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"Two mice fell into a
bucket of cream. One drowned instantly. The second swam like crazy
until he churned the cream into butter and then safely walked away."
Leonardo DiCaprio
Actor in the movie
Catch Me If You Can
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Ardor. Fervor. Intensity. Enthusiasm. My son calls
it the "I Will Factor". And it is no different with investing.
As investors we must have the fortitude and intensity to research,
analyze and then make the difficult decision whether to buy or to sell a
security. In the face of the initial frustration of being temporarily
wrong we must also have the stamina to hang in until our original
investment decision is played out. Patience, patience, patience.
The drive to investment success, I believe,
frequently necessitates a certain unusual enthusiasm and intensity. More
importantly, this success often involves a particular "fire in
one's belly". It mushrooms into an intensity to stick with a
difficult yet extremely potentially-rewarding investment no matter how
challenging the situation. A recent ABC Funds example was our investment
in Bon-Ton Stores Inc. of York, Pennsylvania.
In mid 2002 we purchased our initial holding of
Bon-Ton Stores, a family-controlled business operating 72 quality
fashion department stores. Bon-Ton, located in small secondary markets,
looked incredibly undervalued at 33% of book value, less than 7 times
earnings and carrying a 2% dividend yield. Unfortunately, no sooner had
we purchased 150,000 shares at $4.75 when the stock plunged to $3.75.
Although we were shocked, we examined our investment premise and
re-analyzed Bon-Ton in even greater detail. We concluded that if the
stock was very cheap at $4.75 it was an incredible bargain at $3.75. We
reasoned that Bon-Ton's depressed price could be attributed to a then
slow-growing U.S. economy, flattish top line revenue growth and its
position as a small capitalization, underfollowed public department
store. In the end we decided to purchase an additional 50,000 shares to
add to our 150,000 holding.
With Bon-Ton's strong financials we believed that
when the U.S. economy did recover Bon-Ton was well-placed for future
revenue expansion and increased profitability. Months passed. What
followed was Bon-Ton's opportunistic purchase of Elder Beerman, the
seventh largest department store chain in the U.S. This catalyst,
improving business fundamentals and the sudden discovery by Wall Street
analysts of this ambitious Nasdaq-listed department store chain has
lifted the stock to its present price of over $15. In retrospect, solid
fundamental analysis, deep analytical conviction and the utmost of
patience contributed to our success of churning cream into butter.
Irwin A. Michael, CFA
