The Rains of Castamere?

Cover Story, by Mark Robertson, Managing Partner


Posted on August 31st, 2018


Better Selling. Our explorations to build selling disciplines based on the time-honored lessons of the modern investment club continues. The August Round Table featured some deployment of selling discipline that some might compare to an infamous Red Wedding. The rate of return since inception stands at 18.8% over the trailing eight years.

The closing scenes of the third season of Game of Thrones was — for lack of a better word — memorable. “The Rains of Castamere”, sometimes referred to as “The Red Wedding,” is the ninth and penultimate episode of the third season of HBO’s fantasy television series Game of Thrones, and the 29th episode of the series. [Spoiler alert: The episode marked the final appearance of a number of prominent series regulars.]

The episode was written by executive producers David Benioff and D. B. Weiss, and directed by David Nutter. It aired on June 2, 2013. This episode earned Benioff and Weiss a nomination for Primetime Emmy Award for Outstanding Writing for a Drama Series.

The episode was widely praised by critics and cited as one of the best of the series. Rotten Tomatoes, a prominent review aggregator, surveyed 21 reviews of the installment and judged 100% of them to be positive with an average score of 9.9 out of 10. The website’s critical consensus reads, “The most unforgettable episode of Game of Thrones thus far, ‘The Rains of Castamere’ (or as it shall forever be known, ‘The Red Wedding’) packs a dramatic wallop that feels as exquisitely shocking as it does ultimately inevitable.” The majority of the comments were directed at the massacre at the end of the episode … IGN’s Matt Fowler gave the episode a perfect 10/10, calling it “an exquisitely awful event that managed to out-do the unpredictable and horrifying death of Ned Stark back in Season 1”. Fowler also said he believed that the episode’s depiction of the Red Wedding was more powerful than its depiction in A Song of Ice and Fire.

For its 65th anniversary, TV Guide picked “The Rains of Castamere” as the third best episode of the 21st century.

Source: The Rains of Castamere (Wikipedia)

Selling Better. We’ve been developing some guidelines for selling for the past couple of years. We still believe that there are only three reasons (with some “overlap”).

  • (1) You need the money. (This is not applicable and applies to personal needs, partner withdrawals from clubs, etc.)
  • (2A) The quality is deteriorating. We are exploring trend analysis — as applied to the quality ranking — to gauge the potential for this trigger.
  • (2B) Consistent with the Rule-Of-5, we recognize that there are times when “something or somebody is wrong.” When the relative return (alpha) lags the market benchmark by 20% or more, we think a “time out” or a few anti-stubborn pills might be in order. For more on this subject and “algorithm,” see: What’s It All About, Alpha?
  • (3) To Make The Portfolio Better. This is historically the most frequent condition and we think this will continue to be the case. It’s a lot like the depicted hand off of the baton in the race shown in the accompanying chart. When a stock has “done it’s job … run the good race” it can make sense to capture the gains and let another runner (better company at a better price) finish the next leg of the race to Sparta.

Round Table (August 2018): Selling Nominations. The guest list for the Red Wedding. Robert Half (RHI) was invited to celebrate and the rest of the positions were considered for “detention.”

Selling Decisions

Robert Half (RHI) has been a very rewarding selection by Ken Kavula and seconded by the audience back on 6/28/2016. The $2000 invested by those decisions is now worth $4598 for an annualized return of 46.8% that beats the Wilshire 5000 over that time frame by +26.0%. The recent strong price performance has “somewhat outpaced” the bolstering of fundamentals and the return forecast (PAR) is now in lower single digits. This is not a time for angst. It’s a time for a high five and to launch a search for a candidate for the next leg of the relay race. If it helps ease the pain of selling … think of the selection of IPG Photonics (IPGP) by Ken and the audience as the passing of said baton. RHI’s PAR of 2-3% is replaced by IPGP at 12-16% depending on your assumptions and judgment.

Computer Programs (CPSI) was massacred back in 2016 as earnings approached zero. With the discipline entrenched, we’d likely have sold CPSI in early to mid-2016. Check out the chronicle. Hindsight is 20/20. Quality deterioration matters.

The multiple positions in General Electric (GE) are a tough pill. The premise is still good and the resultant pieces of GE are strong. Recovery is possible but the removal from the Dow, slicing of the dividend, etc. have been something of a private red wedding for GE shareholders. Many believe that a recovery is possible, but that the stock price may be a dead money situation. That said, we completely understand and wish to underscore the long-term perspective of Hugh McManus. Because he’d persist with a personal holding — and we understand and respect a good Irish stubborn streak when admiring his track record. As damsel Anne Manning mentioned during the discussion, “I bought some GE [and speculate on recovery] because I remember Hugh’s commitment to Bank of America when it seemed to be in comparably worse condition than GE. Y’all can call me stubborn but this could work out well …” We understand. We agree. We’ll be watching and learning.

As we’ve emphasized, this is a work in progress. There’s some debate over the partial sales of Starbucks (SBUX), McKesson (MCK) and CVS Health (CVS). Mark’s perspective is that the reductions in positions could prove to be logical. Think back to the massive challenges faced the last time Howard Schultz went AWOL at Starbucks. (He’s retiring soon.) Starbucks has thrived since his return but it’s a question mark. Dropping from (5) positions in SBUX to (3) could almost be a sort of “hedging.” The same applies to CVS and McKesson and the challenges faced by both companies.

Polaris (PII) (not shown on guest list) has landed on the quality deterioration watch list. We’ve enjoyed a substantial price recovery from PII but have to be concerned about the quality drift. See the Polaris Chronicle — scroll to bottom of company report page …

Booking (BKG) was given a pass. We could be wrong — but its PAR of 13.8% and quality ranking of 98 are worthy and it was almost nominated for accumulation during the August session. Ardelyx (ARDX) gets a non-core pass and stay of execution as Hugh cited improved balance sheet conditions, decent development efforts and enormous price volatility as par for the course. ARDX is also among the favorites of Kris Jenner at Rock Springs Capital Management.

… and Some Perspective

The wedding list may have seemed brutal but it’s important to maintain perspective, too. The total of these transactions amounts to 2.7% of total assets for the tracking portfolio. Few of us would think twice about making a decision about a relatively small partial position in our own portfolios. Remember, our Round Table is something of a lab. We’ll be monitoring how Starbucks et al. would have fared if we’d simply left them alone. We also find it reinforcing — AS USUAL — that the gains achieved by Robert Half nearly offset the losses realized by all of the other wedding guests. This is often the case. We are grateful. For some bolstering, pull up the Round Table tracking portfolio and notice how few positions are worth less than the original $1000 invested.

With that … it’s time to cut the wedding cake.

For More Regarding The Educational Sessions

Round Table. This monthly webcast is FREE and is co-sponsored by Manifest Investing and the Better Investing Mid-Michigan Chapter. Ken Kavula, Cy Lynch, Hugh McManus and Mark Robertson are regulars and are supported by a number of guest damsels and knights. To be added to the email reminder list, send an email to:

nkavula1@comcast.net

The sessions are recorded and are available via YouTube.com (search for Manifest Investing Round Table) Subscribe to be nudged when new stuff is added. Tracking portfolio: http://www.manifestinvesting.com/dashboards/public/round-table

Mark

Mark Robertson

Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.

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