Some time back on this very thread I was waxing lyrical about how I believed the consumer would bounce back like he/she always has and that discretionary retailers (MYR and SFH are the ones I own).
I have to concede that I under-gauged both the duration and the depth of the consumer strike currently underway. On reflection, I think I have overlooked the erosion of disposable incomes by things such as higher utility and transport costs, as well as the new-found savings appetite of households.
The good news is that it hasn't hurt too bad; I was buying MYR and SFH some 6 months ago at roughly their current share price levels. That is to say, buying when I assessed the stock valuations were factoring the worst case scenario, which unfortuantely has now come to pass.
So, while the scope for permanent capital destruction was assessed to be small compared to substantial upside under the scenario of a rebound in consumer behaviour, the upside has now evaporated, especially for MYR, which, by dint of this disappointment will be de-rated by the market for a long time to come.
Besides my misreading of the consumer, where my investment thesis went wrong for MYR was in my sense of the internal cost levers at management's disposal, which would insulate the company's earnings from consumer headwinds. Either those levers don't exist, or for whatever reason, MYR management is failing to operate them.
The point is that the earnings trajectory that I expected from MYR over the next 2 years is no longer intact. The business I thought I had bought is a different one to the one that I now see. So I have sold my stock without any capital gain.
While this is an investment mistake (and the making of investment mistakes should be taken as given) the important thing is that investment mistakes should result only in upside value foregone, and do not translate into value destruction. This defines the risk-return philosophy.
In a portfolio of 20 stocks, one or two will probably be mistakes. So long as they don't destroy one's capital permanently, the value created by the portfolio winners not needed to offset the mistakes.
One thing is for certain: MYR won't be the last stock I get wrong.
Mea culpa.
Cam
MYR Price at posting:
$3.24 Sentiment: None Disclosure: Not Held
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