In early 2013, I had invested in another Swath OSV subsidiary, “Cruise Limited” (Cruise). At the time, Victory was a dormant subsidiary of Swath.

Between early 2013 and October 2013, the share price of Cruise appreciated substantially, the company continued to win new contracts, financial performance improved quarter-on-quarter and the financial position was sound, though the company was taking on increasing levels of debt.

In October 2013, Swath signed a deal to sell its majority ownership in Cruise to a private equity firm. The acquisition immediately required the private equity firm to buy all remaining shares. The private equity firm offered a 15% premium to the 15-day volume weighted average price prior to the offer date. The sale was completed in December 2013.

Success arising in parent company fuels overconfidence in subsidiary

Overall, the investment in Cruise resulted in a return for me of around 125% for a 10-month investment (or absolute profit of about 250,000 Singapore dollars [187,000 US dollars]), and I was brimming with confidence of course at the prospect of such returns continuing.

In November 2013, having finalized the sale of its stake in Cruise, Swath’s management decided it would invest the profits from the sale into Victory. Following the announcement of that investment in Victory, to turn it from a dormant subsidiary into a going concern, Victory’s share price immediately appreciated, further egging on my desire for similar gains.

Failed to act decisively to take an opportunity when its time had come

In early December 2013, Victory entered into a JV with a major Middle-Eastern OSV company. Following this announcement, Victory’s share price appreciated further. In hindsight, if I had invested in Victory in early November 2013 instead of early March 2014, I would have made a very handsome profit in a very short time (about 300%). However, I hesitated, I guess out of fear of the risk to what I had put in. Nonetheless, after reading about the future expansion plans for Victory in March 2014, I decided to invest.

Then came a long list of warning signs amid lack of due diligence

At the time, I did not do sufficient due diligence to review the financial position and performance of Victory, Swath, the history of the JV partner, nor the current projection/forecast surrounding the oil and gas sector.

In essence, I decided to invest due to (a) confidence that the parent entity had sufficient prior success in developing a subsidiary in the OSV sector to repeat such success, and (b) overconfidence that the oil boom would continue. Up to that point, the oil and gas sector had been through a significant boom for nearly five years, with oil prices booming past US$100, major projects being announced, and large contracts being awarded. However, in early 2014 there were numerous red flags that the good times were coming to an end.

Six months of flat or negative growth raises no alarms

In early March 2014, I invested in Victory with an amount equal to about 40% of my original capital investment in Cruise. From March 2014 to August 2014, the share price of Victory generally stagnated (rising 10% or declining 10% but across the period, generally flat).

Sector also signals ‘danger ahead’

In August 2014, the oil sector edged toward the cliff. Regardless, I held on to the notion that “it’s only a correction, and it will come back”. However, the warning signs of a major collapse were flashing. In the same month, after a correction in Victory’s share price following a slide in oil prices, I invested another amount, around 10% of the original investment I had invested into Cruise.

Stands and watches oil prices burn but again fails to act on losses

In late September 2014, oil prices went over the cliff to below US$100, then US$80 and so forth. As the price declined, I simply viewed it as a great chance to average down and grab a bargain in Victory. I had totally ignored the sector’s problems, the flow-on impact to upstream-related sectors and financial performance and position of Victory.

Refusal to set or obey stop loss stems from denial over false bottom

Rather than put in a stop-loss position and decide to accept the many losses and move on, I persisted with averaging down concluding falsely that the bottom had been reached every time a rebound occurred at a resistance level.

Between September 2014 and January 2015, however, the share price kept falling and I kept averaging down to the point that I had reinvested all my original Cruise capital.

Unable to let go of investment despite all evidence

At this point, I stopped averaging down or investing new capital. Even so, the share price continued to fall. In hindsight, I should have sold out my entire position regardless of the losses. However, I continued to hold, refusing to accept the losses, and due to the incorrect presumption that “everything will get better and I’ll get money back”.

False hopes and hurt pride prove a dangerously unprofitable mix

My overconfidence, unwillingness to own up to the loss through hurt pride, and false hope that the sinking ship would at least stay at the surface, all combined to blind me I suppose, and my fingernails remained dug into these investments.

Between January 2015 and September 2015, the share price of Victory stabilized, though it was down more than 60% from initial investment levels. In October 2015, the parent entity of Victory, Swatch, filed for bankruptcy. Accordingly, the share price of Victory fell 50% the day after, and continued to fall until November 2015.

Since, November 2015 oil prices have been on more of an upward trend, but the OSV sector has remained significantly depressed. Accordingly, while oil prices have increased, Victory’s share price has continued to decline and is now 80% down on the level it was at during my initial investment. Despite all of this, I have refused to sell, unwilling to accept I made a mistake, and still feeling a recovery is due.

The investor who hung on like a legendary bulldog

Relative to other OSV companies, Victory has achieved stronger final performance than competitors, undertaken a successful refinancing exercise and boosted its order book. However, given the extent of its prolonged losses, the amount I invested, the length of time I invested in a company with a very poor share price, and my stubbornness to abandon the position, I conclude that it the worst investment I ever made.

Andrew’s takeaways – Avoid these mistakes to become a better investor

The toughest question to answer: ‘When should I give up?’

