American Consequences - February 2019

TALES OF emotional investments

coming to the market after Jordan had paved the way and made basketball (and sneakers) more popular than ever. The Guru knew this and knew how important a great basketball shoe could be. He had seen firsthand how the “Air Jordans” propelled Nike’s brand. So when James, a young man in his mailroom, confirmed that he and all his friends were buying the new Grant Hills, the Guru bought truckloads of Fila shares... and the bet paid off. Hill’s first shoe sold more than 1.5 million pairs, which at the time made it the best- selling sneaker launch since the first Air Jordans. And after Hill won Rookie of the Year honors, his second shoe sold even more pairs. Fila’s market share went from seventh in the industry to third in just two years. The company’s stock surged even higher, going from the teens to more than $100 per share. But right around the time Fila debuted the “Grant Hill III” third-generation sneaker, the Guru noticed something troubling... Fila’s shares had stalled out. When he checked in again with James, he was disappointed with what he heard... When it came to playing basketball, the shoes were a bust. James and his friends had moved on... back to Jordans and back to Nike. The Guru didn’t want to believe it. He dug deeper, did more research, but deep down he knew the story had changed.

The Guru didn’t want to believe it. He dug deeper, did more research, but deep down he knew the story had changed. Fila had lost its gritty edge, pushing too far into fashion to grab a share of the suburban wallet. As painful as it may have been to give up on his thesis – one that had worked before and made him a fortune – the Guru sold his shares. Sure enough, Fila began to struggle shortly thereafter. Rather than flying off the shelf at more than $100 per pair, the shoes were severely discounted and barely selling. Then, it got even worse. James told the Guru that “no one” was wearing Fila anymore, not even the older-model shoes or related athletic gear. In 1998, the company’s U.S. sales fell 49%. The once-profitable company lost more than $130 million. Shares cratered, falling from a high of more than $100 in 1996 to the single digits. In 2003, vulture investor Cerberus acquired the company for a little more than $1 per share. The Guru shared this story with me as it was playing out in the late ‘90s. He told this story not to gloat, but to convey a powerful lesson as vividly as he could: that in certain instances, a long-term “buy and hold” investor must sell... like when your initial thesis and the primary reason for investing in a company is no longer valid... no matter how many times you’ve been “right” before. Austin Root, Analyst and Portfolio Manager

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