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 ?