that I did not have the stomach, timing, or makeup to short stocks. It was a painful lesson that I could be correct with an investment thesis, and yet still lose capital because of the way I handled the trade. Needless to say, I no longer short.

As a value investor, I am often "early to the party" so to speak. I sometimes see value when much of the rest of crowd has turned on a particular name. I saw a tremendously underappreciated retailer in Cabela's ( CAB) early 2009, a name that most hated at the time. One well-known pundit termed the company a "walking heart attack" around that time. Among other reasons the stock was panned was because the company had a financial-services business with credit card operations, which was becoming a no-no for retailers, due to default and other risks.

The company's retail stores were also said to have a "museum-like" feel to them with much wasted space, and the stores were said to be in out of the way locations.

I saw it a bit differently. First of all, the company had a cult-like following among hunters and fishermen. Those customers happened to be holders of the company's rewards based credit card, more than 1 million strong at the time and had stellar credit, with average FICO scores of 787 at the end of 2007. These were customers who paid their bills. In fact, during the credit crunch in 2008-2009, Cabela's credit card charge-offs were well better than most in the industry.

So fear that the credit card operations would implode were overdone. Second, the market had so punished the stock that it was trading for less than seven times analysts' estimates.

I took a position in the $5.75 range in early 2009, and the stock took off. Now, that is uncommon for many of the names I purchase, because it typically takes time for the idea to play out. My position was closed in the $20 range, which I was very happy with at the time. Since then, Cabela's has hit the $70 range, and so there was much left on the table, too.

So there are also lessons in the trades that go right. As I stated previously, as a value investor, I am often early to the party, and early to leave.

The bottom line is that it is important to reflect on good and bad ideas. That's how you learn.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication, Heller was long XXXX.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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