In theory, it should have been a good idea to invest in the company I worked for

As part of my 401(k) plan, I was given the choice of different funds in which to invest my retirement contributions, along with the choice of investing some of my retirement in shares of the company at which I worked.

Note: In the United States, a 401(k) plan is the tax-qualified, defined-contribution pension account. Under the plan, retirement savings contributions are provided, and sometimes matched, by an employer, and deducted from the employee’s paycheck before taxation.

Giant company operated across generations ends up in bankruptcy court

Tragically, even though my company had been around for generations, it eventually went bankrupt and my shares in the company became almost worthless. And by almost worthless, I mean, I eventually received a check stemming from the court proceedings about six years later for about US$2.75.

Don’t put all of your investments in one basket

Investing your retirement money into the same company where you work is a terrible idea so a dividend reinvestment program offered by your own company may sound nice on paper, but you are only making others rich and are not properly diversifying your personal risk.

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

Invest in the company you work for with caution

Many companies offer employees stock-ownership opportunities. If you can buy the company’s shares at a discount to the market price or if the company matches your investment, it could be very valuable. If that’s the case, it could be in your best interest to put as much money as possible into it. Just don’t stay invested in that stock forever.

Try to avoid concentration risk

Many stock-ownership plans require you to own the shares over a long period. In such cases, you are locked in. So, if you put your maximum amount into the program and you’re locked in for a long time, you will be very exposed to this one company. Of course, we all like to think we know that this company will survive and thrive, but in reality, nobody knows. Your best solution is to maximize the contribution that makes you the most money but to try to exit portions of that position as soon as you reach the time that you are allowed to sell. In this way you capture part of the benefit that the company is giving you, but you don’t get yourself overexposed to that one stock.

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
• Failed to diversify
• Invested in the company they worked for

5. Failed to monitor their investment

• Failed to review investment strategy regularly

The post Always View Yesterday’s Successes Through Today’s Glasses appeared first on My Worst Investment Ever.

I invested in a company operating in a dominant position of its segment within China’s processed–food chain. I liked the investment idea based on the theme that processed food consumption typically rises alongside a country’s rise in income and urbanization. We see this play out when branded products on the shelves of the modern food retail networks replace wet markets, butchers and greengrocers (produce markets). 

Business model in one country may not work in another 

This investment theme had worked very well in Europe around 20 years earlier. Back then it was more about industry consolidation and increased raw-material-pricing power. China appeared to have a massive, organic market for the taking.  

Long list of good reasons for investing can make investors blind to the bad 

The main points on which I was basing my investment were: 

• The company was already operating in its home market with scale advantages and market share in the early stages of the industry’s development. 
• Its position relative to customers was on the comfortable side of one-to-many. There were even benefits of customers consolidating their own industry in a massive conversion of traditional localized players to a modern branded and national platform. This rapid modernization accelerated the drive to reach every urban wallet in tier one and tier two Chinese cities.  
• The company was hitching a ride to a more expansive distribution channel. Its move could hardly be better. It could let the consumer brand owners deal with growth, brand goodwill, and marketing expenses. All it seemed to need to do was budget for expansion to match its customers’ volumes and keep the product quality good enough not to be rejected. 
• Its position relative to suppliers was also favorable. It was the main buyer from several producers of what was largely a by-product or discarded waste product. 
• There were no competitors using its technology in the domestic market, certainly none at the same scale, so the company had major market advantages. 
• Already operating in China, it was running at the lowest point of the international cost curve. Foreign competitors entering the market would have to be prepared to subsidize their China ventures for years to gain serious market share.  What did it matter?   
• This company was trading in the stock market at a very low price-to-earnings ratio (PE) multiple. If the international players drew attention to their activities in China, this company would only be undervalued. 
• The company clearly had growth, but its margins were super impressive: EBITDA was more than 40%, especially when compared to the low-capital-intensive production and the low volatility of demand from consumer growth. Consumption per capita was tiny compared to every other country at higher levels of per capita income. 

The positives outweighed the doubts  

This stock was one to buy and lock away, for sure! Well, that’s not how it turned out. With so much in the future looking so favorable, it was easy to overlook the high proportion of variable costs, especially fuel.  Sales were up, margins were high, so why be concerned with operating leverage?  

