(This post was originally shared with newsletter subscribers in August, 2023)
Your author’s life was pretty simple 20 years ago.
I was working the overnight shift at the local grocery store, enticed by one of the highest wages I could find without getting any further education. You see, younger Nelson firmly believed college was for chumps, sure that he could earn a higher salary than his more educated peers through his better work ethic and intelligence.
Some might say young Nelson was a bit of a jerk, and older Nelson would agree.
He also planned to help bridge the earnings gap by investing virtually every penny he made while working from 18-22, stuffing that capital into income producing assets. This is a strategy that worked pretty well in hindsight, and netted me three paid off houses before my 23rd birthday. Those houses were garbage, but still. They produced lots of sweet cash flow.
My goals were simple:
- Make as much money as I could working
- Use my off time to learn about investing
- Seek the best opportunities to intelligently put my capital to work
I was relentless in these goals. I regularly took other people’s shifts and picked up other odd jobs when I could. I was constantly using my down time to read about investing and watch ROBTV (later BNN), even inventing an elaborate tracking system to see how good Market Call guests were. And I invested every spare nickel into real estate — including every nickel I could borrow — growing my tiny real estate empire. I only stopped buying houses when the market exploded higher and there were no longer properties with 15-20% cap rates available.
I also started experimenting with stocks, first buying TD Bank shares in 2002 (from a GASP! full-service broker) and then opening my own self-directed online brokerage account with TradeFreedom in 2003. I chose TradeFreedom because it offered $9.99 trades, much cheaper than the $29.99 typical fee charged by online brokers at the time.
Yes, kids, that’s how much we used to pay for trades. It was horrendous.
So I started researching stocks, driven primarily to the deep value approach characterized by Benj Gallander and Ben Staddleman of Contra the Heard. These guys had terrific long-term returns, and I could easily identify with the strategy of buying former superstars who were temporarily beaten up. After all, who doesn’t like a deal?
My research led me to McDonald’s. The fast food giant was reeling, suffering from a milady of problems. The movie Super Size Me had just been released, a documentary-style film that followed Morgan Spurlock’s journey as he ate McDonald’s every meal for a month. The climax came when a doctor told Spurlock to stop the experiment immediately, or risk long-term health effects.
(It was later revealed Spurlock had an undisclosed alcohol problem which may have also been contributing to his poor health and weight gain.)
McDonald’s wasn’t just suffering from poor publicity. Sales were stagnating, with the company reporting a mere 2% sales growth (in constant currency, anyway) in 2002. Various issues had impacted its foreign operations, including a weaker Euro, Mad Cow Disease, and various crises in Latin America, Russia, and Asia. It was also rapidly losing market share to upstarts like Subway, which were able to convince consumers that a footlong sub was somehow healthy for them.
It all culminated in a $344M loss in 2002 after the company took various charges related to restructuring costs and restaurant closures, or a $0.27 per share loss. It was the first annual loss in the company’s history, and investors sent shares reeling on the news.
Your author, meanwhile, was following the story with keen interest, watching the stock fall as sentiment continued to degrade. I watched shares fall from $30 to $25 to $20 before really getting interested. The stock kept falling, hitting $18, then $15, and then all the way down to $13. This all happened in about five months in early 2003.
I told myself I would back up the truck at $12 and put a significant portion of my portfolio into the stock which, at the time, would have been a couple hundred shares. I wasn’t quite 20 years old when all this was happening, so I didn’t have serious money to invest, and I was pouring money into paying off my rental portfolio. But I was willing to put a decent amount of what I had into McDonald’s.
Alas, I didn’t get the chance. The stock spent all of about three days hovering around $13 before quickly rocketing higher. It was back above $20 before the end of the year and was above $60 just five years later. As I write this, McDonald’s shares are trading for approximately $289 each, good enough for a return of 19.42% annually from the 2003 lows. My potential US$2,600 investment would be worth something like US$100,000 today if I pulled the trigger.
Instead I bought some stock I can’t even remember that I probably sold in about 2004 because it was a dud.
An important lesson
Stories like this are fun — or heartbreaking, depending on what side you’re on. But ultimately they’re pretty useless if they don’t teach any lessons.
So what did I learn from my aborted foray into McDonald’s stock?
Firstly, I learned to seize opportunities when they’re in front of me. The stock market is fickle; narrative often drives price. But that narrative is never predictable, and it can often turn on a dime.
This has mostly been a good lesson. I remember buying National Bank of Canada shares at just above $50 during the lowest of the March 2020 market crash. That position has more than doubled in just a few short years since, and I plan to hold it for a very long time.
But it hasn’t all been good. I bought Extendicare back in 2014 after it sold the U.S. operations, capital it pledged to invest back into its comparatively better Canadian business. I thought this was a great opportunity, one that would transform the company. A decade later my shares are pretty much the same as where I bought them. Thank God for the dividend. This was, in hindsight, not a great opportunity.
The second lesson I learned is the danger of an arbitrary target price. I’m the first to admit I pulled the $12 McDonald’s buy price out of my ass. It could have easily been $13 or $14, in which case this could be a very different blog post.
There are a million Buffett quotes about buying a good company at a fair price, but I prefer Nick Sleep’s method. He identifies quality companies, waits until they trade at a reasonable price, and then buys them over the long-term. Or, as he more succinctly puts it:
Smart investors aren’t waiting for an arbitrary buy price. They seize the opportunity when it is dangled in front of them, knowing you don’t get many chances to buy a world-class company at a terrific price.
Finally, the third lesson I learned is the importance of patience. Let’s face it; Nelson 20 years ago wasn’t a very good investor. There’s a good chance I would have sold McDonald’s at $25 if given the opportunity, especially after it doubled in about a year. I lacked the maturity and the experience to really take advantage of the situation, and I probably would have screwed it up.
In fact, I learned much more by screwing this situation up than I ever would have profited by getting it right. The lesson is always right there, sitting there, almost mocking me. I want the pain of missing that golden opportunity to eat away at me.
The bottom line
Let’s not kid ourselves here. Ultimately, I’d much prefer the extra $100k I’d have today by investing in McDonald’s. I’d rather have more money than less money. Or, as Mr. Burns so eloquently put it:
But I also know myself, and there is pretty much a zero percent chance I would have been patient enough to hold McDonald’s over a 20 year period. I would have sold in 2005 or 2007 or whenever, pocketing a nice gain but losing the perspective gained by missing out completely.
I’d rather have that lesson. Because that lesson has shaped my investing career in numerous ways. It helped me take advantage of temporary mispricings. It helped shape my long-term focus. It helped me be a more patient investor, teaching me the real money is made after the first decade. And it helped me understand the value of an ever-increasing dividend, one of the most effective signaling mechanisms of a business’s overall health.
So thank you, younger Nelson, for screwing up the investment opportunity of a lifetime. It was an important lesson, and I’m glad you learned it.