In what is an unusually swift u-turn for the portfolios, I exited our position in RELY during the month of August, resulting in a roughly 1% hit to overall performance, after initiating the position in July.
With every position that is established within the portfolios, there are certain fundamental elements that should remain intact or on track in order for us to remain in an investment. Every situation is different, making the list of fundamental faux pas vary among our investments.
In the case of RELY, the CEO Craig Bouchard was a key element in the overall strategy, as it was abundantly clear that the first acquisition made was the first in a series of acquisitions, with subsequent acquisitions being what would drive profitability going forward. In order for their strategy to be successful, the presence of an excellent asset allocator was of obvious importance.
Mr. Bouchard struck me as an excellent asset allocator, understanding the various nuances of rolling up several companies in an effort to create a highly profitable entity with significant tax attributes. So when it was revealed during August that Mr. Bouchard had resigned his position, it struck me as both extremely surprising and a sign of trouble in a highly leveraged company that simply cannot handle trouble in the slightest given their current debt load.
Perhaps more than any other company in the portfolios, RELY was CEO dependent in order to see their mission through. The fact that they switched out quarterbacks in the 2nd quarter during a game that they seemed to be winning is an oddity at best and a sign of a failed initial acquisition at worst.
Oddities in leveraged situations, especially in the volatile field of raw materials, are best left to the daredevils among us, of which I don't count myself as one. Further, admitting that the first acquisition was ill-advised, which is essentially what Bouchard resigning or more than likely, being fired, points to, means that the company has a very long road ahead in terms of righting that initial wrong. A process that I am not necessarily interested in being part of due to the leverage involved.
Lastly, it should be noted, that among value/special situation/event driven managers, I consider myself to be especially cognizant of risk. One of the worst habits of your typical, garden variety value manager is the belief that a value stock becomes that much more valuable when it moves lower. The tendency among the traditional investment community is to see greater value in the name instead of question their own thesis.
My initial reaction whenever a position goes against us, especially right from the start, is to incessantly question my thesis. Where is it possible that I have gone wrong? Where could it be that management has gone off course? What signs are there that business is deteriorating? Are there macro-economic angles that I am missing? These are just a few of the questions I ask repeatedly as losses accrue in new positions.
This is not to say that I won't average down into positions. I have and will do this when all the angles line up correctly. However, my default line is not to think because a stock has gone down 25% from where I bought it, that I am getting a 25% better price. My line in that situation is that I was 25% off in my assessment of the value in the company, why was I so far off and what could it be that I'm missing?
