Today I sold all of my remaining Seritage Growth Properties stock. It was a 7% to 8% position in the After Dinner Investor portfolio and for me personally. I decided to sell for a few reasons which I’ll explain below. And I put all of that money into Prosus, increasing my Prosus position to a 27% position, both personally and in the ADI portfolio.
Recently there have been some bearing signals about Seritage. The CFO left, Mohnish Pabrai moved it out of the 2022 Free Lunch Portfolio, and Mohnish sold 26% of his stake according to a recent Form 13G filing.
— Investing with Tom (@TomInvesting) January 10, 2022
Investors buy a stock for just one reason (because they think its price is going to go up) but they sell for many reasons. So my decision to sell was not based on these recent bearish signals alone.
My investment in Seritage has always bothered me to some extent, and I could never figure out why that was. But now I’ve realized what was bothering me. I bought Seritage for too high of a price. Seritage was a shameless clone, and my shameless clone rule is to not buy a stock for a price that is more than 30% higher than what my superinvestor had bought it for. And I always assume that the superinvestor bought the stock for whatever the low price was during quarter in which they bought it. Mohnish bought Seritage in the second quarter of 2020, and the low during that quarter was $6.68. 30% higher than $6.68 is $8.64. I do sometimes make exceptions to this rule, and Q2 2020 was a very unique point in time. It would have been okay if I had assumed Mohnish bought Seritage for $7 or $8. But even at $8, 30% higher is $10.40. Yet I bought Seritage for $12.50. It was a mistake from day 1 because I bought it at too high of a price.
Beyond the purchase price mistake, I also never really felt that comfortable with Seritage. I understand their situation generally, but I’ve never had a level of clarity about Seritage that I’m fully comfortable with. I’ve decided Seritage should be in my Warren Buffett inspired too hard pile. Will Seritage transition before the debt is due? What will be left after they transition after having sold portions of their real estate? What will Seritage be worth after they transition? The answer to all these questions is I don’t know. If other people have more clarity about Seritage, good for them. But for me, I don’t have the level of clarity I need to feel comfortable. Maybe I’m not smart enough. And that’s okay. This game isn’t about being the smartest, it’s about investing the right way for you and getting rich.
Ring Energy is simple to me. Apple is simple to me. And Prosus is simple to me. I understand these businesses, their situations, their outlooks, and what the future could look like, and I feel comfortable in my ability to place odds on various future outcomes for these businesses. But with Seritage, I don’t feel like I have that ability. It does seem likely that they own a ton of attractive real estate and that eventually they’ll make it out and be fine. But it’s not a sure thing. And the risks of wipe out or a huge loss or even just not making that much of a gain all seems present. What are the odds of those situations happening? I don’t know. But I don’t like that some of the negative outcomes are possible. All it takes is one wipe out (for me it was Gulfport Energy) to make one not want to get involved in any more debt-heavy situations.
Another thing that I don’t like about Seritage as an investment is that it relies on future outcomes having to play out. I don’t like relying on future outcomes because the world is complex and difficult to understand. I’d rather lock in my value on day 1 and not have to rely on predictions about the future playing out. With Ring Energy and Pedevco I was buying more oil net asset value than the stock price, on day 1. With Apple I was buying a dominant brand that was already moving into recurring, high-margin service revenues, on day 1 (it was just plain old cheap), and with Prosus I’m buying a $1 (75 cents of that dollar being Tencent) for 54 cents. Value, locked in, on day 1.
I wish Seritage and their shareholders the best, and it seems like it could work out great and be a multi-bagger from here. But for me, it’s going in the too hard pile, and I decided to put the money into Prosus, a day 1 value play with no threatening debt situation, share buybacks going on, and a long growth runway.
I have more thoughts on selling Seritage and buying more Prosus in the video below.