Bogumil Baranowski – Be Careful With Businesses in Secular Decline

Apr 9, 2023

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BIO: Bogumil Baranowski is a founding partner of Sicart Associates, LLC, a New York City investment firm. He has almost two decades of investment experience.

STORY: Bogumil invested a lot of time and money in two companies that were drowning in debt, had poor management, and had a secular decline.

LEARNING: Just because it’s cheap, don’t compromise on debt, management, and secular decline. Debt is the number one risk for an existing company.

“Yes, you can make money, but keeping it is equally as important.”

Bogumil Baranowski

Guest profile

Bogumil Baranowski is a founding partner of Sicart Associates, LLC, a New York City investment firm. He has almost two decades of investment experience. He holds a master’s degree in Finance and Strategy from Sciences Po Paris and a master’s in Finance and Banking from the Warsaw School of Economics. He is the author of Outsmarting the Crowd and Money, Life, Family. He is the host of the Talking Billions Podcast.

Worst investment ever

In 2011, Bogumil picked up Verifone stock because it was cheap. The company had just acquired Hypercom, one of its competitors. It looked like they were well positioned, with Ingenico being the other competitor to coexist in a growing industry. Bogumil paid attention to how cheap the stock was. However, he had questions about how the merger would go, and the management was questionable. But Bogumil thought the price was so reasonable. So he overlooked the debt added for the acquisition and the fact that management was not exactly the team he was comfortable with.

Soon enough, the management changed. There was a temporary chairman who even went to Bogumil’s office for a chat. Bogumil and his team invested so much time in understanding all the Verifone’s pieces, the payment systems, and how its products are sold.

Then the stock started going down and got to 50% of his entry point. The earnings were also dropping, but Bogumil kept holding onto the stock. Then the tipping point came when Bogumil met with the new management. He didn’t like their approach, so he finally dropped the stock. He walked away with about a 70% loss at the time.

Bogumil also shared an interesting case study, a South African retailer - an example of what can go wrong. The company was importing furniture from communist countries and then reselling it at very good prices. So it was a good business. One of the managers decided to get more aggressive with growth, and the company ran into some trouble.

Bogumil looked at this company because some people had told him it was an exciting story. He had reservations about retail but put the company on the list regardless. Bogumil did his research well. Five minutes into reading about the company, Bogumil was ready to say no, no matter who was recommending it. But he decided to use it as a case study to teach his interns.

The company was piling up debt quickly, and the market cap reached 20-something billion. It was the zero interest rate time in Europe, and money was so cheap. Businesses could easily get loans. This company accumulated about 20 billion in debt and was not picky about what it bought. The company purchased a US mattress business rolling up at a very high premium (over 100%). Bogumil thought it was crazy for an over-leveraged company to buy another over-leveraged company at a 100% premium and borrow money as if there was no tomorrow. And when he watched the management, listened to them, and read what they were saying, Bogumil felt uncomfortable.

But as Bogumil continued learning the company’s story, one of the executives was featured on a cover of a prestigious magazine. The magazine called him the new visionary of retail, the one who figured out retail. So Bogumil made a note of it and kept watching it. A year later, the company went to almost zero and was nearly bankrupt. It negotiated a deal with the banks, and the management was fired.

Lessons learned

Just because it’s cheap, don’t compromise on other factors that affect a stock, such as debt, management, and secular decline.
Decide to cut your losses and not just think in terms of money but also in terms of time
As an investor, money is one thing, but time is also crucial. Don’t waste too much time on a bad investment.
It’s not only what you’re buying but also what you choose not to buy that can make a difference in the portfolio.
Too much debt in a company is a red flag.
Pay attention to how the management communicates with you.
Be careful with a secular decline if you’re a value investor looking for a bargain.
A company that can hold on to cash and is ready to survive will flourish in any economic downturn.

Andrew’s takeaways

Debt is the number one risk for an existing company. Run with a minimal amount of debt.
When acquisitions come along, and you got the cash, you can move fast and beat your competitors.
Just because it’s cheap doesn’t mean you have to buy it.

Actionable advice

When analyzing a company, pay attention and ask the right questions. Take the time to get to know the company’s story. Then explore the worst thing that can happen and how you can lose money on that business. Once you have that figured out, you can get excited about why you can make money in it.

Bogumil’s recommendations

If you’re new to investing, Bogumil recommends reading One Up On Wall Street by Peter Lynch. If you know a bit about investing, then any book about Warren Buffett is fantastic.

No.1 goal for the next 12 months

Bogumil’s number one goal for the next 12 months is to keep publishing an episode weekly on his Talking Billions Podcast and get to his first 100 guests.

Bogumil Baranowski – Be Careful With Businesses in Secular Decline

Guest profile

Worst investment ever

Lessons learned

Andrew’s takeaways

Actionable advice

Bogumil’s recommendations

No.1 goal for the next 12 months

Parting words

Connect with Bogumil Baranowski

Andrew’s books

Andrew’s online programs

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