The Dumbest Investment I Ever Made

This article could be differently titled because the investment itself was a
good one. The problem was it couldve been a personally historic one, and the
lesson is one Ill remember for a very long time. New York City was a great place
to have a job in late 2000. I was writing on a television show and going out
every single night. One day while walking home along a different subway route, I
found myself standing in front of a men's clothing store called Jos. A. Bank
Clothiers (NASDAQ: JOSB ). I wasnt much of a suit guy, but this was New York and
I needed a wardrobe upgrade. And since Peter Lynchs book had said to keep an eye
out for investing opportunities just like this, I investigated the company. At
the time, the company had around 90 stores and modest expansion plans. Earnings
were increasing 68% year-over-year, and they were generating about $10 million
in free cash flow. This was a fine achievement for a little company whose
enterprise value was a tiny $36 million. Despite the expansion, the company also
was buying back shares. It seemed to me that management really was taking an
unnecessary risk to buy back stock when it should be expanding, but my gut told
me that was because management believed the buyback was a better ROI than
expansion. Management was either really smart or really dumb. But their suits
looked great on me, the service was excellent, and I believed I had an
undervalued diamond in the rough. I purchased the suits and the stock. If youre
looking at JOSBs chart, you must be jealous knowing that I bought in at a
split-adjusted $1.28 and am enjoying a 46-bagger. Dont be jealous. I sold the
stock. At a split-adjusted $6. So cry me a river on my near-five-bagger, but a
46-bagger wouldve been oh-so-sweet. It wouldve been that rare time you hear
about the guy who put $10,000 into Microsoft in 1976 and became a zillionaire.
My mistake was not letting the story play out. The company had a great story,
but a couple of years later, I panicked when I saw that sales were up 9% but
inventories were up 30%. That suggested to me that the company was not managing
inventory well and that consumers had, for whatever reason, found a new suit
outlet. Having been burned in the past by retail clothiers, and knowing retail
investors can be finicky, I figured now was the time to get out. My lapse in
knowledge was that inventories were growing because the company was about to
open a lot more stores and they needed that inventory to stock them! Doh! Since
then, of course, the company now has 515 stores, generates tens of millions
annually in free cash flow, and while its days of 30% growth are over, its still
growing at a 12% clip. The lesson is that as an investor in any company, you
must keep your eye on all aspects of the story. One slip-up could cost you big
time. Lawrence Meyers no longer owns shares of Jos. A Bank.