A Monumental Lesson in the Merits of Foolish Investing

Recently, there have been a lot of headlines revolving around some big names in the investing world. Carl Icahn and Bill Ackman have been going toe-to-toe on trying to figure out whether Herbalife (NYSE: HLF  ) is in fact a pyramid scheme. And now George Soros is throwing his name in the hat as well, trying to exert his sway on the company's story. Meanwhile, Herbalife's stock price continues its roller-coaster ride.

Who's right? Who knows, really? It's worth noting that Herbalife has grown sales at a better than 13% annualized clip over the last five years while at the same time bringing the share count down by 16%. All of these headlines, though, got me thinking back to David Einhorn's famous short call on Chipotle Mexican Grill  (NYSE: CMG  ) back in October 2012 and why there was just no way I could rationalize jumping on that bandwagon. Let's take a look back at what has happened.

Oct. 2, 2012
Word got out that David Einhorn revealed his Chipotle short thesis at the Value Investing Congress. The basic gist was that Chipotle would be facing some serious competition from the likes of Yum! Brands' (NYSE: YUM  ) Taco Bell and its new Cantina Bell menu. On this day the stock opened at $319.87 and reached a low of $290.15 before closing at $302.96, down more than 5%. I started talking to my boss, Fool co-founder Tom Gardner, about Chipotle being a business with many of the qualities he looks for in his Everlasting Portfolio in Motley Fool One.

Oct. 18, 2012
Facing expectations of a less-than-stellar quarter, Chipotle released its results for the third quarter. The following day, more sellers piled on and Chipotle shares fell another 15%, closing at $243. I ratcheted up my case for Chipotle's long-term prospects with Tom, looking at the situation as a potentially opportunistic time to add Chipotle to the latest Everlasting Portfolio picks coming out on Dec. 2. We both saw two distinctly different companies. Considering Chipotle's food costs ring in at about 33% of sales versus Yum! Brands' 28%, we saw Chipotle as striving to offer a far different product with a priority on ingredients. Chipotle's mission of "Food With Integrity" spoke volumes to us both.

Dec. 2, 2012
After much deliberation and research, Tom added Chipotle to the Everlasting Portfolio during a time of general pessimism regarding the stock. The cost basis: $264.80. While the stock was off its recent lows, and with an earnings multiple creeping below 30, we both noted that the last time we had seen Chipotle at such a valuation in relation to its earnings multiple was in the first half of 2009, when the company witnessed a similar time of very low same-store sales and questions regarding its growth prospects. We didn't think it would last.

July 18, 2013
Chipotle announced second-quarter earnings that impressed Wall Street, with 5.5% same-store sales along with confirmation that the company's second concept, ShopHouse Southeast Asian Kitchen, was in fact gaining traction and a part of the company's long-term growth strategy. Shares broke back above $400 and today are closing back in on $420. As it stands, Chipotle is a big winner for us in the Everlasting Portfolio, having gained more than 55% and throttling the market in the process. Since Oct. 2, 2012, when Einhorn's short thesis came out, Chipotle's stock is up approximately 37%.

Nobody's right all of the time, including us
Chipotle the business is doing very well today, and Foolish investors should be happy. I'm not here to say that this is case-closed and that Chipotle's stock price will never come back down. However, there are some timeless lessons here in regard to Foolish investing and why it works. We Fools see Chipotle as a much longer-term story than many others do. This mind-set can and does give us a great advantage; time is our friend, and we're focused on the business, not the day-to-day gyrations of the stock price. Furthermore, we also know that Chipotle has an excellent management team in place, with a founder, Steve Ells, who appears to be married to the long-term success of this business.

Investors like Einhorn, Ackman, Icahn, and Soros have a lot of money to throw around thanks to their success, and they are quite plainly very smart investors. But everyday investors like us should be extremely cautious listening to them and furthermore even considering acting on their moves. They are playing a different game; a faster game in which positions come and go like a meatball pizza here at Fool HQ on pizza day. Hubris appears to matter to these guys; Foolish investors should embrace humility and all of is redeeming qualities.

Wrapping it all up, Chipotle-style
Will Einhorn ever be able to profitably crawl out from under his short on Chipotle? Maybe. Time will certainly tell, but I'm liking his chances less and less with each passing day. Chipotle is a fantastic business with an amazing growth story ahead. Perhaps the biggest lesson from all of this is to never follow anyone blindly into any investment. Remember, just because someone has the financial means to act on an investment and they make headlines doing it, rarely are they making calls that are in line with our interests. It's best to just read about them in the newspaper and call it a day. After all, it's your money; invest it Foolishly.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 02, 2013, at 11:34 AM, TheCommonTulip wrote:

    This is an awesome case study and great work...sure, I'm biased (I own shares of CMG) but this short never, ever, made sense to me. Great example of many things: invest don't trade, don't follow big fish blindly, evaluate a business and not a ticker.

    Great work!!

    AT

  • Report this Comment On August 02, 2013, at 12:24 PM, TMFJMo wrote:

    @TheCommonTulip: Thanks for the kind words! I had a lot of fun writing the piece.

  • Report this Comment On August 02, 2013, at 4:48 PM, Truth2Power wrote:

    Yeah: when I heard that Chipotle had dropped so much, my first thought was, "time to buy!!!"

  • Report this Comment On August 03, 2013, at 11:15 AM, TMFJMo wrote:

    @Truth2Power: Solid first instinct!

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