A Tale of Two Stocks

Michael Flack

HI, MY NAME IS MIKE and I’m a stock picker. Actually, I stopped picking a few years ago after I hit rock bottom and finally realized I had a problem. But there’s no such thing as an ex-stock picker.

I still frequent Seeking Alpha, read the occasional Barron’s article and, every now and then, have the urge to buy an individual stock. I still occasionally fall off the wagon, but nothing like the ol’ days. Back then, I picked two stocks, but instead of earning a stream of rising dividends, I earned a valuable lesson.

Stock No. 1: In the early 2000s, I formed an investment group using what was then the hottest website in the U.S… Craigslist. Over the next few months, I met with a group of diverse investors at what was then the hottest restaurant in the U.S… California Pizza Kitchen. Over numerous Thai crunch salads, we discussed various investments ideas, including “condo-izing” a small apartment building, Vector Tobacco, Audible and—what I thought was the best one—Medallion Financial Corp.

Medallion Financial provided loans to buy taxicab medallions in New York, Boston, Chicago, Newark and Cambridge. For those who don’t live in these cities, a medallion is the license required to operate a taxicab. It’s a piece of metal about six inches across that is physically mounted to the hood of a taxicab. Every taxicab has to have one.

It was also a license to print money for those who owned one. New York City drastically limited the number of taxis in Midtown Manhattan. Anyone who has ever tried to hail a taxicab outside Penn Station on a rainy Friday during rush hour could attest to its worth.

While this country doesn’t like the idea of a cartel trying to set the price of oil, New York didn’t seem to mind allowing a cartel to monopolize the number of taxicabs. The sale of new medallions seemed to have more to do with the city needing to periodically rectify its finances than it did with meeting the needs of potential customers stuck for a ride.

Medallion Financial traced its roots to Leon Murstein, who purchased one of the first taxi medallions ever sold by New York City back in 1937. The company his grandson formed subsequently got into the finance side of the business, while also owning a significant number of medallions itself.

The loans Medallion made seemed virtually risk-free. If the owner could not make the payments, the medallion could be ripped from the hood of the taxicab and resold—almost always at a higher price. The fact that the new owner, most likely an immigrant, would have to drive their medallion-adorned taxi 12 hours a day, seven days a week to make payments was a matter that investors like myself didn’t concern themselves with.

The historic price of a medallion was a huge reason for the value of the company. Since the first medallion was sold by New York City in 1937 for $10, the price of a medallion had increased to more than $1 million by 2014. That’s an annualized 15.5% return, or 50% more a year than the S&P 500, including dividends.

I bought some shares. The company and I both rode up the disturbingly constant increase in medallion prices until a company called Uber came along. Well, needless to say, the price of a medallion has since dropped precipitously, as has the stock of Medallion Financial. It got so bad that the company changed its ticker symbol from TAXI to MFIN.

Stock No. 2: Thornburg Mortgage was a publicly traded real estate investment trust that I read about in a James Glassman article in The Washington Post in 2004. It was a unique mortgage company in that it only sold adjustable-rate mortgages to rich people who put at least 20% down. Thornburg then serviced these mortgages itself—it didn’t package and resell them. This enabled Thornburg to stay in direct contact with the customer, and easily alter or renew the mortgage. The company used options to hedge away any interest rate risk. It was an extremely well-run and profitable company.

As the financial crisis began to unfold in 2007, Thornburg’s business model performed magnificently. Its predominantly rich customers continued to make their mortgage payments. The 20% down covered the costs of the few defaults. Everything should have been copacetic, except that the crisis caused the value of all mortgage-backed securities to plummet. Investors treated the performing mortgages that Thornburg carried the same as the subprime garbage.

Once that happened, the short-term loan market that Thornburg relied on for financing dried up. Nobody would lend the company money. A death spiral ensued: dividend suspension, an 18% interest rate loan and a subsequent secondary stock sale.

It was a testament to the business model and underwriting ability of management that, during the months that this took to unfold, its portfolio of mortgages performed quite well, with few delinquencies. This, unfortunately, did not help. The company eventually ceased operations and filed for Chapter 11 bankruptcy reorganization while it liquidated.

Both of the above stocks served as a death knell, signaling the beginning of the end of my investment in individual stocks. In both cases, I had performed a thorough fundamental analysis and invested in a conservatively managed company with a wide moat—unlike my investment in Enron, which may be the makings for another article. In both cases, my diligence was rewarded with a significantly lower share price.

No matter how rigorous your analysis, no investor can foresee all the developments that may affect the business model of even the best-run companies. I’ve learned that this makes stock picking problematic, at best. Though there is this one pink sheet company that looks promising….

Michael Flack blogs at He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.

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