You Are Playing Hockey against Wayne Gretzky

If you absolutely need to win a sports match, you must play it against a team you can beat hands down. Investors were offered such an opportunity in 2008. With a little bit of homework, you could have found securities that offered five to ten times the return on your investment with very little risk. It felt like playing hockey against a bunch of two-year-olds.

In 2011, the situation has reversed. Equity valuations are fair at best and stretched in some sectors. Now you are playing hockey against a professional. It is a game most people can’t win, no matter what the return merchants are saying. Were they pounding the “buy, buy, buy” table in 2008? No, they weren’t.

The worst part about this metaphor is that as investors, we don’t fully grasp whom we are playing the game against. My guess though is that right now, we are playing hockey against Wayne Gretzky.

Good luck with your game!

Michael Bigger. Follow me on Twitter and StockTwits.

Ten Thousands Crocs Stores Globally?

Friday night, my family and I were in New York, and we took the time to visit the Crocs (CROX) store located on Spring Street in SoHo, New York.

We own a significant position in Crocs, which I purchased in 2008 at an average price below $2. I often post about CROX on my investment blog.

The stock price, which dipped to a low of $0.89 in late 2008, is now trading above $18. In April 2010, I wrote about why I thought CROX could reach $20. Since the stock is currently trading near my price target, one might think that the potential upside for CROX stock price has evaporated.

I don’t think so, and I am writing this post to explain why.

This visit allowed me to figure out how big the Crocs retail opportunity really is.

We were stunned by the number of people shopping and buying at Crocs|SoHo. We were impressed by how well the products displayed on the shelves. The staff was friendly, and the store looked immaculate. My wife bought a pair of Ularoo, and my son and I each bought a pair of Ocean Minded Nomad Rover. All in all, we spent more than $300 in the store.

We observed other interesting things while roaming through the store.

• We saw some people you would expect to see at an Apple store trying on and buying Hover sneakers.
• We asked an employee to describe how busy the store is throughout the year. He said the store is crazy busy most of the time. Totally nuts, he said.
• My wife, who is from Europe, noticed many Europeans shopping in the store during our visit.
• Most of the other shoe stores on Spring Street were empty. Crocs was jam-packed with customers.

As I watched happy faces walk around the store to find what they were looking for, I was reminded one more time about how unique and powerful this brand is.

I think management is up to something with that retail concept. Since the company has the highest margin in the footwear industry, it is in a great position to exploit commercial real estate opportunities that are becoming available as traditional retailers pare back their businesses in the face of mounting pressure from Internet retailers.

Crocs management has made a big push on the retail front, and the company will be operating 400 stores by the end of 2010. The stores allow the company to merchandise the depth of Crocs’ more than 250 styles. In my opinion, looking at the store we visited, there is no reason to believe the company can’t expand its retail footprint to more than 10,000 stores globally. Why not?

When you overlay Crocs’ retail opportunity with its aggressive global Internet business initiatives and a solid turnaround in its wholesale division, the Crocs story holds promise for the next ten to twenty years.

The road will be bumpy at times, but there is so much Big Mac in this investment thesis that as a family, we have decided not to pare down our position

Written by Michael Bigger. Follow me on Twitter and StockTwits.

The Pitfall of Feeling Like a King

Last weekend I updated my wealth spreadsheet and I felt like a king. It reminded me of days when as a teenager selling knickknacks on the street of La Tuque I would go home at night counting my bounty countless times, even smelling it. Hey, money smells better than the local paper mill.

For capitalists money is a way to keep score and man does it feel good when the magic Excel grand total cell updates to a new all time high.

My excitement lasted a brief moment though as I reminisced about how different I felt during the bear market of 2007 and 2008.

In late 2008, I went kiteboarding with a very successful friend of mine who told me before we hit the liquid for a sick session that he had suffered major losses in his investment portfolio. He was considering going back to work to refill his money tank. Ouch!

Our investment portfolio suffered as well. However, following the sage advice of Shelby Davis, I bought stocks with both hands.

“Bear markets make people a lot of money; they just don’t know it at the time.”

–Shelby Davis

The action I took then drove the magic Excel cell all the way to a new all time high. For investors, it is the actions taken then that are making money now.

What should we be doing now? The way I go about answering this question is to flip Davis’ statement on its head:

Bull markets lose people a lot of money; they just don’t know it at the time.

