Delphi Management Shows Us How Bumbling the Industry Is


Among those with very little understanding of how to invest, the errors that analysts make can escape them. The mistakes they are making these days are much more glaring.

Scott Black is nothing if not experienced. He founded Delphi Management back in 1980 and has been at the helm as president ever since. His firm is highly regarded as an industry leader and count Michael Bloomberg among their clients. Experience is only helpful if you learn from it, and Black just showed us he’s even worse than a neophyte when it comes to investing.

If someone knew nothing about investing, they may be lured into some pretty bad investments at times, but when they get to the point where a decision was so bad that they become covered in their own blood, there’s probably a better chance that they will do the right thing and go to the hospital versus someone who fancies themselves as their own financial physician and decides to just keep wiping off the blood as the wound opens up more and more.

We’ve seen plenty of horrible stock picks and horrible trades before, but it’s hard to imagine a trade that could possibly be worse than the one that Black recommended in January. He just didn’t recommend it, he did the trade himself, and is still in it. The last part is what really separates this pick from all the rest, because of what happened with it.

It’s not that people haven’t lost their shirts on holding stocks over the last month or so, but Black lost a good part of his wardrobe on this one, and the raiding of his closet may not be over.

What makes this trade so bad is that even your kids may have known how much trouble Royal Caribbean was in back on January 24, and in spite of the fact that Black liked the company at the time, if we could pick one stock in the entire market that we knew was headed for trouble from the coronavirus back then, this was clearly the one.

There’s more to this story than meets the eye, starting with how people will cast their vision far down the road and miss the obstacles right in front of them. Royal Caribbean may indeed be fine, but they had more guns pointed at them over the last while than anyone, and the guns weren’t just a threat, as we knew that their stock would be mercilessly shot down like no other over this mess.

Fast forward to last Friday, where Black stepped up and gave another interview, with the media undaunted by this debacle. He’s still sought out for his advice, and the only explanation is that the crowd has no idea just how bad this and other trades he has made over the last couple of months truly were, or how misguided his views are, ideas that he continues to hold tightly to in spite of how much blood he has lost over them lately.

Incredibly, Black is still in his position, as of last Friday at least, even in the face of Royal Caribbean completely shutting down operations for at least 30 days now. He at least admits that he “probably” should have exited. While that’s a good first step, we wonder how he could possibly use the word probably here, as this is much like trying to wrestle a gorilla with your bare hands, getting pounded so badly you end up in intensive care, and thinking that this probably wasn’t a good idea.

Since Black’s recommendation, Royal Caribbean stock has lost 76% of its value. The pick was bad enough, as this stock was already on the decline when the pick was made, and no matter how long we may plan on holding something, it is just plain stupid to buy a stock on the way down if you are going long.

Unfortunately, very few of these self-proclaimed money management experts realize this, and will expose themselves to way too much risk as well as cutting their ultimate returns. With Royal Caribbean back then, both of these mistakes were magnified to an incredible degree, to the ultimate degree even.

Whenever you end up exiting, whether that be the next day or 50 years from now, the losses that we court when we enter a stock position at the wrong time will remain on the ledger to the very end. Even if you pay $1 more per share than you should have, this is $1 less return you will get in the end.

If given the choice between buying a stock at $130, where this stock was back then, or the $30 that it ended up going down to, it’s obviously better to pay $30. When your stock has to more than quadruple for you to just get back where you started, even if that happens, a more than 400% gain is just better than breaking even.

For the rest of his life, Scott Black will be out this $100, or more, per share, because this is not a stock that is ready to enter even now with it being decimated. There will be a time where it will offer a good entry, but this will be much closer to $30 than it will be to $130. Whatever he leaves his loved ones when he dies will also involve $100 a share less, and the pain of this may be still felt by his descendants long after he is gone.

It’s the hanging on all the way down this huge hill, being tied to a horse and dragged all the way, covered in so much mud and blood, that makes this trade inexplicably bad. This may just be the worst trade of all time, and it may even remain so forever, as there may never be another stock this bearish ever again.

This is like betting on the proverbial 98-pound weakling in a match against the Incredible Hulk, who tells our man he wants to kill him seeing our guy beaten to within an inch of his life, and continuing to want to bet on him. At some point you have to throw in the towel, and preferably long before brain damage occurs.

We know for sure that Black has no concept at all of risk management, which happens to be a very important facet in investing. Anyone who does not think it’s all that important just has to look at this trade, or any other one that involved a real beating like this. Going down 10% might be excusable, and 20% might be bad but not terribly so, but 75% is simply an insane amount to lose on a trade. What’s worse is that this might come back and he probably won’t realize what he lost and may even end up bragging in ignorance about this butchering.

Perhaps you think that you don’t have to worry about managing risk because you are focused upon a time where the probability that you will be up is high. Royal Caribbean as a company still looks fine, and in fact this may end up being one of the most exciting plays on the long side we will ever encounter, once this is all over and things return to normal.

Completely Ignoring Risk is a Foolish and Dangerous Approach

There’s no way that this company is only worth 25% of what it was longer term because people are taking a break from cruises for a while, or anything even close. Down the road, this will all be a distant memory with no lasting effects, as long as you don’t believe that this virus will kill us all and no one will be alive to take a cruise anymore. This is no excuse for throwing away a massive amount of money because you don’t perceive the risk.

People love cruises generally and many will be chomping at the bit once we get the all clear, once they straighten out from this twisted psychosis that has imprisoned much of the world’s inhabitants. We might even see this this stock double or triple our money in a relatively short period of time, but not if we have taken the damage and need to recover just as much as the stock does.

