Canadian Business Online has a series profiling “Canada’s Best Small Investors” and on October 26 they profiled Rob Morrison.
Now, as it happens, I know Mr. Morrison slightly. He was an active chess player when I was active; he was always much, much better than me (he was a master at the time I was a mere “C Class” player) and our difference in age (he’s about 5 years older) was much more significant at the time, so we never did much more than exchange nods – in fact, I would be flattered if he remembered me.
Anyway, he is profiled in the Canadian Business series. The article has an adulatory tone; there is no actual returns analysis presented in the piece, which is really just a highlights reel of Mr. Morrison’s most stunning investments.
As I’ve mentioned before, this is a warning sign. Yes, you want to know how people achieved their returns; but that’s after you have their track record in hand so you have a better idea of what questions to ask.
I have no complaints about Mr. Morrison’s security analysis, which is not too surprising since the article’s tone is so upbeat. He appears to specialize in distressed – or seemingly distressed – companies that are being beat up by the market even more than they should be. It’s an extreme form of value investing and to some extent might be pigeonholed as ‘special situations’. There’s nothing wrong with that! There’s a lot of money to be made by kindly offering to take investments off the hands of someone who’s panicking.
My ire is aroused by the concentration so blithely applauded in the article:
Morrison started buying in 2000. Jo-Ann’s stock continued to swoon. It hit bottom at about $3 in early 2001, and Morrison invested all the way down. By mid-2001 Morrison was seeing signs of recovery, and in August that year he bet the farm on Jo-Ann.
It was a gutsy move—and a masterstroke. Toward the end of 2001, as Jo-Ann Stores sorted out its inventory problems and secured new financing, its shares rose from $3 to $6. By late summer 2002, they were in the mid-$20s. Later that year, when Jo-Ann hit the high $20s, Morrison began to sell. At that point he had 94% of his holdings invested in the stock.
How could he bet nearly everything on a single distressed company? Morrison says he protected himself the best way he knew how—by paying much less for a good company than he knew it was worth. He had researched every aspect of Jo-Ann Stores. He had even driven to the U.S. with a friend to check out a dozen locations and chat with the sales staff.
Nothing wrong with the analysis.
Everything wrong with the execution.
Putting 94% of your portfolio into a single company is reckless – there’s really no other word for it.
As I have so often emphasized in this blog, the world is a chaotic place. The best analysis in the world relies on things that have already happened … new things can, and do, happen all the time, with unforseen and unforseeable effects.
The only way to guard against such random chance is through diversification. If you make a lot of small bets – and they really are diversified – then the effects of random chance will be mitigated and you will be left with the incremental returns you deserve as the fruits of your analytical labour.
If Mr. Morrison’s investment in Jo-Ann Stores had been limited to, say, 10% of his portfolio, I would be the first to applaud – assuming, of course, that his long term track record, when analyzed properly, is as good as implied in the article.
But in holding up for admiration an investor who put 94% of his portfolio into a single bet, Canadian Business has done small, perhaps impressionable, investors a disservice.