Random Excuses

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Jason’s Random Words

As you surely realize, this week's newsletter is late. This is not the first time we've failed to schedule a newsletter to run, and we would be remiss to not point out one social media follower's clever quip the last time we did this, who pointed out we should have titled that mess-up "Random Excuses." 

It looks like the universe was just lining us up to use it this time. 

That's because the subject this week really is about random excuses. Or to be specific, our proclivity to make them as stock pickers, often to justify why our bad stock picks really aren't bad. 

I'll use an example from my past. One of the longest-held stocks in my portfolio is Clean Energy Fuels. It's a company that I have followed for nearly a decade and a half at this point, and one that I absolutely fell in love with during the early days of the U.S. shale boom. The short version is that the company, which provides natural gas, natural gas stations, and services for those stations, to the operators of large fleets of vehicles. 

Without boring you too much with the details, I let my focus on the trend and potential for growth of natural gas as a transportation fuel, obscure my objectivity on the company's ability to deliver per-share value for investors in the business. As we stand here today, Clean Energy sells about twice as much natural gas as it did a dozen years ago, but almost no value has been created for investors. Here are some statistics from the business itself, since 2011: 

• Revenue is up 7%

• Operating cash flow is up 138%

• Shares outstanding is up 129%

That last number is the key, and it demonstrates how destructive dilution can be. The company more than doubled its cash flows, but on a per-share basis, cash flows are up 7%. 

In 12 years. Total.

As a result, the stock went from high-flyer to laggard. Since my earliest (currently held) investment in March 2012, shares have fallen from more than $22 to about $2.36 at recent prices. That's down almost 90%. 

There's an even bigger loss over that period: opportunity cost. The S&P 500 has gained more than 375% over that same period, turning every $1 invested in the broader market, and then left alone, into about $4.75. Instead, I have about $0.12 for every dollar I started with. 

There's more to this story. Many of you may know, but my guess is the bulk of you don't, that I met personally with the CEO of Clean Energy on two occasions in his Southern California office. I also twice met one-on-one with T. Boone Pickens, the other co-founder of the company and at the time its biggest financial backer. 

Simply put, I let a lot of non-objective excuses interfere with my ability to unpack my thesis, and question whether I was just wrong. Most importantly, I failed to look more closely at the economics of the industry, and whether the company could find much financial success for investors, even with the industry itself growing. I was too busy making excuses to justify the company's missteps and failures to create value for shareholders. 

The lesson here isn't to avoid investing mistakes. You can’t. Nobody has a perfect record, and making mistakes is probably the best teacher for becoming a great investor. The true lesson is to rigorously question yourself, your thesis, focus on why you're probably wrong, not why you're right and what the market is getting wrong. 

Sure, sometimes the latter is true, and a contrarian bet pays off big. But more often, the market's right, and you're just making random excuses. I hope you learn that lesson faster than I did with Clean Energy Fuels. 

Jason