Have you ever watched Deal or No Deal?
It’s the game show where contestants have to choose between 26 briefcases to win $1 million. Each briefcase represents a secret amount of money, from $0.01 to the coveted million.
Contestants get choice after choice to eliminate briefcases from the board, and they’re offered deals from the “banker” along the way based on the amount left in play.
If the player has eliminated several of the low-denomination briefcases, that offer will be higher. If they were unlucky enough to eliminate the high-denomination briefcases, the offer may be a pittance.
The point of the game: Will they quit if offered a satisfactory amount?
Some say yes, walking away with $75,000, $300,000, or even more. Others say no and keep on playing – gambling, really – for their chance at a cool million.
Sometimes the odds are in their favor to keep playing. Other times, it’s safer to walk away with the sure thing, even if it means accepting a lower amount.
The stock market is not a game show, but it’s a useful lesson all the same – sometimes the sure thing is your best bet… even if it means a smaller return.
A few months ago, we “took the deal” in the pages of my small-cap service, Wide Moat Confidential.
In April, I recommended Advance Auto Parts (AAP) – an auto-parts retailer I used to build for that had fallen on hard times. But the company was in the midst of a turnaround, and the stock looked downright cheap. In under three months, the stock was up 97%.
In July, I recommended that readers sell half their position, taking virtually all the risk out of the investment.
Maybe that will look foolish a year from now. Maybe, as predicted, Advance Auto will fully right the ship and shares will be significantly higher.
But in the markets – and in life – we have to continuously reevaluate our decisions and shift our actions accordingly. It’s also true in business. It’s what has kept great companies growing for years and even decades.
But there are other companies that probably should have quit while they were ahead…
A Relic That Used to Be the Company to Beat
Back when I was a real estate developer in the ’80s, ’90s, and 2000s, I built for many big-name businesses – companies we take for granted today as simply being part of the fabric of America.
Walmart (WMT)… Dollar Tree (DLTR)… PetSmart… CVS Health (CVS)… Advance Auto Parts: the kinds of companies most Americans find in our typical commuting sphere.
But I also built for once-great companies that have since struggled or gone under.
RadioShack, Goody’s, and Party City, for example, were solid clients back in the late ’90s and early 2000s. So were Family Dollar, Walgreens, and OfficeMax – now a subsidiary of the soon-to-be bought out ODP (ODP) – businesses that still exist but are struggling.
And then there was Blockbuster Video…
I first heard of Blockbuster in the late 1980s when one of my local developer competitors became a franchisee. So, I began doing my due diligence as well, coming to the easy conclusion that this chain was going places.
At the time, I was also building for and leasing to competitors like Hollywood Video and Movie Gallery. But Blockbuster knew how to dominate. According to the Foundation for Economic Education (“FEE”), at its heyday, the chain “was opening a new store every 17 hours!”
Banks loved Blockbuster back then. Recognizing its growing brand appeal, they practically threw money at anyone who would build for the video rental chain.
Plus, they recognized that most of these buildings were easily convertible and located along major intersections. In other words, even if that individual Blockbuster failed, the property was still worth something.
So, I kept building video stores as long as the banker would lend me the money.
By 2004, Blockbuster boasted over 9,000 stores, employed 84,300 people, and brought in $6 billion in revenue.
Even so, I saw the warning signs well before its management did.
Time to Quit
All told, I collected hundreds of rent checks from Blockbuster. But I also noticed its missteps firsthand, like how it was so slow to adopt DVDs.
As FEE notes:
DVDs were smaller, cheaper, more durable, offered better picture quality than VHS tapes, and enabled Hollywood studios to sell movies directly to the public. This posed a threat to Blockbuster, which acted as a rental intermediary between the expensive, studio-produced VHS tapes and budget-conscious consumers.
So, in its defense, management did have their reasons for sticking with their status quo as long as they did. Then again, Warner Brothers (WBD) offered them the chance to rent its DVDs before mass release. In exchange, the studio would get a 40% cut.
Blockbuster refused, thinking it was too big and mighty to bend the knee like that.
It also misjudged its much-despised late-fees policy, which added $800 million in annual revenue. That second miscalculation opened the door for Netflix (NFLX) to start up with its subscription-based solution.
Annie Duke – who I brought up in yesterday’s article, "When It’s Time to Quit” – mentions how poorly things went from there in her book Quit.
New competitors, including Netflix, sprung up. New and disruptive technology (streaming) was developed. Blockbuster, when presented with the opportunity to acquire Netflix, refused. Then, it persisted in its business of renting physical copies of entertainment content to people in person to their store locations.
Did you notice that third sentence: Blockbuster refused to acquire Netflix. Once again, it was given a business-saving opportunity. And once again, it refused to learn any new tricks.
“The road to sustained profitability for a business is not only about sticking to a strategy or business model,” Duke writes. “It is also about surveying and reacting to the changing landscape.”
The same applies to investing in those businesses.
So, here’s my word of advice: Don’t be like Blockbuster. And don’t be like those Deal or No Deal contestants who end up with just one penny because they were too fixated on $1 million.
Learn how to evaluate and adapt. Sometimes, that may mean quitting a particular investment.
Or it could mean quitting while you’re ahead.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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