Pitfalls of Asset Value Investing: And Never Breath a Word About Your Losses

Feb. 6.09 | About: Circuit City (CCTYQ)

CNBC has an interview with Ricardo Salinas, the Mexican billionaire who took a position in Circuit City Stores Inc. (OTC:CCTYQ) after it fell into bankruptcy and lost $41 million. In the interview with Michelle Caruso-Cabrera, Salinas explains why he made his bet on CCTYQ and how it went wrong. Although Salinas’ CCTYQ investment wasn’t a Grahamian net net, his explanation does capture some of the pitfalls of investing based on asset values:

Mr. Salinas made the majority of his $41 million investment in Circuit City after the troubled chain filed for bankruptcy protection in November. He amassed a 28 percent stake in the company and then began trying to work out a deal with Circuit City’s suppliers in an effort to take the chain private.

But Mr. Salinas backed out of the deal just before the company decided to liquidate, according to a recent account in The Richmond Times-Dispatch.

“It was much more complicated than he expected it to be,” an unidentified source told the newspaper. Pricing on some inventory “was just too high” and the support from banks and vendors “just wasn’t there,” the Times-Dispatch quoted the source as saying.

In his CNBC interview, Mr. Salinas expressed regret about not capturing Circuit City at a bargain-basement price and losing his investment, but acknowledged that it was for the best.

“I don’t care how rich you are, it must hurt to lose $41 million,” Ms. Caruso-Cabrera said to Mr. Salinas on location in Mexico.

“You know - when you’re talking about investments and businesses- it doesn’t pay to be afraid,” Mr. Salinas said, according to a transcript of the interview, which will be broadcast Wednesday night on CNBC. “It doesn’t pay, because fear is not a good counselor. Fear makes you do stupid things. So, of course it hurts.”

Mr. Salinas said he is moving on from his experience but is still looking at buying American assets.

“Well, we’re looking at a couple of mining companies that have been really pounded by the declining commodities,” he said in the interview. “And we think that, you know, mining is a great business. So we might go into a new tack there.”

(Via The New York Times Dealbook)