Wednesday, July 25, 2007

Investment Mistakes Part 5 – Listening to Rumours & Following Gurus

While considering whether a company is worth buying into, one has to take into account many factors. As discussed under the research series parts 2, 3 and 4 thus far, investors have to scrutinize a company’s financials and assess its ability to sustain a competitive advantage over time based on the 5-forces model. Even then, as Warren Buffett mentions, it is better to buy a great company at a fair price rather than a fair company at a great price. When he uses the word “fair” in this context, he is referring to the price at which the shares of the company are being offered in the stock market; and to compare this to the intrinsic value of the company, in order to see if there is a sufficient margin of safety.

My “mistakes du jour” journal continues with my fifth mistake, that of purchasing a stake in Asiapharm on March 29, 2006. My mistake was in seeing the price surge from about 80 cents plus to over 90 cents (at the time), and also hearing how one friend made good money from this counter by buying at 69 cents and selling at 94 cents. I made the ultimate error of “chasing the stock’s price” by doing momentum purchasing, and also to listening to a friend’s tip without doing prior research on the company. Thus, I was a victim the classic case of rumours, tips and hearsay (see my previous posting on this).

The problem was that I rationalized my purchase decision based on the fact that Mark Moebius of Templeton Investments had just taken a strategic stake in the company (which caused the share price surge). The announcement and press release stressed that Mr. Moebius’ fund had bought a substantial stake in the company, and that he was a very shrewd investor who could see good value in companies. Thus, forums were abuzz with people who praised his decision and collectively, they agreed that the 90-cent plus level must be good value. Mr. Moebius was, in effect, almost worshipped to “guru” status because of the performance of his famous Templeton fund.

This was a classic example of investing based on guru’s moves. Most of the time, prominent fund managers may invest in a company for a variety of reasons; plus they are not always right about value either (hey everyone is fallible). Thus, I learnt the hard way that objective, independent research and thinking is always far superior to “hero worshipping” somebody else. I am not trying to imply that the guru may be inferior or trying to mislead people in any way; it’s just that when fund managers invest, they may have their own reasons and always remember that their entry price is much, much lower than the market price (usually), thus they are in a totally different boat from the retail investor.

Ultimately, I sold out on June 9, 2006 at 64.5 cents, incurring a whopping 31.4% loss after the price kept drifting down due to tighter industry regulation from the Chinese authorities. To be fair, Mr. Moebius could not have known this was coming either and thus was unprepared for the devaluation of Asiapharm as a result. Even though Asiapharm subsequently announced the acquisition of several drug companies, the share price never recovered back to the 90-cent level due to continued strict industry regulations. As at the time of this post, Asiapharm’s closing price is 70 cents, way below my original purchase price of 94 cents. If I had stubbornly held on and refused to admit my mistake, I would have lost out on the opportunity cost of investing in a much better, cheaper company.


fishman said...

Sorry to hear about your loss, and thanks for sharing it so openly to everyone. I remember reading somewhere it's not the mistakes that you make, but whether you learn from it that matters more! And it's better to make mistakes early than later, when the stakes are much much higher!

So don't despair, let's learn from it together, and together....Huat Ah!

musicwhiz said...

Hello fishman,

Yes, mistakes should be kept small so that the resultant damage does not adversely affect the performance of one's portfolio. At the same time, one should seek to learn as much as one can from the mistake, instead of avoiding it or blaming something else. I notice that most people on forums blame their losses on "bad luck". If one attributes losses to bad luck, this is essentially saying that one is gambling (similar to horse racing, soccer betting or Toto).

Most people also try to "win" the market or "take revenge" which is just another useless emotional outlet which may end up in more losses.

I will be blogging about the 7 Sins of Investing some time in the future, and will make it into a series with 7 parts.