Wednesday, September 16, 2009

The Importance of Monitoring

I guess I cannot emphasize this more - but monitoring is one of the aspects of investing which an astute and dedicated investor CANNOT miss out on (the caps are intentional to highlight the significance of this activity). By "monitoring", I mean not just monitoring business news about the health of the economy and the latest industry trends and news, but also to monitor, on an almost microscopic level, the corporate announcements and strategic moves made by the companies you own (as well as do not own). I will elaborate below......

The lack of monitoring is actually the leading cause of failure to obtain a decent and sustainable return in the stock market. After all, doing the research is only the first part in an investment decision - we must still stick around to ensure things are going smoothly, and beat a hasty retreat when things are not going as planned or if we discover we had made a flawed judgement call. I've actually met many friends who express surprise when their investment falls in value sharply, as in the case of Jurong Technologies where a few of my friends expressed surprise and amazement that it was suspended. A simple cursory glance at the financials would have told something, and the frequent announcements made on SGXNet would have alerted one to its potential troubles and its eventual suspension due to inability to service their debts. I am really surprised when friends approach me for simple, basic information about the companies they own as this information is readily available on SGXNet or the Company's website. This seems to imply that most people are just lazy - they do not bother about where their money goes and do not seem to care what happens to the company in which they are part-owners of. This heck-care attitude can only lead to financial disaster because if you do not put in effort and time into growing your wealth, then it's like a plant which has not been watered and given sunlight!

After scanning through the book "Your Money and Your Brain" by Jason Zweig for a third time, I came across a section which mentions what we should monitor, and how it will help us in our investing journey and also to hone and sharpen our investing acumen. Apparently, monitoring just the companies you own is insufficient as it only allows you to learn about what you are vested in. In fact, the book mentions that in addition to that, we also have to monitor companies which we had sold as well as companies we thought of buying but eventually did not. For companies which one has sold, we should continue to monitor it to see if we had made the right decision then to divest; or if the decision was based on incomplete information or flawed logic. For example, though I had divested Swiber some time back, I still keep up with corporate news surrounding Swiber. In a way, I would think that we can learn and see if our original views for divesting (or investing) were right and this can help us to test our principles and philosophy and assist us in refining it further. Selling an investment which subsequently does very well would also allow one to classify it as a mistake in selling too soon (mistake of commission) which one will do well to learn from.

As for monitoring of companies which we planned to buy but did not, the aim is to assess if this turns out to be a mistake of omission! A good example I can quote is Rotary Engineering, which appeared on my radar around Feb or Mar 2009. I did some reading up and due diligence on the company but decided against investing it in due to comments made by the Chairman Mr. Chia Kim Piow about the long-term prospects of the industry (i.e. oil storage tanks). I was also not too comfortable about their net margins and was unsure of their competitive strengths in terms of being able to clinch mega-deals. It turned out that I was very wrong as Rotary had announced a SGD billion dollar deal a few months back and the share price has rocketed from a mere 20 cents (yes, with cum dividend of 2 cents to boot) to the current S$1.20, a 6-bagger. Such "sins of omission" should be monitored closely for it helps us to crystallize our thoughts on why we avoided it in the first place and why we should have chosen it. Of course, the key here is to stay focused and rational and not to "jump on the bandwagon" just to prove yourself right and in the process, throwing caution to the wind and ignoring proper margin of safety.

So the task of monitoring rests squarely on the shoulders of investors, and those who are corpulent and tardy in getting information risk losing most or all of their capital. The act of monitoring cannot be emphasized more and I spend most days checking for any corporate updates and reading up more on the companies I own (as well as those I wish to own!). Investing is a continuous learning process and we can never claim to be good enough at it. We should, as investors, constantly cast a critical eye on our own portfolios and try to re-balance them now and then to maximize returns. On the flip side, I should also caution against buying and selling frequently just for the sake of re-balancing. What I mean is that if an investment fails to meet our original stringent criteria, it should be divested and the proceeds allocated to a more promising company.

12 comments:

simon said...

out of curiosity, what was the mistake you made with rotary engineering? i mean, what did you see at that time that made you think they would not be able to clinch mega deals?

Musicwhiz said...

