I made a huge mistake
Selling Text SA and adding to another stock
Hi Partner 👋
I’m Pieter and welcome to a 🔒 subscriber-only edition 🔒 of Compounding Quality.
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I made a huge mistake.
And you know what's funny?
Many Partners of Compounding Quality knew it way earlier than I did.
One of the HUGE advantages of being in this together is that we all learn from each other.
But which mistake did I make?
On the 7th of January, we bought Text SA.
My conclusion about the company’s moat went as follows:
“Text SA has a proven business model with a marginal, nearly zero customer acquisition cost. They benefit from economies of scale and have a very high Gross Margin and ROIC. This indicates the company has a competitive advantage as well as pricing power. As a result, Text SA gets a score of 7/10 for its competitive advantage.
But guess what?
Text SA’s moat is (probably) less strong than I initially thought.
The risk of Artificial Intelligence (AI) disrupting the industry is high
The industry is highly competitive
Warren Buffett said that if you don’t want to own a stock for ten years, don’t even think about owning it for ten minutes.
I am unsure whether I still want to own Text SA for the next 10 years.
And that’s exactly why we will sell the company.
We’ve only held the company for 5 months. This isn’t our style. You can learn more about the investment philosophy in our Owner’s Manual.
The key conclusion here is that I made a mistake buying Text SA in the first place.
I take 100% responsibility for this painful error of judgment.
But you know what? We will make plenty more mistakes in the future.
Making mistakes is inherent to investing.
We keep learning all the time.
Investors should always keep François Rochon’s rule of 3 in mind:
One year out of three, the stock market will go down at least 10%
One stock out of three that we buy will be a disappointment
One year out of three, we will underperform the index
Text SA currently weighs 2.25% within the Portfolio. We bought it for 114.4 PLN. The current stock price is 89.2 PLN.
This means we made a loss of 22%.
It’s by far the worst-performing stock within our Portfolio.
We will cut our losses and let our winners run.
But what will we do with the money freed up by selling Text SA?
We will use the proceeds to add to an existing position that seems significantly undervalued today…