People learn more from their mistakes than from their successes. This is absolutely true as I just swallowed many bitter pills this month. Recently I divested three of my non-performing stocks in my portfolio: Stamford Land, San Teh Group, and Casa Holdings.
So, what did I learn this time from the recent divestment?
- When the initial buying premise is no longer there, decide quickly whether it’s still worth it to keep the investment. In the case of Stamford Land, I purchased it on the premise of expecting regular dividend of 5% while waiting out for investment to bear fruit (i.e. realize its value). The company was definitely undervalued as their hotel portfolio was carried at cost in their balance sheet. At one point of time in 2008, the company received an unsolicited offer of A$850m for eight of its hotels. At that time, had the company chosen to accept it, the share price would have been valued at S$1.15 a piece. Subsequently, since the company rejected it, the 5% yield was hopefully sufficient to cover the opportunity cost of waiting. Apparently they cut the dividend by close to 90% in 2016 in order to spare some cash for the property development. I should have noticed it back then. Subsequently, I found out too that the company doesn’t have a shareholder-friendly management. This is one of the many reasons why market chose not to bid its price higher. While in the case of Casa Holdings, I should have divested it out back in 2014, immediately after the company decided to make a foray investment to develop residential property in Iskandar Malaysia. When I bought it, the company made its money from selling kitchen appliances, consistently dishing out good dividend and with the low P/B ratio, it appeared to be a smart investment back then. So many things have changed since then. Furthermore, on hindsight bias, we knew that Iskandar Malaysia residential property is having oversupply situation and may take longer time to develop into an economically-sustainable city.
- Be discipline & stick to your investment rule. Cut the loss quickly and move on. This falls under Regret Aversion Bias, also known as Loss Aversion. People, including myself, are always reluctant to sell losing investment – In dating world, this is similar to the case whereby we tend to stay longer in a ugly relationship with our abusive girlfriend/boyfriend, rather than breaking up and move on. Knowing that we may not be ready to accept the consequence and pain of breaking up. In my investment strategy, I’ve always set 36 months (3 years) as the maximum threshold of investment holding period. Should the investment does not bear fruit as initially planned, my strategy requires me to divest it immediately. Yet it took me 72 months to divest San Teh, 52 months for Casa Holdings, and 40 months for Stamford Land. Perhaps I was still expecting that the situation would turn around. I should’ve divested them earlier knowing the opportunity cost of waiting is not worthwhile. There are two opportunity costs at play here: first is the opportunity cost of waiting for the investment to realize its value & second is the opportunity cost because the capital could have been re-allocated to another investment which yields better return.
- Realize that an investment can be a “Value Trap” – sometimes an undervalued company can stay undervalued for a very long time and still market choose not to adjust its price to reflect its fair value. This is the case of San Teh whereby I initially purchased it knowing that they dished out yummy dividend back in January 2012. The company chose to dish out huge dividend after successfully selling their cement business in China. After distributing the dividend, the share price to reflect this and it went down even lower. The market knows that the company’s other business has been performing poorly and is not enough to replace the profits generated from the divested cement business.
- P/B (Price/Book) ratio alone is not enough to justify an investment – This is a continuation of point 3 above. Value investors frequently falls into this value trap – expecting their investment will bear fruit but in the end, the waiting takes too long & in most cases, value may never be unlocked. San Teh’s book value, as of June 2017 financial reporting, stands at S$0.55 – much much higher than the share price. It also carries no debts in their balance sheet. Simply speaking, there is no way the company can go bankrupt. While Casa Holdings’ book value stands at S$0.336 – five times higher than it’s share price. This is a situation of deeply undervalued company. Yet looking deeper into its financial result, the company is operating at a loss and close to half of its assets in balance sheet are tied to development properties in Iskandar Malaysia. The market knows that it will take them years to completely sell these properties. Financial ratios such as ROE (Return on Equity), P/B ratio, leverage ratio only uncover initial piece of the story.
- The importance of having a catalyst – how high we value about a company doesn’t matter, what matters is how the market value it. If the market perceive that the company does not have good prospect in the future, we may be stuck for a long time waiting for the stock to realize its value. In the case of Stamford Land, Casa Holdings, and San Teh – all of them lack the right catalyst for the market to realize their hidden value.
- The importance of having a target price – immediately set a target sell price right after or better: before we purchase the investment. Without target price, we would not know when to sell an investment. It is important to know what’s our investment style. In some cases, most investors blindly followed what Warren Buffett does: buy-and-hold forever. Hoping that they could find the goose that lays golden eggs. This may not bode well as his situation is different than most other investors: the holding power & the buying power. Having a target price & selling gradually will help investors to lock in the much needed profits.
After all said and done, winning and losing are normal in investment world. I’ll just have to treat these as paying my overdue tuition fees in order to become a wiser investor.