by Everyone loves the story of you buy a stock, you use your last $1,000, and 3 years later you end up with millions because you happened to buy Tesla or you put it all into Bitcoin before Bitcoin was cool.
The reality is that is not the majority of investing. Investing your hard earned dollars requires research, selecting companies that have a competitive advantage, and ones you feel are set to dominate their industry to provide you above average returns.
As always our belief here is to build your portfolio around low cost index funds. After you have done that and you want to explore individual stocks do it!
Today we are going to outline our investment in Dave and Busters.
Why did we invest in Dave and Busters?
We started our investment in PLAY in June of 2019. There were a couple of reasons we selected Dave and Busters and we will outline them below:
- They had taken advantage of the real estate down turn of the 2008-2011 time frame to get leases on properties that were in their favor
- The new store openings were in smaller footprints and delivering on what the customer wanted
- They had a dividend and solid balance sheet
- We were also customers of Dave & Busters because who doesn’t love the ability to play the claw. It is a magical machine that is tons of fun.
To summarize we believed they had a market leading position and we were customers of the company on a frequent basis.
When we made our initial investment it was June of 2019 and the stock price was $40.36.
What Action Did We Take Next
Our next step was what we do with our purchases on a regular basis. We did nothing. We of course monitored the news, reviewed the quarterly performance as it came in, and we collected our dividends that were automatically reinvested into the stock.
The Ides of March and a Changing Economy
2020 was some kind of special year. In February the stock had reached $46 per share and we were up 14% on our original investment. We were in this for the long haul so this was icing on the cake.
As lockdowns began to take place across the country the company had to close stores. In their business that means not a reduction in revenue but no revenue. We watched the stock go from $46 in February to $14 in March (chart below).
Warren Buffet has said (paraphrased) if you liked a stock at the price you purchased it then you should like it on at a more affordable price.
These were unprecedented times and we didn’t know what was going to happen long term. We did know that many other companies were about to face the same thing.
We also knew that prior to the lockdowns an activist hedge fund had been acquiring shares in PLAY and that was good news for us since they had far more to lose then we did should things not work out.
As you can see in the chart above things got dicey real fast. We decided that since we liked the company at $40 that we also would like it at $14.
When it Keeps Dropping You Have a Choice to Make….Do You Buy More or Ride it Out
When we purchased again at $14 we believed that the company was in a good position and this was a good buy. Today we look correct however at the time we still believed that the company would continue to navigate the waters, which they did.
The stock continued to drop over the next several days and with the news we were reading about the company we believed they would make it back out of it. We made additional purchases at $12,$8, and $7.68.
The stock reached a low of around $7. While in the chart above it looks like we were able to time things and buy at the bottom at the time we were not sure it was the bottom. What we believed was a few core items:
- The company was going to be able to navigate the situation
- They had a competitive advantage over competitors based on their balance sheet
- They continued to work to acquire credit lines and access to additional capital
- They had navigated the real estate crisis well and knew how to prepare
When you invest your money in a company you have to be confident in their competitive advantage and the individuals running the company.
It’s easy to look at the chart above and say “well I would have bought at $7.68”. We told many of our friends at the time that we were invested in this stock prior to the drop and at the drop and most thought it was too risky.
Was there risk? Absolutely!
Had you purchased at the bottom for this stock you would be up just over 5x today.
What is the Take Away From This?
When you purchase stock in an individual company ask yourself if you would buy more if the stock dropped. Look at their balance sheet and determine if they can survive a reduction in profits. Have they handled this situation before? These are important questions to consider when you invest your money in a company.
Twins Rules for Financial Success
As with all of our content here we want to encourage you to follow three core rules :
- Have an Emergency Fund/Squirrel Funds
- Invest for the Long Term
- Invest Automatically & Consistently
