Musings of a Young Investor: Lessons from Losses

“I have always found it profitable to study my mistakes” – from Reminiscences of a Stock Operator

“Those who do not learn from history are doomed to repeat it” – George Santayana

With that in mind, I decided that it would be a good opportunity to review my losses after investing in Singapore stocks for 3 years. Since tuition fees have already been paid, it would be wise to learn the lessons and avoid making the same mistakes.

1) Lippomalls [Loss: -3.50%]

My first Singapore stock. Classic value trap. Picked this counter because it was providing one of the highest dividend yields amongst Retail REITs. Earnings and DPUs declined subsequently due to unfavourable weakening of the Indonesian Rupiah relative to the Singapore Dollar causing the once high dividend yield to fall to more realistic levels. Fortunate to realise the mistake and cut losses early.

2) BreadTalk [Loss: -20.37%]

I invested in BreadTalk due to its growth story and scalability. Once a high-growth company, the company has since turned stale. Revenues has been increasing but earnings per share has not kept up. ROEs have been declining since 2014 with high leverage. Net margins have also been poor, averaging 2.5% (FY12-15). Cut losses after 4 quarters of poor earnings.

In hindsight, I should have cut losses earlier, after 1 or 2 quarters of poor earnings (would have broken even). Even better, I should have just avoided this company altogether because it had no discernible economic moat, poor net profit margins, and increasingly high leverage.

3) Valuetronics [Loss: -21.87%]

Classic case of not investing in your circle of competence and not understanding the business. I invested in the company purely based on its financials and valuations alone. It had above average revenue and net profit growth, high net cash, good ROEs, and pays a high dividend yield. However, as I would learn, past performance is not a guarantee to future performance. The lack of understanding of the company’s business and future growth prospects made it hard to value and hold. Not to mention that one of its core revenue segments, Consumer Electronics, was having major problems.

In hindsight, I should have cut losses earlier, after the 1st quarter results of stagnant profit growth (approx 5% loss). Even better, I should have just avoided this company altogether because I did not understand the business well enough, there was no discernible economic moat, and lacked clear growth catalysts.

4) Neo Group [Loss: -35.48%]

The company was doing well prior to my purchase, my only concern was its increasing leverage. I felt that it would not be much of an issue if the company continues to perform and grow its revenues and earnings. However, although revenues grew, earnings started to stagnate, and eventually decline into a loss. Furthermore, the company’s leverage doubled since my purchase. Therefore, the poor earnings growth and deteriorating balance sheet caused the company’s share price to fall sharply over the past 2 years.

In hindsight, I should have cut losses earlier, after the company’s net income declined for FY15 (approx 10% loss).

5) Osim [Loss: -62.18%]

Similar to Valuetronics, I invested in Osim mainly based on its financials. Then it boasted of its 22 consecutive quarters of record profit. I believed that the trend would continue. Boy was I wrong. By the 2nd quarter of my purchase, its net profit fell 28%, triggering a massive sell off. If I had cut my losses then, it would only have been a 27.44% loss. Revenues and net profits eventually turned south, from bad to worse. To add insult to injury, a week or two after I exited my position, Ron Sim decided to take the company private at a substantial premium to my exit price.

In hindsight, I should have cut losses earlier when its net profit fell for the first time in 22 quarters.

6) Ezion [Loss: -66.32%]

When oil declined 50%, from $120 to $60, I strongly felt that we were at the bottom. Hence, I went about to pick the best pure-oil play company in SGX. I felt Ezion (fell from $2 to $1) would be best able to ride the recovery in oil prices despite its high gearing since it claimed to be “insulated” from the drop in oil prices due to its “secured chartering” and how it was a servicing shallow-water players instead of the deep-water companies which would be most affected  since they had higher breakeven prices. I felt I had prepared for the worst. The worst happened. Oil prices went from $60 to $30 in a matter of months. Ezion’s earnings and share price took a beating as it became clear that the company wasn’t as insulated as it had seemed previously.

In hindsight, there were more than 1 learning points from this trade:

  1. I was too early in calling the bottom. I was impatient. I should have given more time for the market to bottom and show signs of recovery.
  2. I should have cut losses when Ezion’s 1Q15 revenues and net profit fell, at a 10% loss.
  3. I should not have added to a losing position (average down).

Summary of Learning Points

  1. Look for earnings growth. All 6 of my losing trades had a fall in earnings
  2. Sell when earnings decline. All 6 of my losing trades had a fall in earnings
  3. Look for robust balance sheet. 4 out of 6 my losing trades had weak balance sheets
  4. Cut loss at 10% of entry price. Every major % loss started small.
  5. Average up not down. Better to be a little profitable than running a large loss.

 

Kenny Chia

Value-Growth Investor

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