Dell

I originally bought Dell stock in 2006, thinking it presented a good value. That purchase was an investment mistake -- not because the price has come down over two and a half years, but because there was something I could have and should of known at that time that would have changed my conclusion.

In essence, Dell's economic moat wasn't as durable as I thought it was. Dell has turned out to be more of a turnaround story than I had thought early on.

In making my original investment in Dell, I saw a Geico: a long-term low-cost provider of a commodity who is low-cost by selling direct (i.e. is more efficient) when the competition cannot sell direct due to various reasons.

This at one point was true of Dell and is still true of Geico. But here's the crucial point, here is what I had missed: what has happened is that the price gap has narrowed significantly in direct vs retail PC's. For maybe 5-10% more than a $400 direct-sold Dell you can get a PC from the store and use it today (this used to be 30-40% more on a higher base, say, $1800). And along with the instant gratification you get someone explaining things to you in the store, a return policy, etc... basically a value-added retail experience at a tiny extra cost.

Dell has now started selling through retailers. So basically what has happened is comparable to (1) agent-based auto insurers narrowing the price gap and (2) average auto policy prices halving to the point where Geico now finds its best move to also sell through agents. The direct-sales moat is irrevocably impaired. That's where Dell is not like Geico: agent-based auto insurance is not going to get much more efficient, and auto policy prices trend up over time (exposure goes up because the underlying assets people insure, their cars and bodies, become more expensive to repair over time) increasing the absolute price difference.

What Dell has going for it now is its world-class supply chain and capital management, its customer relationships, its brand, and whatever it can continue to sell direct (which for now is the majority of its sales, but who knows for how long?).

Dell is still a low-cost provider of a commodity. And the market is heavily fragmented. According to wikinvest, the top four PC makers (Dell, HP, Lenovo, Acer) accounted for only 44% of the global PC market in 2006.

So far Dell's retail sales have shown good revenue potential but not-so-high profits. As they tune this model things could change for the better.

The stock is still cheap in my view, but this is only because the price has come down more than my perception of business value; i.e. it has remained cheap despite my assessment of the business prospects dimming.

Related: Warren Buffett's The Security I Like Best, published in 1951.