Two Quick Investment Lessons

In looking at two of my recent losing investments, PILL and TTES, I´ve come up with two quick lessons.

• PILL´s lesson: Avoid weak balance sheets, even when there is minimal debt. The first thing to look at when analyzing a company is a positive Cash Value (Cash - All Debt). In theory, you want this value to comprise a nice chunk of the stock price (over 20% is now my standard). A strong cash balance provides good downside protection and the financial flexibility to invest in growth initiatives. PILL has a negative cash value and so should not have been bought, even though other criteria were met.

• TTES´s lesson: Avoid companies where outside investors (or even insiders) own a majority stake of the stock. At first glance, this advice may seem contradictory, but time and time again I have seen that stocks with concentrated owners (greater than 40% inside ownership) have been miserable investments. Of course there are exceptions, but they are rare. In general, when there is a majority owner they run the company without any  regard to minority shareholders, taking out huge salaries, making side deals etc. Since First Reserve owns almost all the stock in TTES, the stock should not have been bought. As can be seen, First Reserve is now completely screwing current shareholders by engaging in a huge secondary offering. There is another reason to avoid stocks with significant insider ownership (greater than 40%). Wealthy Shareholder activists/hedge funds will rarely target these stocks for shareholder proxy fights because there is simply no way to gain control of these firms and increase shareholder value. So "poor" minority shareholders are left to fight it out with the owners. It´s a battle you can´t win.