I guess this explains why I recently tweeted this —@biggercapital: I will probably be miserable for the next two years. All I want to do is sell $$

Feeling like a king makes me real nervous. I never make money one or two years down the road when I feel like that.

Are you feeling the effect of the magic Excel grand total cell?

Written by Michael Bigger. Follow me on Twitter and StockTwits.

An Ear to the Ground

Bear markets make people a lot of money: they just don’t know it at the time. ─Shelby Davis

I got really excited on November 10 after @fledgingtrader pointed me to the following blog post written by Curtis Faith Be Careful – Market in Danger Zone.

Faith predicts a bear market that might retest the 2008 bear market low. Most big market predictions like this one usually turn out to be wrong. However, Curtis has been right before and there is something to say about keeping an ear to the ground and verifying if his prediction is unfolding.

Here is a passage about the timing of bear market from our e-book In Praise of Speculation!:

When stock prices do not rally beyond the prices at which they were before the break occurred, it is a sign that the turning point has been reached and that the bear market has started, although the majority of people do not realize this until a long time afterwards.

I recently wrote the post titled Why Our Investment Blog Is Boring. This post explains why we love bear markets so much.

What do you think? Are we on the verge of a big bear market? If so we have the cash, and are ready for it!

Written by Michael Bigger. Follow me on Twitter and StockTwits.

Marketplaces and Inflation

Written by Michael Bigger. Follow me on Twitter and StockTwits.

Inflation has been in the news quite a bit lately. On Sunday, Howard Lindzon posted a great piece about printing money titled Printing Money…I Mean Quantitative Easing. The video embedded in his post is hilarious but alarmingly Right On!

This piece got me thinking one more time about what else other than the traditional vehicles (agricultural products, gold, silver, etc) could benefit from inflation.

Here is an idea…

Businesses that could thrive during a period of high inflation are the hard-good online marketplaces such as Amazon, Craigslist, eBay, and others. The reasons supporting their potential success are as follows:

1. Traditional retailers will have a tougher time managing price increases compared to their agile technology-skilled competitors.
2. As the prices of hard goods and the volatility of the market increase, activity on the online exchanges should increase.
3. Arbitrage opportunities will abound on the online space to the benefit of the marketplaces’ owners.
4. Online supplies of used merchandise should increase as prices increase, as sellers trade hard goods for hard goods.

Google Search might also benefit as a hard-good and price-discovery tool.

eBay is really interesting right now because its stock is reasonably valued and its marketplace is heaven for value shoppers. Inflation could unleash a powerful catalyst for this company.

What do you think?

Are We Traders or Investors?

Written by Michael Bigger. Follow me on Twitter and StockTwits.

There is so much debate these days about trading versus investing. Recently, I have heard some people say investing does not work and the only way to go is trading. At Bigger Capital, we trade very actively, yet we think this is nonsense.

We view investment as an activity that creates true wealth—basically, creating much output with relatively little input. We have been very successful investing. We made more than 600 times our investment on Innovative Fibers (a private investment). We did extremely well buying securities such as Amazon, Crocs, and others when no one wanted to own them because we held a long-term view about those securities that turned out to be correct.

Yet, we know that regardless of a security's intrinsic value, its price will fluctuate a lot in the short term. We view trading as taking advantage of those fluctuations. We are pretty good at that too.

Very few securities qualify for our investment capital. We usually commit to an investment once every three to five years. When that happens, we commit for size. In the meantime, we are very happy trading.

So I guess we are both of these animals. We trade and invest.

In addition, we are a business builder. We are building trading businesses, which, in a sense, is also an investment. You see the pattern here. The lines between trading and investing are often blurry. So if someone shows you the next Innovative Fibers and you decide to pass because you are a trader, please give me a phone call.

Great Ideas From Crocsideas

Written by Michael Bigger. Follow me on Twitter and StockTwits

Outstanding Business Digest recently quoted Charlie Munger as saying “Go where the competition is low.”

Most readers of this blog know we have a significant position in Crocs (CROX). Search for Crocs on our blog, and you can read all our posts about it.

One of the many things that fascinate me about the company is that it has a website called crocsideas.com. Crocsideas.com is a treasure trove for Crocs investors because on this site, the company asks customers to submit new ideas and also to rate new styles coming out soon.

I have a funny feeling that not many Crocs investors go on the site. This is how we get our hands dirty with this site: we go on there as a customer and investor and we analyze new products. We promote and demote new styles, and, more importantly, we read other customers’ reviews and try to find out what makes customers go bananas over Crocs.

