We are wired to assume that the future will be like the near-term past and underestimate the potential for a major change. As Howard Marks would say “99% of financial history has taken place inside two standard deviations, but everything interesting has taken place outside those bounds”. Indeed.
A little more than 3 years ago, Yahoo! Inc (NASDAQ:YHOO) was still trading under $15 and was considered one of the dogs on Wall Street. It had changed 6 different CEOs inside a few short years and it had done very little for its investors. Back in those time, Phil Pearlman went on a limb and called that Yahoo could be a $50-billion dollar company in 3 years. I decided to make a friendly bet with him and told him that if it happens, I will send him a case of premium beer.
I felt quite confident in my position. It was like selling very out of the money call spread for a very decent premium: risk/reward was 1:1 and I did to be a good sport, too.
Earlier this week, Yahoo came within very close proximity of reaching Phil’s target. I consider it good enough to admit that he is the winner of our bet.
The curious thing about Yahoo is that none of us needed to have some special insights in order to make money in it. Price was all we needed to spot a major change of trend. In November 2012, Yahoo cleared new multi-year highs from a very long sideways base near $16 and it hasn’t looked back ever since. We made that bet before the breakout occurred.
I don’t know what his reasoning was and how his thinking changed over time, but I have to admit that he made an incredible call and he won his beer fair and square.
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