Managers' Biggest Errors of Omission

Dorsey: For each of you, what's been your biggest recent error of omission, either the stock you wish had sold, the stock you wish you had bought. And I ask this instead of the error of commission because I find that everyone should be able to talk about their mistakes, the stuff that I did that went wrong, but it's only the really good managers who look and say, what didn't I do that could have added value.

Forester: You want to start it.

Bobrinskoy: Yeah, because I know this one. This is Sara Lee. This comes back to the point that was made earlier about recommitment bias. I mean we knew this company extremely well. We knew the businesses very well. They were right here in town. We knew management. It had everything we liked. Everybody hated it. It had underperformed forever, and it was this issue because we had been good and passed for so long that when it got just ridiculously cheap, we couldn't pull the trigger, we didn't pull the trigger and that one – it really bothers me because it was a fat pitch. I mean it's more than doubled since a year ago in a very stable business. They have a very good coffee business, a decent meat business, and everybody hated it, and so we should have stepped up.

Forester: I'm going to go with – I remember in March of '09, and it just still haunts me today, I think about it in the shower in mornings regularly. When we had looked at lot of the life insurers, the MetLife, the Hartford.

Dorsey: ...They got down to single digits, a lot of them...

Forester: ...Oh, I know, and I look at those...

Dorsey: Sorry. I didn't mean to twist the knife deeper.

Forester: No, that's okay. I still feel it every day, and I remember the first week in March running a screen and telling the guys in the office, "these look like dogs right now but we are going to be buying these things in the next couple of weeks." And I put it off a little while and then all these things ran like 15%, and I thought, oh well, I missed that first 15%, doggone it. I'm going to wait a little bit, wait for a pullback. Well, 40%-50% later, now you've missed 40% or 50% and it just – I wish someone had a 2x4 to smack me with and just said look, you're still very early. These are going to be triples at least.

Dorsey: Yeah. And the great lesson in that is that stocks that have gone up can keep going up and stocks that have gone down can keep going down, and so anchoring on what the stock has done lately is not always the best indicator of future performance.

Forester: Sure.

Ramsey: For us it'd be missing, by and large, missing the U.S. retailers. We did capture some of the ... consumer discretionaries has had a fantastic run. We've been in media. Globally, we've been in autos, auto parts and equipment, but just the proclamations in the fall of '08, the frugal future, The New Frugality was a book that was published in early '09, just the consensus as to the U.S. consumer pulling in his horns, which has happened. But the retail stocks, I mean the indices I like to watch are up 200% from their lows. I find it very interesting, the consensus in late '08 with the new normal really coming to the fore. The U.S. consumer is passing the torch to China is the main global economic engine. Well, that's happened. But the way to bet in the stock market has been the opposite. The retailers were up 200%. China is one of the worst performing major markets off of its low, even though everything I think has happened in terms of the economic momentum being passed on, again, to China. So I'd say, we had some bits and pieces of U.S. retail names there, but we just didn't capture near what we should have if we could just blindly followed the models, I think.

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Dorsey: So, if I may wheel the 2x4 for a moment longer, are there any, I mean, changes even at the margin to your process or sort of reminders that you have that you – sort of takeaways from these three experiences?

Forester: I think I always want to buy – I tend to be a perfectionist, so I want to buy right at the bottom, and that really – you only know that in hindsight, there is no bottom until you go into a client meeting and we can point at the bottom and say, "why didn't you buy there?" Well, you don't really know at the time that that's really the bottom and whatnot. So in those extreme situations, I'm trying to get myself to get like a 10% to 15% leeway. If I miss the first 10%, don't worry there's plenty more.

Dorsey: Right.

Bobrinskoy: Just one other omission I have, my second omission is Netflix. The Founder of Netflix is a guy named Reed Hastings, who I've known for 15 years, a very good friend of mine. And I didn't pull the trigger because the stock never looked cheap, but it's gone from $7.50 to $200 in the time I've known him, and just the lesson there which I have to keep reminding myself of is there is no substitute for a great manager. And I knew he was a spectacular manager at that time, and I should have just invested with him as a great partner. So we really are trying to reinforce the importance of management as a takeaway--that there is no substitute. If you have an opportunity to invest with a great manger, take it.

Ramsey: For us it would just to be trust our disciplines. I mean there is line from Bull Durham, "Don't think too much it only hurts the team."

Dorsey: So trust what the models are saying, don't try to overthink them? That makes sense.