On bad stock picks

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Jason’s Random Words

On the podcast this week, Jeff and I talked about stocks that were generally viewed as overvalued, and where we stood on them as being worth buying at these "expensive" valuations or not. One in particular, Kinsale Capital (KNSL), got some interest on social media from a few listeners. We also were able to get our good friend Tyler Crowe to scream into the void. 

Jeff and I (more me than Jeff) came down on the side of Kinsale being worth buying even at what is a pretty expensive valuation. 

Of course, Kinsale reported earnings this week, and the stock immediately sold off. It's down about 18% since. Whew! 

So, were we wrong to call it worth buying? Well that depends. Obviously, this week we are very wrong. Tyler, is, well, he's crow(e)ing about it. Can't blame him. 

But I stand behind my argument that Kinsale was (is) worth buying at even the higher price. 

Let's start with the first rule of buying stocks, and it's not Buffett's "don't lose money" rule. Sure, that one is important, in full context. But the real first rule of buying stocks is simple. 

Don't buy any stock, ever, that you're not prepared to see fall by 30% in value or more. Stocks fall in value. It happens. 

Understanding this is actually part of Buffett's "don't lose money" rule. So long as you go into the transaction and your ownership understanding that shit happens, you're less likely to step in it when it does. Finding success in stocks is in playing the long game, and not letting the market's short-term action cause you to sell at a loss just because the stock fell. 

Back to Kinsale. 

On the podcast, the point that I stressed about it being worth buying was simple. It has about 1% of the insurance market it participates in, and that it's the only pure play pursuing, and that is a segment of insurance that's really too small and un-repeatable for most large insurers to make a priority. And they're also really, really good at what they do. And if there's ever a time to pay a excessive valuation – within reason – for a stock, it's when the company behind it has a tiny share of a very large market, and they're demonstrating the ability to disrupt it in a sustainable way. That's Kinsale at its core. 

At the end of the day, whether Kinsale is a winning investment or not is probably not going to boil down to paying 33 times earnings or 10+ times book value in 2024. It's going to boil down to the company executing on what Michael Kehoe is trying to do: Be the biggest, best, most-profitable specialty insurer. 

But!

This only works when you have a good framework as an investor. A process that's built based on your financial goals, when you need to reach those goals, and that also includes optimizing for you. Your own temperament and psychology is just as important as anything else to your financial success. It doesn't matter what stocks you pick if you don't have a process in place to encourage better decision making (and the Munger inversion corollary of discouraging worse decision making) you'll mess it up. 

Kinsale, for example, has seen is stock price fall by double-digits after earnings about 10 times over the past five years. But in total, it's up about 425% over that same period. They just keep executing on the thesis, creating value for owners of the business. It's also cheaper on an earnings multiple basis than it was back then. 

Keep shouting into the void, Crowe.

Picking the right stocks is only part of the work. Building a framework that helps you maximize those stock picks by making the right decisions before and after you buy is maybe more important.

You can do it. I believe in you. Well, except Tyler.

Jason