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Recency Bias And Capital Structure Mis-Allocation

May 05, 2020 8:29 AM ETAR, M, NLS, PTON, RRC, TSLA27 Comments


  • I share important lessons learned from mistakes made exhibiting Recency Bias and Capital Structure Mis-Allocation.
  • Nautilus is the stock where I exhibited Recency Bias and it proved costly.
  • I explain that had too much money in Range Resources' bonds and how that capped my upside to its dramatic stock rebound.

This is the third article from my learning from mistakes series. The goal for me is to share with readers my expensive cost of tuition in the form of mistakes (the direct cost from losses and opportunity costs).

For context, in case readers aren't aware, I published the first two articles, in this three part series in April 2020.

Enclosed below are the links to the first two pieces, in case you haven't read them and are intrigued.

As I stated in the two prior pieces, my overarching goal and quest has to become a good investor. This goal has been my North Star and something that I have been striving towards since I started investing, back in high school (circa 1996). Lo and behold, given my inherently contrarian personality where I often question many things, sometimes quite critically, this has been a blessing and a curse. As an investor, critical thinking is an important skillset, but sometimes overthinking can be very costly.

Let me explain.

This year I have made two major mistakes. Let's start with my first and least costly mistake - Recency Bias.

Recency Bias

In 2020, on three occasions, I dipped my toe in the water on Nautilus, Inc. (NLS). Before I explain the trades and mistakes, let me briefly describe the company. Nautilus is a well known home fitness company founded in 1986. Readers might be familiar with its brands that include: Nautilus, Bowflex, Octane Fitness and Schwinn.

On January 17, 2019, the business inflected negatively when the company pre-announced horrible Q4 2018 results. The stock was then trading at $11.79 per share prior to the warning. SA's Carl Surran did a nice job of summarizing the miss.

Source: Seeking

This article was written by

A career wanderer and journeyman, with a passion for deep value and contrarian investing. I spent five years on the buy side in investment grade bonds on a team that managed $50 billion of assets, 3.5 years as an energy credit analyst for an energy company, and had multiple stints in corporate finance, most recently as a strategic financial analyst. I have an undergraduate degree in Finance (UMass Amherst) and earned an MBA (Babson College).

I actively invest my own capital and for a few family members.

Favorite quotes:

“When you are inspired by some great purpose, some extraordinary project, all your thoughts break their bonds: Your mind transcends limitations, your consciousness expands in every direction, and you find yourself in a new, great and wonderful world. Dormant forces, faculties and talents become alive, and you discover yourself to be a greater person by far than you ever dreamed yourself to be.” (Author - Patanjali)

“Tentative efforts lead to tentative outcomes. Therefore, give yourself fully to your endeavors. Decide to construct your character through excellent actions and determine to pay the price of a worthy goal. The trials you encounter will introduce you to your strengths. Remain steadfast...and one day you will build something that endures: something worthy of your potential.” (Author - Epictetus)

"Hope sees the invisible, feels the intangible, and achieves the impossible." (Author - Unknown)

"When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left, and could say, 'I used everything you gave me." (Author - Erma Bombeck)

Analyst’s Disclosure: I am/we are long AR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Also long RRC and M.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (27)

CaptainMooseInc profile picture

Willing to take a look at SDC and do a write up? Earnings on 5/13. 56% short interest (which I know you love), and news today that three major insurers are adding them. I feel like a perfect storm is brewing (similar to GME) for a short squeeze.
Courage & Conviction Investing profile picture
@CaptainMooseInc Sorry. I just don't have the bandwidth. I am going to launch my Marketplace service, sometime next week, and I have a bunch of stuff to do for that.
Raw Energy profile picture
Sounds more like a disciplined investment strategy rather than mistakes on the E&Ps on the recent transactions. By your definition, I make mistakes on every trade, selling before the absolute peak and buying other than at the absolute bottom! ;-)
Courage & Conviction Investing profile picture
@Raw Energy Thanks for reading. I always enjoy your balanced commentary and sense of humor : )
jonnoarmo profile picture
Great analysis on AR and RRC over the past few months. I was on the CC last week and could not believe how one of the analysts was not even using updated figures. LOL. He laughed it out and tired to back track but it was obvious. Does this mean you are out of AR for the time being? Looks like you went back in partial into RRC premkt. Thx
Courage & Conviction Investing profile picture
@jonnoarmo Thanks. I still own some $AR in my legacy buy and hold account. I read the AR call, over the weekend, and agree on the clueless of the sell side on this one. However, I would buy back some AR on weakness.
Old Fireside profile picture
Been there, done that, and will certainly do it again. I made some decent bucks on your analysis, thank you very much, but should have made 3x. Still, “a bird in hand” is still a bird in hand. I guess if we stay in the game and continue to learn, tuition costs notwithstanding, we might earn the crown one day, perishable though it may be. Patience and perseverance, courage and conviction, along with generosity to keep the greed tamped down may preserve sight. Tough waiting for the next clearly recognizable opportunity.
Courage & Conviction Investing profile picture
@Old Fireside Glad you like the article and made some money on $AR.
I really like reading your articles. In last article your wrote everything right. Maybe I am wrong but with short covering we can reach 10$. Not much supply on the sell side. I am talking RRC.
Courage & Conviction Investing profile picture
@Vidal33 Thanks. Yes, I agree, RRC is very possible.
Getting too clever will really cost you, as you correctly recognize. But I also get the sense you're not thinking hard enough about position sizing.

