This year 2 of my portfolio companies filed for bankruptcy – American Apparel and Box Ships. Both have lessons for me.
Let’s first talk about American Apparel. The company was in the news for the removal of founder, shareholder and CEO Dov Charney for several sex scandals. The CEO then struck a deal with the private equity firm Standard General, boosting Charney’s stake in the company to 43% but giving Standard General a say over a large block of stock. Standard General also owned a huge chunk of American Apparel debt. I felt that there was a high probability that Standard General would facilitate a takeover or take private deal for American Apparel. Thus, with American Apparel stock trading at bankruptcy, my downside was low but upside large. Knowing that if I was wrong the stock would be worthless, I sized the position really small. While the investment did not work out as I hoped, I believe that my process was still correct.
The second company that filed for bankruptcy was Box Ships (TEU). I bought TEU for exposure to container shipping after I remembered that Motley Fool recommended the stock back in end 2011. I definitely did not see TEU filing for bankruptcy. Ultimately, I made an investment in TEU without really knowing much about TEU itself, though I knew something about the industry. I repeated a mistake I’ve made several times where laziness cost me. I should really eradicate this habit. Thankfully, the position in TEU was also small.