Is an Investment a mistake due to an Uncertain Future ?

I guess I didn't know how to describe what I am about to say, thus the very vague and clumsy title above ! But dear reader, perhaps by now you would have read about the global financial crisis, the sub-prime contagion and be bombarded by endless information about bank bailouts, auto bailouts and what-nots. This is how I define "uncertain future", and as I go along my investment journey, I realize that what confronts me as an investor is not just my ability to analyze and select good companies, but to be able to assess their future potential and survival to a certain extent. Let me elaborate further.....

As investors, our role and job is to assess the ability of companies to grow their earnings and ensure a steady stream of cash flows. Our returns will then be based on the capital appreciation of the shares (representing part ownership of the Company) as well as any dividends accrued over the years. Looking at past data is always easy and it is a cinch to crunch past numbers in order to attain some semblance of being able to identify a good company. However, the fuzzy part of investing is not in analyzing the past, but in predicting the future. Businesses are subject to constant change from a myriad of factors, and stakeholders are forever interacting with the company and altering its intrinsic value, thus I realized that the notion of "the fundamentals are still the same" is misleading; due to the fact that changes in the external environment and within the company itself would cause some degree of shift in its so-called "fundamentals".

With the advent of ths current severe economic downturn and sharp recession, visibility has suddenly been greatly reduced. It's as if 2 years ago in 2007 we were driving a Porsche in clear fine weather, but now the skies have darkened considerably, it's pouring and a fog has sprung out from nowhere to ensnare the unwary driver (investor). Not to mention that the Porsche has probably been downgraded to a battered 10-year old spluttering Ford car ! As an investor who used to be certain about the future potential of the companies I own, I suddenly find myself thrust in the middle of a dense fog with no sign of lifting, and there is no clear visible path to take. Thus, the best thing to do is to tread slowly and uncertainly through the mist, all the while monitoring the humidity and whether the mist threatens to turn into a deadly airborne plague. This analogy aptly describes what I had gone through in the past 12 months as the global financial turmoil engulfed all my companies, rendering many of their plans useless and forcing them to change course and steer clear of danger.

Going through my list of companies, Ezra and Swiber's long-term plans are now in jeopardy due to the slump in oil prices to US$40 per barrel, thus threatening oil and gas E&P into deeper waters which both companies had planned for. This caused Ezra to cancel 3 out of 5 of its MFSV and Swiber to postpone the construction of its Equatorial Driller. Boustead is affected by the oil and gas slump (even though they managed to clinch S$65 million worth of contracts recently) and also the property slump as they are into multi-industry. Tat Hong, being in the construction industry, also issued a profit warning as equipment sales weakened and the operating environment became more challenging. Pacific Andes and China Fishery are affected by the global trade slump and many countries are not importing due to trade financing drying up, thus their expansion plans may also be in danger. Last but not least, First Ship Lease Trust is the most affected as the global shipping industry has almost come to a standstill, with many vessels lying idle amid an over-supply as bulk shipping dries up. As a result, not only has the Trust been unable to grow, it has also been beset with problems such as potential client default (bankruptcies), loan to debt covenants and also loan repayments. Looking back, their aggressive payout was unsustainable in light of the worsening conditions, and the business model was flawed as I only thought about the upside and did not consider the hazardous effects of the downside. So, as a result, I burnt my backside.

So when do such events translate into investment mistakes ? As Warren Buffett said, you only know who's been swimming naked when the tide goes out, and I got caught nude quite flat out on some of my investments. For others, fortunately, I was wearing swimming trunks. FSL Trust immediately comes to mind as being my most recent and regrettable mistake as I under-estimated the risks of the business model; now I may have to wait 5 years just to break even on my investment (and that's assuming the Trust survives this downturn, of which there is slim chance). Another mistake is Pacific Andes, which I did mention in a previous comment that I had paid too much for, even though it is a good company. Its margins are too low, leverage too high and could not generate enough cash flows to justify my over-priced purchase.

Thus, I would conclude that a murky outlook does not necessarily render one's investment a "mistake", unless one assesses the facts again in light of the current circumstances and finds out that one paid too much for the risk one is undertaking. Recessions will come and go as part of a normal capitalist society's business cycle but companies which are well-prepared and dextrous can navigate the fog safely and emerge into the sunlight. Right now, I certainly hope that my prior research on the company's Management and policies can help my companies get through this unusually horrid storm.