Monday, October 29, 2007

Investment Mistakes Part 9 - Selling Too Early

One of the most classic investment mistakes is selling too early, in what is also known as "short-termism". This occurs when one does not take a long-term view of a company, and attempts to "trade" a small gain, or maybe one sets a specific target price which is 10-20% higher than their buy price, and subsequently sells when it hits the trigger point. Both methods are price-dependent, rather than being business-dependent. Again, I reiterate that if you have bought into a good company at a fair price, then why in the world would you want to sell ? So begins my analysis of my mistake below....

Please also note that an investment mistake does NOT necessarily consist of transactions which resulted in losses. In fact, this mistake had resulted in a gain, but the opportunity cost is so tremendous that on hindsight, the paltry gain is hardly enough to justify the act of selling so early ! The company in question is Labroy Marine, which is a prominent ship-building company in Singapore and which had recently also ventured into building rigs. Just today, on October 29, 2007, the company announced that it was being acquired by Dubai Drydocks LLC (DD), the same company which took Pan United Marine private in May 2007. DD is offering S$2.8425 per Labroy share and they are planning to take the company private. The chairman Mr. Tan Boy Tee and executive director Mr. Chan Sew Meng have already agreed to sell their combined 65.49% stake in Labroy to DD, effectively making the deal unconditional.

Way back in April 2005, I purchased shares in Labroy Marine at a cost of 64 cents per share, which looks amazingly cheap now eh ? The problem was that at the time, I had nary a clue about value investing, and even less knowledge about how to properly value a company and see its potential. To me, it was all about making a quick gain from the sale of the shares (I did not use contra) at a set price. In the end, I sold at 70 cents in May 2005 for a miserable gain of 9.4% (6 cents) and totally missed the upside as the company grew and the share price ran into S$1, then surpassing S$2. That was one of the hard lessons I had to learn about the essence of long-term investing, and even Warren Buffett had made the same mistake when he sold his first investment too soon. The painful fact is that if I had held on to Labroy till now (when DD announced the acquisition), I would have made a cool 344% profit.

The mistake and subsequent lesson to be learnt is that one should NEVER set a pre-determined target price to exit if one is investing in a company. This is because a company is always growing and its business is dynamic, thus placing a target price on it (like the analysts always do) seems to imply that the growth will terminate when it hits that price. In the end, one may very well sell for a profit but miss out on the huge potential which the company has to offer.

Since that mistake was made, I have held on very tightly to shares in Ezra Holdings which I purchased in October 2005, as I recognized that the company was growing very rapidly and that its earnings were scaling up tremendously. A mistake was made and a lesson was learnt; Ezra has since grown into a different animal altogether, to the extent of reporting 5 years of consecutive revenue and net profit growth and also listing a subsidiary in Norway. Thus, I now approach every company with the view that I am buying a piece of a good thing, and who wants to let go of a good thing to exchange it for something which may not be so good ?

14 comments:

Anonymous said...

Hi MW,
Nice article. YOu do read Common Stock Uncommon Profits by P.Fisher rite?

I was about to let go my holding last year October too. But hold on after reflecting that wise men ever mentioned about this. He bought Motorola and Texa holding them for decades.

musicwhiz said...

Haha, well I have flipped through the book at the bookstore and read selected sections in their entirety, but I did not actually buy the book yet as the writing style is not so easy to digest. Perhaps I will get down to buying it some time in the future, as part of my education in the proper methods of investing.

Regards, Musicwhiz

Anonymous said...

Hi, I recommend that you go and read this book by Kobrick, The Big Money. I was in the same situation as you before and have since switch my strategy following a lot of his strategies...besides others ie Fisher. It has yielded me Big Money. Good luck

Anonymous said...

Hi, once you look through the rear screen, everything is so clear, can't say that for someone looking through the front screen. Did you know Labroy is going into rig biz? unless you are the director or part of the mgt, an average investor would not have that information. I'm not against long term, but we have to be very sure our coy selection criteria and investment object. Besides, if today your stock jump 100% in a week, not unseen off these days, would you not want to sell, for whatever reason you have bought it? In other words, TOO EARLY is subjective, and comments should be made with the right mindset. Rdgs.

musicwhiz said...

Hi Anonymous, thanks I will check out the book. I wonder which bookstore has it ? Haha will check Page One at Vivo and Times bookshop at Marina. Let's hope his strategies explain the rationale behind each decision.

Regards, Musicwhiz

musicwhiz said...

Hello Anonymous,

I am glad you brought this up. It is a good issue to debate and discuss.

Although one will not "know" if Labroy was going into the rig business, 64 cents/share still represented a good margin of safety for a company which was growing their shipbuilding business. Hence, part of the research process should involve the company's core business' growth prospects as well as the industry growth. As value investors, we have to use our best knowledge available to make an informed, educated guess about the future.

