- - Thursday, August 19, 2010


One of the more frustrating aspects of investing, from my perspective, is when the stock market and investors fail to see what I do. I suspect at least a few reading this think to themselves, “What an overconfident …”

Not true. Well, not entirely.

Rather, what I am addressing is common to many investors — what to do when you become frustrated by an investment, particularly if it’s in a stock that you yourself have selected.

On one hand, you begin to question your judgment and the underlying data, whether you should have ever bought the stock to begin with or if you should just exit the position.

On the other, we have to acknowledge that sometimes it takes time for the stock market and other investors to catch on and recognize what initially attracted us to build that position in the first place.

I most recently experienced this frustration with Kopin Corp., a company that in my view is well positioned in the industry shift from mobile phones to smart phones and the larger migration toward connected devices. As such, Kopin is a central player in my “Powering the Mobile Consumer” theme. Moreover, it enjoys an interesting position in its display business, the vast majority of which serves military and defense applications. Given that nature of the display business, it tends to have a very favorable margin structure. Sprinkle in recent wins that should jump-start that business in the coming months and, well, all seemed well.

Kopin reported second-quarter results, and while I can’t speak as to what others were expecting, the quarterly results were very rather in line with what I was expecting. Management reaffirmed its revenue forecast, and the results for the quarter were in line from an earnings perspective. Needless to say, I was not expecting any big changes in the share price near term, or so was my thought.

It would appear that I was in the minority with that assessment, for the shares tumbled soon after those quarterly results were released, losing more than 20 percent of their value over the ensuing two weeks.

As you can imagine, this immediately had me wondering if I had missed something either in the recent earnings report or in some other aspect of the company’s business. It would seem that someone’s expectations were not met. I double-checked my math, recalculated metrics, ratios, percentages and margins, and I found that my math held up as did my reasons for selecting Kopin. These included a positive shift in the military display business, the favorable trends in the wireless end market and Kopin’s position with its customers as well as those of its customers with mobile phone, smart phone and other connected device manufacturers.

Hmmm. It all seemed to hold, including the upside potential. I was sufficiently frazzled that I even went back as I do from time to time and revisited the process I use for selecting a company. This speaks to the heart of investment philosophy and raises a crossroads of sorts — the process versus the short-term outcome of the decision based on that process.

One would argue that it’s the results that matter. My reply is true but …

The “but” is nicely described by Michael J. Mauboussin, a chief investment strategist at Legg Mason Capital Management. In his book “More Than You Know: Finding Financial Wisdom in Unconventional Places,” Mr. Mauboussin points out that “good decisions will sometimes lead to bad outcomes and bad decisions will sometimes lead to good outcomes.”

Mr. Mauboussin goes on to say that “the best long-term performers in any probabilistic field — such as investing, sports-team management and pari-mutuel betting — all emphasize process over outcome.”

To me, the process includes understanding the business, valuation analysis, catalysts for upside and those for the downside as well as the negative perspective. Many I have found solely focus on the positive or upside view and when things go awry, as can happen from time to time, frustration ensues. This is why I utilize a net upside view that factors in potential upside as well as potential downside in a stock when making a selection.

If your process checks out, then we have to examine your timetable or your degree of patience. By patience, I mean the willingness to let the thesis play out over a certain time frame so long as thesis and supporting data continue to check out. I have said before that this is one of the differences between investing, which to me connotes a longer-term perspective, and trading, a get-in-and-get-out mindset that can span a day, a week or a bit longer.

My goal is to be a good investor, and that requires patience. Normally, I would look for a quote from Warren Buffett, but this time I think Kenny Rogers summed it up well when he sang, “You got to know when to hold ‘em, know when to fold ‘em, know when to walk away.”

I’m not ready to fold on Kopin or on some other companies. I’ll have more patience, continue to scrutinize where needed and do my best to keep overconfidence in my views in check.

Do the same.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm located in the Washington, D.C., area. He can be reached at [email protected] washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

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