As I have posted previously, I review a lot of blogs, and do a fair amout work with screeners to look for the next great deal. I wanted to highlight why I did not take a position in a stock that was recommended by one of my favorite value bloggers: Greenbackd. It had all the makings of a company I would like. It was a net net stock with a catalyst to help extract the value, in this case a likely liquidation. If you want the details of Greenbackd’s research you check out his posts here and here. But I did not invest, why?

I did my own due diligence and actually came away with a slightly higher potential liquidation value than Greenbackd’s of $1.19 share vs. his $1.17/share. And yet I still didn’t invest.

The most important reason for me was that the margin of safety was not big enough. Margin of safety is the Ben Graham concept of the difference between the “instrinsic value” of a company, in this case we will call it the liquidation value, and the price of stock. In this case it was only about 20%. I like mine to be the classic 1/3 off the sticker price margin of safety. I like it even more if it is higher. As he states in one of his posts its not a big return, but fairly solid. Maybe. That brings me to my next point.

This stock is thinly traded, sometimes no shares change hands in a day. That is not always a problem for me, but because the margin of safety was not that big. It is a huge contributing factor for not buying. If I was wrong, getting out of the position could be costly, much more so than with a stock with higher volume.

It points out the most important lesson in investing. Do not do something because someone else does.  Even if you respect them and their analysis. If it conflicts with your philosophy of investing or you don’t understand why they invested in it, don’t invest. Here is the hard part of this advice. They may be right. If I was betting. I would bet on Greenbackd. He has a great track record and solid analysis, but the margin of safety was too low for me. I am comfortable sitting this one out. I understand why he invested and he will probably make money. But I would be uncomfortable with the trade because I need a great margin of safety and so I passed on the trade.

If you agree with Greenbackd and you can get someone to sell you their shares for the closing price (no shares have traded since last week) there is still some money to be made in this. If you are like me a little more conservative, wait. Only you can ever decide how you will invest your money.

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