We all make mistakes, that is the only way we truly learn. When it comes to trading, some mistakes are more costly than others. Bad risk management can put an end to your trading career before it even gets off the ground. A few bad entries can screw up your quarter. Being stubborn about a specific company can cost you a chance to capitalize on a good trend. Obviously the former is worse than the latter, but as time passes your focus should move towards those missed opportunities and hopefully away from preserving capital, that should be second nature.
Everyone misses trends, doesn’t quite understand a specific story, or exits a winner too soon, no trader catches them all. But when we do, it’s important to learn why, to burn it into the back of your mind, to recognize the pattern of follies that lead you astray.
I have been a hater of Crox since day one. I was introduced to those ugly looking plastic clogs in 2004 living in San Diego. A really hot, I mean smoking hot girl from Boulder, Colorado introduced them to me. She said they were a sporty fashion statement, or something along those lines. I laughed, then tried to hook up with her, and failed. She now works for a national news organization as a reporter.
I traveled through Southeast Asia for 3 months in 2007, Thailand, Cambodia, and Vietnam, with a short trip to Japan. It was an amazing adventure, my first time through the region, and definitely not my last. A friend and I traveled to some very isolated islands in Thailand’s southern region, the Phi Phi islands. The little harbor on the main island had a small but bustling little tourist alley where vacation supplies could be found for those in need. I was backpacking, my friend was on a vacation from teaching english in the north of Thailand.
On that road I came across something interesting, knock off Crox. It was the first time I had run across them, they were indistinguishable from the real thing, just missing the logo. I laughed, they were making knock off Crox, and selling them for $4 a pair. I said to myself, if they can sell knock off Crox for $4/pair in Thailand, this company can’t have a defensible product, surely others would copy their silly style and the Crox brand would be worthless.
I was obviously wrong.
The stock went nuts that summer, and when I returned to work at Geller Capital, we owned it. I told David what I saw in Thailand, he just laughed. It was a real learning experience for me to see David dismiss so easily the fact that Crox’ main product was easily duplicated and sold at 20% the price of the original. He really couldn’t care less what I thought about their business model, all he needed were the numbers on the income statement and the chart.
That fall we sold the stock as it broke down technically, we exited up more than 50% on the position. And eventually, as I had expected, Crox got smashed, it fell from a high of $75 to a low of $.79, wow. Just an epic collapse for a former high flying momentum stock. I was correct regarding their business, but before I was vindicated we walked away with greater than a 50% gain at Geller Capital. Lesson number one, just because you believe a company is going to have issues with its business model down the road, doesn’t mean you shouldn’t own the stock now while it is riding a wave of sentiment and momentum. A more recent example would be Netflix.
After bottoming out in early 2009 post crash, it took Crox a little while to get its act together. I don’t buy stocks trading under $5 normally so it wasn’t even on my radar, technically or fundamentally until the spring of 2010. The stock went on a tear in April and was making new highs right after the flash crash. That’s the type of action you want to see in a market leading stock. I noticed, but couldn’t wrap my head around what had changed at Crox which was brining this stock back to life. In my mind, it was a junk company trading on the rest of the shoe trend.
But I was obviously missing something, the stock kept popping up on my screens and I kept ignoring it. I was biased because of my past experience with the product, and it would end of costing me a lot of money in missed profits.
I wasn’t paying attention to the fact that Crox had actually come through the crash of its stock and the crash of the American economy with a pretty decent balance sheet and sales. Not only that, but management had begun to expand Crox’ line of products beyond those simple ugly rubber flip flop things. I had no clue because I had refused to even walk into the Crox store which was right around the corner from my apartment.
So I kept ignoring the stock as it climbed from 11 all the way towards 18 dollars. Huge mistake.
A few weeks ago I was walking around SoHo with some time to kill before a meeting and happened to walk by the Crox store. I decided to wander in, just for the hell of it. I immediately realized the mistake I had made. There were two whole floors filled with different types of shoes, all made with that rubber sole, but completely different in style. Crox had expanded from just making those ugly rubber clogs to all types of shoes from sandals to hiking boots. They had a real product line, and the market was thus pricing them for a high level of growth. I looked at some of the shoes and actually thought of buying a pair.
Lesson number two, don’t ever dismiss a company because of a limited product line, you’ve got to keep track of their development, companies can expand quickly these days, you can go from being a one trick pony to having a full lineup of products in a short period of time. I completely ignored what was going on within this company, I saw the fundamentals numbers on my screen improving, sales, EPS, number of stores, but I wasn’t keeping up with the product itself, I was foolish and stubborn.
It’s cost me a lot of money over the past few years to ignore this stock. It has traded well technically and fundamentally had all the right cues for me to be interested. While I ignored Crox, I definitely did not ignore Under Armour, a company which has similarly expanded its product line since the crash and is killing it right now. I caught a large chunk of that trend because I understood the core product, I was a consumer of Under Armour and saw the potential for product line expansion.
Always pay attention to what is going on underneath the surface in the companies that come through your technical and fundamental screens, don’t write them off for previous bias in either the way you traded them or how you feel about their products. Companies and products change, quickly.
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Leigh Drogen is the founder and chief investment officer of Surfview Capital, LLC, a New York based investment management firm employing an intermediate term long/short momentum strategy. More »
This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.
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