We do the same thing when we look at the best sellers in shoes on Amazon.com.

Investing in a consumer goods company has a lot to do with figuring out its customers. In fact, investing in any company has a lot to do with figuring out the customers. You know you’ve found something good when the customer is delighted out of his or her mind.

Our investigation reveals that in Crocs’s case, the customer is having a great experience.

How Much Big Mac Is in Your Investment?

Written by Michael Bigger. Follow me on Twitter.

One of the most successful posts on this blog has been A Thousandfold Return on Investment. It tells the story of my friend who made more than one thousand times his money investing in McDonald’s in the 1960s. It also shows his field trip report which he wrote in 1965.

Any time I make a long-term investment, I always ask myself whether there is a little bit of Big Mac in the investment thesis. Does it feel like investing in McDonald’s in the 1960s and 1970s? Are customers going bananas over the experience, the operational excellence, the consistency, the product comfort, etc.?

Here is a list of some of the investments we have made over the years that had a little bit of Big Mac in them:

• Amazon.com, 2001
• Priceline, 2002
• McDonald’s, 2003
• Netflix, 2005
• Crocs, 2008

You might want to think about "How Much Big Mac Is in Your Investment" when you make your next long-term commitment. I won't commit capital to a long-term investment unless there is some Big Mac in the thesis. I make very few long-term commitments. 

Reality check: We’ve had plenty of Polaroid as well in some of the clunkers we have bought over the years.

BTW...I just published this work: In Praise of Speculation!. Check it out and let me know what you think. 

Crocs Update: Investment Thesis: Walking on Marshmallows

Written by Michael Bigger. Follow me on Twitter.

I am not going to bore you with more complex financial facts about Crocs (CROX). Search for Crocs on this blog or look at the latest earnings report to convince yourself. CROX’s business is on fire. The company has the highest margin in the footwear industry (Biggest Footwear Public Companies).

Why that is?

A good place to start investigating the nature of CROX successes is on Amazon.com. Day in day out Crox has about 40 to 50 percent market share on the top bestsellers shoes on that site. On August 25, it had 17 on the best 25 for a share of 68%.

I recently read most of the customer reviews associated with the top selling Crocs. What I learned during that process is best summarize by this statement from one of the reviewers:

“They feel like walking on marshmallows”

It is that feeling of comfort that makes some people disregard their indignation to the Crocs Classic look and wear the shoe. No other shoe companies that I know of delivers comfort like CROX does.

We are already up about 7+ times on our Crocs investment and we think the run is far from over. Sure, the stock will experience some severe pullbacks but we think the company will sell many more shoes in 10 years from now. Crocs global expansion holds promises. The company should deliver about $1 of free cash flow during 2011. Given the nature of its competitive advantage, its growth rate and its untapped market globally, we think CROX is worth $20 at a minimum. $30 is possible.

We intend to maintain our investment in $CROX….

•         As long as Crocs can deliver the marshmallows experience
•         As long as Crocs manage its business well and with very little leverage
•         As long as Crocs stays at the top of the rankings on Amazon.com
•         As long as the stock is not overvalued
•         As long as the company treats shareholders well

Stalking The Education Sector For The Big Money

Frederick Kobrick had this to say about “big money” in his great book The Big Money: Seven Steps to Picking Great Stocks and Finding Financial Security (Amazon affiliate link):

 Over time, you’ll be able to work with more confidence and less frustration, and have a far better chance of making the big money. While this can be triples and quadruples, I think of the “big money” as more like making 10X, 25X —even 100X or 200X—your investment by owning the greatest companies, and owning them with true insights and patience over the long term.

Any time some stocks in a sector collapse by about 90 to 95 percent, we go on the lookout for a great investment that could deliver the big money. We are patient waiting for the perfect set-up: greatness at a cheap price. 

The private education sector has come under intense pressure recently because of the higher-than-normal delinquency rates of government student funding. This situation has created all kinds of issues for these companies. As an example, Corinthian Colleges (COCO) is down 86 percent from the all-time high it reached in 2004.

The education stock’s valuations have not reached our target levels yet, and we are far from being convinced that we can find a great company among the rubble, but we are stalking.

Is there anything on your radar screen that you think will make you the “big money”?

Written by Michael Bigger. Follow me on Twitter.