From my experience, one of my stocks really did jump nearly 100% within a few months, but with a long-term view, I do not mind holding on as I did not feel that valuations were too demanding as growth was expected to be strong.

I definitely agree that "too early" is subjective and some part of it is of course hindsight logic; but in Labroy's case, selling at 70 cents would have been too early considering the company was still growing at a healthy pace. Hope this clarifies.

Thanks, Musicwhiz

Anonymous said...

People get involved in the stock market with the best of intentions: they do it to make their money start working harder for them. You can certainly make money using techniques rooted in any one or even both of these paradigms, but take note that patience, experience and in some cases, skill, play a large part in your success when participating in the markets. In Technical Analysis, stock market volatility is yr friend, while in Fundamental Analysis, the power of compounding is yr friend.

I don't believe that there are any wrong investment approaches in the absolute sense, just dangerous ones. A strategy becomes dangerous if you decide to apply it without sufficient planning, knowledge or study, causing you to make reckless moves or generate heavy losses. So the key is to go with what works for you, realizing your limitations while capitalizing on your strengths.

EuniceTan

Anonymous said...

can technical analysis be applied on FA? i mean for example if u are a good TA/FA guy, once u hv identified a good stock buy @ a low and sell at a high!.....hmmmm

musicwhiz said...

Hi Eunice,

Thanks for your comments. Yes, both methods have worked to a certain extent but take note that the world's most successful investor has been a value investor and not a trader using TA. No doubt, there have been people using TA to gain superb wealth, but the problem I have is that you must constantly watch the market.

A strategy works if you have tested it and applied it objectively, and you must stick to your strategy and make modifications along the way as you learn more. It's always a learning process, and for me too I am still learning about value investing. I know that TA works for some people, but for me it's value investing which has given me good returns. Thus, to each his own. I just hope this blog helps more people who wish to know more about value investing instead of dangerous speculation which can drain you of wealth.

Thanks, Musicwhiz

musicwhiz said...

Hi Anonymous,

Yes, TA can be applied with FA in order to "time your entry" into a fundamentally sound company; but I haven't seen many people using BOTH very effectively. Most people are either one or the other. Value investing is more than just FA, but most people just think it's another form of FA. I would say that FA is a subset of value investing, but value investing takes a more holistic approach to understand a business, going past the numbers and ratios.

Cheers, Musicwhiz

Anonymous said...

Hi, you have talked about long term and valuation for a company you know well and have vested interest. Have not seen you discussing or computing the value, i.e. the so called intrinsic value. To qualify your TOO EARLY or when to sell, maybe you should attempt an estimation for all to agree? Rgds.

musicwhiz said...

Hi Anonymous,

Yes, the companies I own are also the companies I know best, in terms of their business prospects and their plans and strategies moving forward. This is why I blog about them the most. The problem with blogging and analyzing another company in great depth is that it requires a lot of time and effort. With my current busy work schedule (in which I have to travel occasionally) + my commitment to a healthy family life, I realize I may not have the time to devote to doing intensive research on another potential company. That said, I do agree that it should still be done, but I prefer to take a more laid-back approach as the market is way too high anyway for me to be interested in buying a part-ownership of another company.

Rest assured that I will progressively introduce my research on other companies listed on SGX. I would like to discuss salient aspects of value investing in greater detail first before ploughing into individual company analysis on my blog. Another reason is so as to observe the companies' performance over a period of time to see how it grows/declines, so that I can comment more appropriately and this will enhance my decision-making. Patience is always a virtue when it comes to value investing.

Regards, Musicwhiz

musicwhiz said...

Hi Anonymous,

Yes, value investors can sit back and relax once they have identified a superb company whose earnings are almost sure to increase over the years. In the Singapore context, no company really exists (IMHO) which has the characteristics which WB talks about (i.e. wide economic moat, franchise power etc), thus I have to ask for a greater margin of safety and have to do more active monitoring of the business.

The intrinsic value is als an ever-changing value which is an estimate, rather than a certainty. For example, you can put a value on brand equity/strength or JV/collaborations with strategic partners.

Good luck to you too !

Regards, Musicwhiz

Anonymous said...

Quite agree with you on time commitment and hence laid-back approach once you have invested in a company that give you good returns for many years to come. Sure if you've large margin-of-safety, you can even adopt: "I don't know and I don't care" attitude! However, unless you're absolutely sure you have gotten the right company, there are instances when business risks taken by the mgt seems too much and our fragile (unlike mature) market participants get nervous. It is with these considerations that you should compute a instrinsic value, i.e. the discounted value that one can received from that company from it remaining life. For example, if PacAndes will to reach $1.60 tomorrow, I may well sell all out and save keep the returns. Good luck!