Strubel Investment; Sold GameStop; Valeant Lessons

Strubel Investment; Sold GameStop;  Valeant Lessons

Strubel Investment Management Portfolio Update; Sold GameStop, Discusses Valeant by Ben Strubel, Strubel Investment Management

Dear Investors,

This month’s newsletter will just be a few quick updates on the portfolio.

Gates Capital Returns 32.7% Tries To Do “Fewer Things Better”

Gates Capital Management's Excess Cash Flow (ECF) Value Funds have returned 14.5% net over the past 25 years, and in 2021, the fund manager continued to outperform. Due to an "absence of large mistakes" during the year, coupled with an "attractive environment for corporate events," the group's flagship ECF Value Fund, L.P returned 32.7% last Read More

First, we sold out of GameStop (GME) completely. (A few years ago we halved our position when the stock more than doubled.) For years, Wall Street has misunderstood GameStop, always comparing it to the next Blockbuster Video. Despite superficial similarities, GameStop is a completely different type of retailer. GameStop has far fewer store locations, much smaller stores, and much higher sales per square foot.

Additionally, GameStop has the “buy-sell-trade” business model, which allows gamers to trade in used video games for cash or credit. This is GameStop’s core business. It allows gamers to buy $60 video games for $40. On Wall Street where most people have above-average incomes, the prospect of driving to a store to trade in old games (or buy a used game) to save $20 isn’t too appealing. For a young kid working part time or someone with a modest income making $35,000 a year, saving $20 is a huge deal.

We are, however, starting to see some problems on the horizon. Amazon has started offering 20% off new video game purchases for Prime customers. When we take into account that Amazon also has a used game trade-in program, we may be seeing the emergence of a real competitive threat. Another company getting close to selling $60 games for $40.

The biggest issue, though, is GameStop’s role in the video game publishing eco-system. Publishers have a love/hate (OK, mostly hate) relationship with GameStop. On one hand, they need GameStop because it is their most important retail outlet. On the other hand, they hate GameStop because as a middleman it is earning profits that could be going to publishers under a direct distribution model (i.e., end users download games directly from the publisher). Additionally, used video game sales benefit only GameStop and consumers. The publishers don’t see a dime every time someone buys a used game.

We are nearing the end of a console cycle, and in a few years we will see a replacement for the Xbox One and the PS4. With every new console, there is a big risk that publishers will force some type of used game restrictions on the consoles. It could be something where users need to pay a small fee (to the original game publisher) to unlock a used game before use or as heavy handed as disabling used games outright. Gamers are huge fans of used games, and there has been an uneasy standoff with both Sony and Microsoft fully supporting used games.

We think the risks outweigh the rewards for GameStop at this point, so after many years we have finally sold out of the stock completely. In its place, we bought Rockwell Automation (ROK), an industrial automation company. You can read an article we wrote about why we believe the company is attractive here.

We’ve also rebalanced the portfolio over the last 18 months, more so than we have in the previously. Since the beginning of 2015, the stock market as a whole really hasn’t gone anywhere. But, during that time we’ve had a lot of our individual stocks go up and down (thankfully more up than down!). Because of this, we’ve had to frequently rebalance our portfolios to prevent several positions from becoming too large. While that means we were trading more than we would like, it was necessary to help balance risk.

It’s also helped returns. From the beginning of 2015 until this writing (June 6th) our stock funds have returned 8.08% for our Value Fund and 12.05% for our Dividend Fund, compared with just 5.66% for the S&P 500 and -.58% for global stocks (Dow Jones Developed Markets Index).

But, the most important part of rebalancing is, as I’ve said, reducing risk. Below is the stock chart of Valeant Pharmaceuticals (VRX) from the beginning of 2015 until today. We’ve written about Valeant in the past and how many famous investors had huge positions in the stock, including a famed mutual fund that at one point had over 30% of its investors’ money in Valeant.


The stock is down almost 83%. Valeant’s business model has unraveled, and the CEO was forced out. The company has a huge debt burden that makes turning things around extraordinarily difficult. I’m not picking on the Sequoia Fund or Bill Ackman for making a mistake and investing in Valeant. Everyone makes mistakes. Instead, I’m picking on them (well, using them as a counter example) for putting huge percentages of their investors’ money in one non-diversified company.

No matter how smart you think you are and what your track record of success is everyone has blind spots and everyone makes mistakes. That’s why we believe it’s important to keep a reasonably diversified portfolio for clients, and that’s the reason we’ve been rebalancing and trading more frequently over the past 18 months. We, like all investors, have had investments that have been losers over the same time period as Valeant, but part of the reason we’ve had great returns is our diversification. Our losers weren’t big enough to “ruin” the rest of the portfolio.

No Company Profiled

No Company Profiled This Month.

About Our Portfolios

The Capital Appreciation Fund and the Dividend Fund are innovative, investor friendly alternative to traditional actively managed mutual funds called a Spoke Fund ®. We can also customize portfolios for clients seeking less risk and volatility by including allocations to other asset classes such as bonds and real estate.

Spoke Funds are significantly less expensive and more transparent than a large majority of mutual funds. Both portfolios are managed for the long term using value investing principles. Fees for both portfolios are 1.25% of assets annually. That figure includes both our management fee and all trading costs. We try to minimize turnover and taxes as well in both funds.

Investor accounts are held in your name (we never take investor money) at FOLIOfn or Interactive Brokers*.

For more information visit our website.

*Some older accounts may be custodied at TradePMR.


Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and investing may cause capital loss.

The performance data presented prior to 2011:

  •  Represents a composite of all discretionary equity investments in accounts that have been open for at least one year. Any accounts open for less than one year are excluded from the composite performance shown. From time to time clients have made special requests that SIM hold securities in their account that are not included in SIMs recommended equity portfolio, those investments are excluded from the composite results shown.
  • Performance is calculated using a holding period return formula.
  • Reflect the deduction of a management fee of 1% of assets per year.
  • Reflect the reinvestment of capital gains and dividends.

Performance data presented for 2011 and after:

  • Represents the performance of the model portfolio that client accounts are linked too.
  • Reflect the deduction of management fees of 1% of assets per year.
  • Reflect the reinvestment of capital gains and dividends.

The S&P 500, used for comparison purposes may have a significantly different volatility than the portfolios used for the presentation of SIM’s composite returns.

The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.

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Ben Strubel earned a Master’s in Business Administration in Investment Management from Drexel University’s LeBow College of Business in Philadelphia, PA. He was inducted into the Beta Gamma Sigma honor society, the highest academic honor society for master’s degree students. While at Drexel, Mr. Strubel founded the LeBow Graduate Investment Management Club and the DragonFund Large-Cap Fund, which was responsible for investing $250,000 of Drexel University’s endowment. He also holds a Graduate Certificate in Financial Planning from Florida State University. He earned a B.S. in Information Technology from Rochester Institute of Technology in Rochester, NY. He teaches classes on finance and investing at Harrisburg Area Community College and for Manheim Township. Mr. Strubel also writes for several investing websites including and He resides in Lancaster, PA.
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