Sure, Royal Caribbean will lose money this quarter and next, but two quarters don’t really matter much and you just dust yourself off and get back on your feet again. As long as this virus scare is out there though, and especially as long as this cruise line is parked in the docks, this is not the time to be on board. While we will recover more quickly from this than most people imagine, if this were not the case, that’s all the more reason to bide our time.

Good investing, not the pin the tail on the donkey sort but actual good investing, requires that we manage both the good and bad times. It’s far too easy to manage the good times, as you just sit in your chair and watch, but when the bad weather comes, you need to be in a position to limit your risk.

You can overdo risk management, like people are doing in the face of this virus as the ultimate example perhaps, where there might be a one in a half a million chance of getting sick and one chance in several million that you may die, and you respond by shuttering yourself in with your hordes of toilet paper. However, you probably don’t want to visit a hospital in Italy full of infected people with no protection either, and if you are thrown into that situation, not even try to run away isn’t such a great idea.

Being in any stock over the last while has been crazy enough, but picking the worst one on the market in terms of risk and then seeing this risk materialize in such an incredible way, and not even flinch, is something else altogether.

Even though we may be happy enough to ride out even the bigger bumps such as the 20% dip in 2018, there are some bears that are so ferocious that no one should ever think of ignoring them. Back in January, we did not know how big this bear would become, taking the market down so much already, but we did know that cruise lines were not the place to be then because the risk of them getting smashed was so high. This was the first thing people turned away from, and they did so in a decisive way.

As time passed, those with any real sense got out, and as the price dropped, this weeded out the folks with a minimal of intelligence and left the fools to set by and take it. Eventually, even the fools sold, and this left only the biggest ones still left standing, with Black among them.

Moves down this big, from events such as the one that is occurring now, the financial crisis of 2007-08, the crash in 2000, or any other huge bear just cannot be managed any other way but by running away. The marks that these bears leave are indelible if you are foolish enough to want to go toe to toe with them.

We’re not anywhere near the levels of these other historic stock market crashes, but this is far from over. As long as the number of cases rises, which you can count on happening for a while just from all the additional testing we’re going to be doing, as long as the long-running horror movie is serving as the primary form of entertainment for people, and as long as officials take measures so out of proportion with the risk that no one could even have dreamed this up, stocks are going to be under fire.

There is a good reason why this happens and it has nothing to do with what people think stocks are all about, long-term profitability. When you have a downward move that has this much momentum, and when it actually makes perfect sense for everyone to sell, more and more end up doing that. This is not about where stocks will be a year from now, it’s about more and more people getting off of this plane by putting your parachute on and jumping as it continues to fall from the sky.

All the new testing being announced will certainly propel the growth of cases for several more weeks, and it will only be when this expansion of testing levels off that we will start to see growth of new cases decline. This is a lot like hunting for sea shells, you find a lot more of them when you have a lot more people looking for them.

We Need to Select Our Pied Pipers More Carefully Than This

We could look at more of Black’s picks, the ugly and the uglier, but the ugliest does just fine in demonstrating his heinous disregard for managing risk. The idea with investing is to look to capitalize when the odds are in your favor, and perhaps tolerate a little of their being a little out of favor or a time, but we cannot justify going against what may be the most incredible odds against long positions that you may ever see in your lifetime with this stock.

This doesn’t come close to making sense, no matter how we may try to. The hope that a stock may recover doesn’t do it, which makes as much sense as camping out in the cold to the point of hyperthermia on purpose, and then comforting yourself by thinking that you’ll probably get better. When you end up with a lot less money than under any other scenario, when the goal is supposed to be to make a bunch of money and not lose a bunch, this is well beyond making sense out of.

Black really opened up his scary mind to us when he told investors last Friday that they should hang on to their stocks but not buy new ones. This does not make any sense either, as whatever reason there would be not to buy would apply identically to reasons to hold. You can’t even throw in meaningless commission fees to at least have something on that side of the ledger, and it is completely empty with the other side having a bottle of red ink spilled upon it.

This gentleman is horribly confused about investing, which wouldn’t be such a big deal if we just took a random investor off the street and had a look at what they thought and what they were doing, because this guy is held to be some sort of expert with a following. If the Pied Piper has lost his mind, the little children who follow him are in real trouble because you never know where he will lead them. Black has led his children off of a steep cliff unto the rocks.

Black told us to damn the torpedoes, damn the coronavirus, and get on this ship full of infections anyway. The torpedoes have hit, and he was true to his word. We can only hope that not many people have chosen to go down with the ship alongside their captain, as Black deserves this, but they do not.

We are very excited about this stock a little down the road, but as we always say, timing is everything, and good timing beats horrible timing every time. Royal Caribbean dropped another 7% on Monday, and although it may not require the coronavirus terror to wrap up to start moving in the right direction again, due to beating beaten up so much that the buyers may start moving on it, there’s too much risk and uncertainty involved to either buy or hold it right now.

You never want to do one but not the other, as if it’s too bearish to enter, it’s too bearish to hold as well. If the expectations are negative, not wanting to lose entering it and not wanting to lose holding it add up to exactly the same thing, the same risk and the same expected losses. For some reason, many are biased toward holding, but it arises out of complete confusion, not a good state to be in when investing.

This should all be so obvious to us, but if we allow ourselves to buy into all of the stupid things that these experts want us to, we really do have the blind leading the blind, and the only way to have a chance to break free of this is to open our eyes and question everything. A child should be able to spot the flaws, but only if they dare to wonder.

The cases will subside, people’s fears will dissipate, cruises will come back, and this stock will make a remarkable recovery. Like Dr. John might want to say, Black was in the right place, but it must have been the wrong time. It certainly was.

John Miller


John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.

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