Don’t Use Nostalgia to Make Stock Buying Decisions
It’s perfectly normal to feel nostalgic during a crisis, but nostalgia is no way to guide your investment decisions.
While it may feel good owning a stock that reminds you of days gone by, rarely does doing so work out well for you and your portfolio.
Take the department store industry. For some 100 years, the department store was the go-to outlet for the retail needs of most people, none more popular or influential than Sears.
Hedge fund billionaire Eddie Lampert thought so much of the name and the nostalgia for the old Sears Catalog, he engineered a buyout of the department store giant for $11 billion back in 2004 as reported in The New York Times, November 2004.
What a disaster that was.
Pershing Square manager, Bill Ackman had a similar experience with JC Penny when he took a 16.5% stake in the company as reported in The New York Times, October 8, 2010.
Both of these investors thought they could use financial engineering and turbocharged management techniques that would bring both Sears and JC Penny back to life.
It didn’t work, as both Sears and JC Penny are essentially defunct.
Nostalgia is a powerful motivator in the stock market simply because it feels good.
If an old, established company struggles and its valuation dips, nostalgia can have an investor losing sight of what’s really important: sustainability of the business model and the ability to generate earnings growth in the future.
I remember buying my first piece of furniture when I was in college. It was a Papa San wicker chair from Pier One Imports.
30 years later with Pier One struggling like every other retailer the thought crossed my mind to own the stock simply for nostalgic purposes. I loved that chair and I’m sure millions of others loved it too along with the other unique items found in its stores.
The stock price was such that combined with nostalgia, I thought what a great stock to own.
Wrong.
Pier One is now in bankruptcy and whatever value was there a decade ago is long gone.
Today we are in the midst of a bear market caused by the Coronavirus pandemic. Many stocks are trading at significantly lower prices than they were at the start of the year; there are bargains to be had.
When you add in some nostalgia, the ingredients are in place for mistakes. It feels like déjà vu.
Several years after I graduated from college, Papa San chair still in hand, I bought my first house. It was time to buy the things needed to make my house my home.
Back then, the go-to retailer to make a house a home was Bed, Bath & Beyond. In the early 1990’s there was nothing quite like it; they were brand spanking new and full of the things I needed for my first house.
My first home was filled with Bed, Bath & Beyond’s products, and I have a ton of nostalgia for that company. But fast forward to today and Bed, Bath & Beyond is a shell of its former self.
With the stock dipping below $5 per share in mid-April, it might seem like the perfect stock to own in my portfolio.
Not so fast.
Considering Sears, JC Penney and Pier One now trade for pennies per share, Bed Bath & Beyond can certainly fall further. In fact, with the Coronavirus pandemic, I think it is safe to say that companies like Bed, Bath & Beyond will be one of the losers when we emerge from this crisis.
Who will be the winners?
We’ve spent much of our research time ascertaining just who that will be going forward. Give us a call and we would love to share our thoughts.