Hi Simon,

The interview with the Chairman gave some hints. He said that competition was increasing, especially in the Middle East, and that the long-term prospects for the business were not positive. He did emphasize the short-term would be fine though.

I guess I was not confident due to the fact that I did not understand the industry as well as I should have, and thus I classify it as a mistake of omission.

Cheers,
Musicwhiz

JW said...

Hi MW,

it's hard to say so at times, because prices are driven by market psychology while valuations are due to personal calculations. I would say that the comments were more on the prudent side, not wanting to promise too much in case it could not be fulfilled.

In that sense, a discounted Cash Flow valuation might be a better idea, supposed we assume ceteris paribus for Rotary.

H said...

Hi MW,

Thank you for your post! You are right that most "investors" (those who hold on to companies for long) do not even follow up on the basics of the company.

I was one of those. I sold chartered and biotreat in 2007, after reading their annual reports. Never regret selling. Only wonder y I was so reckless with my money to invest in junks without knowing much.

I had also divest some lately -- decision is based on fundamentals and its a good call. I do made a big mistake to part away with most of my "see candy" because of PRICE. :) I may not be able to buy back again. But Price/or price running up too fast is surely not a good reason to part with a good company.

Thank U for this timely reminder!

Blessings,
HH

slowlybutsurely said...

Investing is a continuous learning process and we can never claim to be good enough at it. ---- > nice one mate, fully agreed.

Musicwhiz said...

Hi JW,

I suppose you are right. Conditions are volatile and uncertain and CEOs are not allowed to project too far in case they "mislead" the market and investors. Chia Kim Piow is also known to be a conservative fellow (Rotary has a huge cash hoard and is in net cash) and so his comments may have been skewed towards a more conservative outlook.

I think doing a DCF is a good idea, but the problem is that cash flows are uncertain and can change quite drastically, thus making the projection inaccurate.

Cheers,
Musicwhiz

Musicwhiz said...

Hi HH !

Thanks too for visiting and sharing your personal experiences. After finding out how most of my friends seem to just "fling" their money at the stock market, I thought I'd practise a more prudent approach and go the "slow and steady way", hence my investment style does not include speculative or trading activities of any kind. I do get laughed at for being old-fashioned and "slow", but so far this method works ! I cannot say the same for my friends' methods though.

And yes, just as we should not buy when price is rising; neither should it immediately prompt a "sell" decision unless it is very clearly over-valued or the fundamentals have deteriorated drastically.

Regards,
Musicwhiz

Musicwhiz said...

Hi slowlybutsurely,

Thank you very much for visiting !

Cheers,
Musicwhiz

Kay said...

Hi Musicwhiz,

I don't think you made any mistakes for Rotary Engineering. It's hard to predict the future at the point of time when you sold the stock.

Kay

Musicwhiz said...

Hi Kay,

Think you got it mixed up. I sold Swiber and not Rotary. I never owned Rotary, but was just considering it for purchase but did not go through with it. Thus, I classify it as a "mistake of omission".

Cheers,
Musicwhiz

ThinkNotLeft said...

Hi Musicwhiz

I do not see missing Rotary as sins of omission.

Firstly, it is likely that your circle of competence does not encompass Rotary-like industry. It's more likely that Rotary is in your 'unsure' bin.

Second, it is always prudent to avoid investing in companies that you are unsure of.

Third, your analysis suggests signs of hindsight bias and small sample bias. It may be too hasty to declare your information gathering approach as incorrect given a sample of one.

Lastly, you may consider investing bits of money in similar future scenarios, if you wish to avoid such 'sins of omissions' (or regrets).

Musicwhiz said...

Hi Thinknotleft,

Hmm good and valid points you raised. I really did not understand the company and industry as well as I should, and that was one reason for the hesitation. However, I think their net cash position negated a lot of the risks at buying at 20c (which was what I was pondering over at the time). Still, my decision was based on future prospects (i.e. growth) and not just based on Balance Sheet strength alone.

Your third point rings true indeed - my sample size is indeed too small to judge if my selection "skill" is flawed or accurate, and I agree there is always hindsight bias in all of us.

Well, investing small sums is not really my style; unless it's to "monitor" the company before plonking more money in. But perhaps I can consider that suggestion - it's a good one !

Cheers,
Musicwhiz