The guys at the Fifth Person held their monthly webinar this week. This month’s theme was about lessons from Ong Kang Wei’s (one of their blog contributors) personal investing journey. Interestingly, he started investing when he was 15 and like me, started in the US market.
Listening to him talk about US stocks that he, and coincidentally I, used to own and the mistakes he made in his investing journey was like taking a trip down memory lane for me.
Inspired by his sharing, I fired up StocksCafe, sorted through all my closed positions with large losses and reflected on why I lost money on those positions.
Here are 3 lessons I learnt from my reflections.
Not Trusting My Research
My most recent large loss was on my investment in Tencent. Readers would know that I liked the company due to its significant moat and diverse businesses.
Tencent had been under pressure due to Chinese regulator intervention blocking new game releases. I got in at HKD338 in August as a long term holding.
Next thing I knew I was facing a US China trade war which pushed Tencent’s stock charts further down. Facing more than 20% in paper losses, I decided to cut losses at HKD269 and adopt a wait and see approach.
The rest is history. Turns out I sold at the absolute lows and subsequently recovered above my initial entry price, incurring a not so handsome loss of HKD7,200 (21% loss).
Lesson: Trust your research and remember that you bought it for the long term. Any further discount just makes the stock even more attractive.
Not doing my own Research
In my earlier investing days, I made a lot of investment decisions based on my gut. I had a busy career in external audit and I didn’t have the time to do the requisite research. So I acted a lot on what I heard and made judgments from a qualitative view.
My investment in Kinder Morgan Inc was one such example. KMI is a large oil pipeline company that was quite popular on CNBC back then. You heard a lot about that company and other pipeline companies if you watch CNBC.
It had that “toll road quality” to its business, rain or shine oil companies had to pay the company for the right to use their pipeline. Add its large quarterly dividend and the shale oil boom in the US it seemed like great business to be invested in.
I bought a bunch of tranches at US$38 – 40 in late 2014. I averaged down one time at US$31 after it’s initial debt troubles started to rear its ugly head. Ultimately I decided to close out my entire position at US$29 when I finally decided to analyse the company’s balance sheet. I incurred a US$700 loss (20%) after dividends.
Coincidentally, this company was one owned by Kang Wei as well, although due to different circumstances.
Lesson: Do your homework before investing, there are a lot of noise and bulls*#t in financial world. Trust only your judgment.
Side Lesson: Cut losses as soon as you know that something’s no longer invest-able. I avoided a huge further loss in the process as the oil price crash intensified in late 2015.
Wanting the pain to end
Bank of America is one of the large banks in the US. It experienced a near death experience during the 08/09 Financial Crisis having bought distressed investment bank Merrill Lynch at the height of the crisis.
The problem with this acquisition was that they bought all the regulatory risk that came with the company, as Merrill Lynch was a pretty bad actor during the GFC. For years, this regulatory overhang depressed the company’s stock price due to contingent fines that the government had not issued.
Recognising the depressed valuations and the large deposit base which would benefit from rising interest rates, I averaged down the stock a couple of times in July 2015 (US$18.20), November 2015 (US$17.05), January 2016 (US$14.90) and April 2016 (US$15).
However, due to the intensifying oil crisis, there was large scale fears on bad debt and defaults leading to further sell down in the share price. As at this point BAC was already a sizeable portion of my portfolio and reeling from the pain of all the losses, I cut my position in half at US$12.90.
This turned out to be selling at the absolute low and realising a US$1,100 loss (22%). To add insult to injury, I missed out on a subsequent doubling of the share price for that position that I sold.
Lesson: Don’t let emotions rule your judgment. Always remember why you bought a stock and stick to your guns.
Side lesson: Remember the importance of position sizing and portfolio diversification. You do not want to be overexposed to any single stock.
This whole exercise was actually quite fun and revealing about my investment personality. Despite suffering all these large percentage losses, I still able to recover from them due to several things:
- I didn’t let the losses deter me from redeploying my remaining capital into winning investments
- Kept most of my losses manageable through position sizing.
- I was right more than I was wrong.
Hope this post has been useful for you in your respective investing journeys and hope to hear from you in the comments!
If you missed my previous post
Why you should treat Singapore Airlines’ 3.03% Retail Bonds with Caution