August 21st 2020 – Last week we discussed the benefits of consistency and the mindset towards owning a few high-quality businesses rather than buying and selling stocks. A recent example of this mindset of owning “the business and not the stock”, is Lululemon (LULU), the athletic apparel retailer. This company has a loyal client base paying top dollar for technical athletic clothing for yoga, running, working out, and most other sweaty pursuits. Like #Apple (AAPL), Lululemon’s community is strong specifically on the brand loyalty aspect.

To put into perspective the strength of their brand #loyalty, consider this: 40 million Americans had filed for employment insurance yet during the same time period, Lululemon share price had increased by 137.98% between March 16th, 2020 and June 4th, 2020. Perhaps this is yet another example of how the stock market is not the economy.

To put into perspective the strength of their brand #loyalty, consider this: 40 million Americans had filed for employment insurance yet during the same time period, Lululemon share price had increased by 137.98% between March 16th, 2020 and June 4th, 2020. Perhaps this is yet another example of how the stock market is not the economy.

Ownership Vs. Speculation

Imagine for a moment that on January 2nd, 2020, you decided to buy #Lululemon at $233.42/share and at the same time your friendly neighbor bought #Zoom (ZM) at $68.72/share. You both shared these recent transactions over a warm cup of coffee and seemed equally excited about your decisions. Over the next 7 weeks and after watching the stock price change every day, you begin to feel frustrated as your investment in Lululemon does not seem to be paying off. The stock price has remained somewhat dull and you find yourself envious of your neighbor who is up 35% on her investment. Little did you know that on March 16th, your frustration would turn into anger as Lululemon’s stock would decrease by 47%.

So, what happened next?

If you bought Lululemon stock and not the business, it’s very easy to feel as if the stock let you down. Regret kicks in and assumes control over your emotions so you decide to sell the stock at a loss. The aftermath is a loss of capital and regret. But wait there’s more! All 7 Lululemon store locations across #Montreal and Laval is now a reminder of your negative experience.

Conversely, if you adapted the mindset of owning the business and not the stock, your experience could have been completely different. First, you would have never found yourself using your neighbor’s Zoom purchase as your benchmark for success. Secondly, why would you sell a business 8 weeks after buying it? Most likely you would not sell and therefore the 47% drop would represent an unrealized loss rather than a realized loss. In addition to owning the business and not the stock, a 47% price decrease would be exciting news if you wanted to expand your ownership in the company.

On June, 5th 2020, your investment in Lululemon is now trading at $319.78/share. An increase of 27% in 6 months.

What is the key takeaway this week?

Portfolio management is the art and science of selecting and overseeing a group of investments that meet the long-term financial objectives and risk tolerance of a client. If your mindset is set for ownership and not speculation, the odds of wealth creation become favorable.

Talk soon,

Michael Zagari