In the world of traditional, fundamental investing, it is hard to take a loss. This is very different from traders who set up stop-loss points for each of their trades. The difficulty for fundamental investors is that they have devoted their life to trying to find good companies with good stories. They work hard to research these ideas and then they invest. When the share price goes down, the traditional fund manager will think that they see something that the market does not. But truthfully, who knows?

One way to solve this dilemma is for the traditional investor to say to himself: “My idea may have been right but maybe it was the wrong time”. A next question to ask would be: “Knowing what I know now, if I didn’t own this company today, would I buy it today?” If the answer is “No” then it is a good sign that you should exit the position.

Consider using a stop-loss as a money management tool

Assume a trader buys a stock at 100 and puts a stop-loss at 80, if the stock falls to that point the broker is supposed to sell the stock. By planning your future action, you take your emotion out of the investment. A typical fundamental investor abhors such behaviour because it would imply that he is not confident about his research conclusions.

Avoiding loss is critical

When considering long-term returns, some of our research has shown that avoiding large loss is more important that getting high returns. This is like saying that to be a successful batter in baseball it is more important to not strike out, rather than to hit homeruns. Preserve your capital by accepting that the share price can move against your position for a long time.

Mistakes in this story

2. Failed to properly assess and manage risk

• Bought more as the price went down
• Failed to set a stop-loss and follow it

3. Were driven by emotion or flawed thinking

• Failed to invest in a good, familiar idea

5. Failed to monitor their investment

• Failed to review investment strategy regularly

Learn about the six ways you will lose your money and how to avoid them here.

The post False Hope, Poor Due Diligence Blinds Oil Industry Investor appeared first on My Worst Investment Ever.

Ignoring major corrections in the industry

A year later, I revisited the stock after it had fallen from its highs. “This is a good company,” I thought. “It will continue to be a great investment.” I was heavily biased and ignored the research coming out about the revolutionary shale industry.

Pitfall revealed in misguided over-reliance on analyst coverage

Moreover, I was relying heavily on third-party-analyst coverage that was screaming “BUY!”, even as the stock was falling daily. The obvious thing to do? Average down of course! In my mind, this stock was a winner and the share price would surely rebound.

‘Past performance is no guarantee of future results’

However, that was sadly not to be the case. After enduring a 30% loss on a very averaged down position, I had to accept the reality that it would be a tough road ahead for this company, so I took the loss and sold my whole position in the stock. The fact is, the stock did not owe me anything. Just because it did well for me in the past, did not mean the industry or fundamentals could not deteriorate.

Sometimes you must kill the darling of your investments

So, the upsetting lesson for me was that a stock does not know that you own it or what it cost you to buy it. Avoid falling in love with any of the securities you own – they are only tools to help you achieve your investment goals. Try to approach your investments with as much objectivity as you can and recognize the limitations of analysts’ reports and price targets.

Andrew’s takeaways – Avoid these mistakes to become a better investor

Industry conditions can and do change, and specialists will respond faster than you

One major risk of investing in any individual stock is the risk that something major changes in the industry in which the company is operating. These changes can start small at first and can seem to have little impact, but they can gather steam. Also, professionals who follow an industry for a living, as well as company insiders, will almost always move faster than you.

Financial advisers don’t always put investors’ best interests first

One of the big lessons of my career is that financial professionals are driven by many different factors outside the one that you wish they cared about most – the performance of your investments. I prove this in my Ph.D. research about the lack of accuracy of sell-side financial analysts. You can never eliminate conflicts of interest in the world, and particularly in the financial world, which is why you want to choose financial advice from people who disclose their conflicts of interest. Also, it is often the case that brokers are cheerleaders for stocks rather than thoughtful analysts.

Overconfidence can make an investment’s decline even worse

One of the toughest risks you will face is what to do when a stock price is falling. When you buy a stock at 100 and it goes to 110 you feel great, but when it goes to 90, according to Daniel Kahneman’s and Amos Tversky’s Prospect Theory, you feel about two times worse than you felt great when it went up 10. This will cause you to make mistakes when prices are falling. Often, we are overconfident in our investment decisions, and therefore when the share price starts falling, we think if we liked it at 100 we should like it even more at 90.

However, a clearer way to think of this is that maybe your analysis was correct but that you just bought the stock at the wrong time. Some of my research shows that, over a year, if a stock falls by 20% to 25%, in most markets, you would be better off selling it and holding cash. But, no matter how you might handle this situation, make sure you have thought ahead and written down what you will do when the share price falls.

Even top stocks can take a hit so if fortune’s winds change, take action and let them go

Sometimes we like companies and their management so much, we know them so well, that we think they will always be successful and be a good investment. But things change for companies; industries get tougher, senior management changes. Remember that the success of the past will not guarantee success in the future.

Mistakes in this story

1. Failed to do their own research

• Relied on the assumptions of others

2. Failed to properly assess and manage risk

• Assumed past performance would continue
• Bought more as the price went down

3. Were driven by emotion or flawed thinking

• Got too emotionally attached to an investment

5. Failed to monitor their investment

• Failed to review investment strategy regularly

Learn about the six ways you will lose your money and how to avoid them here.

The post How a ‘Good Company’ Can Still Mean a Bad Investment appeared first on My Worst Investment Ever.