If you're willing to spend a ton of hours on various investment ideas you can also afford to allocate some hours to the questions of how much you want to bet, whether you want to double down, at what point you'll get out, and so on. If you spend 200 hours on fundamental research and 15 minutes on bet sizing you'll wreck your returns.

Are you willing to keep averaging down on Macy's for the next 6 months? What is the opportunity cost there? If you're OK with buying before M hits bottom, why are you not OK with buying M after the stock is showing some life? In this high vol climate having your money locked up in any stock has a huge opportunity cost. Even if Macy's stock is bound to recover, is this really the best contrarian idea you've got? If you're not excited about owning Macy's at $5, why do you even hold this position?

Having a 40% drawdown and taking wild bets to recover your money is not a sustainable investing approach.

I don't mean to be too critical, and I enjoy reading your work. But if you're correctly identifying great investment opportunities and not making bank you're making worse mistakes than you think you are.
Courage & Conviction Investing profile picture
@x55111 Well said and you raise some great questions. I love Macy's and will continue to slowly add. I think the real estate protects me. Macy's had been hurt because of the secular decline of malls, not because they aren't good operators.

Thanks for the feedback.
Everyone thought Sear’s real estate was worth more than the stock. We know what happened there. BTU back at $2.95.
Courage & Conviction Investing profile picture
@gstrfbull Didn't realize Sears Old Herald Square and Downtown San Fran. real estate : )
Thank you for sharing C&C. Good to see others make the same mistakes, and we can share in learning from them. I suspect you are gaining a lot of trust on SA by being so transparent with all your trades. This is sorely lacking on this forum. Hardly anyone revisits their missed calls. I for one can be counted on as a future subscriber if you ever re-launch. I am currently still long AR and DTEA . I took 40% gain out of 1/3 of my AR shares so that I feel I can now ride out what the market gives me with very little downside. Keep up the great work - Deep Value analysis is a skill set I don't have (nor the time) and I very much look forward to your work.
Courage & Conviction Investing profile picture
@roots21 Many thanks for the thoughtful feedback. We all make mistakes and it is good to learn from them. Incidentally, I bought back some RRC at $6.35 in pre-market, and plan to buy more on weakness. I also added a little more DTEA on recent weakness.

I do plan to re-launch on Marketplace, perhaps as earlier as next week. I have been burning the midnight oil and feel like I am in a good place to shares idea.

I am working with the Marketplace staff and refining my pitch.

My service is for retail investors that are very active in the markets. All levels of experience are welcome, but more engaged investors might get the most out of it. It is a catalyst driven trading oriented service with an underpinning tied to value and out of favor sectors. The hold period can range from a few days to up to six months (maybe longer). Risk management perimeters will be set based on position sizing and/or stop losses. This isn't a buy and hold and forget it service. And I don't chase yield, however, I create synthetic yield via selective covered call writing. This service is for people highly engaged in markets. I am pricing it low ($365) such that it is assessable to most retail investors. Readers will benefit from my passion for sharing new ideas, and actively following north of 50 stocks. My process is open minded, agile, and flexible. When new information changes, I can and will change my mind. I am done falling in love with stocks and I no longer try to be Wayne Gretzky (trying to anticipate where the puck will go next).

I constantly check myself for confirmation bias and I am working on letting my winner's run (a work in process).

Is this a fair representation?
That is exactly what I am seeking. I am "active" enough in that I am "checking in" each day, and would definitely be open to specific strike points, etc. that require "paying attention". My time horizons are obviously related to which accounts I deploy capital in (tax deferred, vs taxable, short term - saving for a near term-ish goal vs retirement) etc. I have some history in a past career with Merrill Lynch on the retail side as an Investment Advisor. I have seen a real change in the way markets are valuing stocks and my traditional methods seem to be of less value than before (momentum and algo crap I don't understand outweighing good old fashioned metrics). I feel that working with a few resources like your self in "Deep value" and "under the radar" plays is where some of these more traditional valuation metrics (liquidity, book values, cash flow swings, etc.) can still be considered as key metrics for pricing enterprises. I just don't understand some of the valuations out there, and this style of investing feels far more tangible...and yet, provides the high risk/high reward profile I am seeking.
Courage & Conviction Investing profile picture
@roots21 Good to hear. I appreciate the feedback. As I said, I am hoping to launch next week.

In terms of trading. For an example, last night, after the bell, I bought some $LB at $10.31.

I didn't realize it caught an upgrade, this am, so I flipped it at $11 at 7:15am. Nonetheless, I made 7% on a 3% sized bet. Yes, it would have been fun to have sold at $12, but like I said, I missed the upgrade news.

These are the type of trading ideas I plan to highlight, as I follow north of 50 companies.
I don’t think there is anyone out there that hasn’t done that. I got too cute on MR after believing in it for two years and watching it melt away. After a 100% run I also though the shorts would defend. They tried, but it took off on one of those famous times where you aren’t sitting at your computer, because you are playing Taxi for the kids. 🙆‍♂️ Got back in at a costly level. You are not alone. 😉
Courage & Conviction Investing profile picture
@Luck of the Irish It happens. Thanks for sharing. I have three kids (2, 4, and 6) so I know the feeling.
did you invest in btu back in day pre bankruptcy
Courage & Conviction Investing profile picture
@ofgktc I was in the Peabody bonds only. I did recommend the $2.50 leaps, though. I wrote extensively about it on SA.
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