After about two years on from listing, management appeared to be delivering consistently. Enough in fact to overlook murmurs of the controlling shareholder and chairman dabbling in property ventures and the loans to directors that were rising over time. Other investors by this time had been reacting favorably to the story. There was a nice re–rating of the PE multiple. Earnings and price had favorable momentum and the brokers who covered this mid-market company loved the stock. 

But then, the momentum broke. 

Penny drops as management’s dark deeds and subsidiary failures hit main company  

The main shareholder had been more than dabbling in other business activities and more than just borrowing funds from the company. Furthermore, other company ventures were rapidly becoming liabilities and infecting the core business.  Worse still, material parts of the company’s business simply did not exist. The auditors, it turned out, had been complicit and, for whatever reason, chose not to speak truth to power, or in this case, patron, and went along with the deception. 

Amid tainted-food scandals, clean firms flourish but buyers walk from this one 

Meanwhile, the branded food processors were derailed by Chinese food-tainting scandals. The trends in consumer income, urbanization and modern distribution networks all continued to grow in quantum leaps, but this company’s products and share price were no longer rising in line with those complementary conditions. The trend could continue happily without this company or its suppliers. Consumers always have the ability to change their tastes and preferences. 

The stock went from a home run to only one cent on the dollar. It can happen so easily when you’re busy doing other things. 

Emotional about stock, investor ignored ‘lover’s’ flaws 

When we fall in love, we are willfully blind to the defects in the object of our affection. Picking stocks or owning companies can never be a love affair. There can be passion but only if it is a metaphor for our determination to be thorough in our research and mindful of the shortcomings of our own assumptions. But even then, a single company is rougher territory than the maps we draw in our minds of macro trends. 

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

Corporate governance damage can come out of nowhere 

Corporate governance events, where managers or owners act against the interest of minority shareholders, can happen with any company. There are two main types of corporate governance situations. The first is where the market is already aware that the company has poor corporate governance. This knowledge would come from observing the actions of the owners and management. The second case is when corporate governance events surprise and come from out of nowhere. 

Much less is lost when bad corporate governance is already ‘in the price’ 

If a company is already known for its poor corporate governance, then we can say that this is “in the price”, meaning, bad corporate governance in the past has depressed the price of the stock. Many investors would avoid this stock, but some would be willing to trade on the belief that the price cannot go any lower. They believe that investors have overly punished the company’s stock price and there is a chance to make money with the stock going up. 

The corporate governance event that matters is the one you won’t know 

But the corporate governance event that will hurt the most is the one that happens at a company where nobody expected it. This pain is because it will have the most damaging impact on share price when that event hits the market. This type of situation is almost impossible to detect before it happens. And you cannot always rely on financial professionals to warn you. There are various reasons why they may not raise a red flag, even if they start to get suspicious. 

A stop loss is one option to protect against corporate governance events 

Though most long-only fund managers are not interested in stop loss as a risk management tool, it does have some value in the case of corporate governance. One idea is to set a stop loss that’s deep enough that it would only be triggered by a serious bad corporate governance event. In my case, since I view stocks more quantitatively these days, I am okay with putting on a stop loss on each stock when I buy it. When the stock price hits the stop-loss price I sell; it doesn’t matter to me whether it is a corporate governance event or some other negative factor. 

Mistakes in this story 

2. Failed to properly assess and manage risk 

• Failed to consider cultural issues (in Asia, saving face, fear of giving bad news)  
• Lacked influence over management 

3. Driven by emotion or flawed thinking 

• Let emotions drive their investment decisions 
• Got too emotionally attached to an investment 

4. Misplaced trust 

• Failed to review a person’s history and references 

5. Failed to monitor their investment 

• Failed to review investment strategy regularly 

6. Invested in a start-up company  

• Expected idea from other country or region to work 

The post Single Stock Not Best Choice for Long Position on Macro Trend appeared first on My Worst Investment Ever.

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.

Weak expertise, poor sense of duty, and gender imbalance were key faults

Firstly, all the team members were working full-time and joined in with this business as a part-time job.

Secondly, none of us co-founders were coders or programmers, as we were all from marketing and sales backgrounds and did not have huge sums to invest in hiring a full-time coder.

Lastly, the nature of the business was centered on women, and three out of the four partners were men, who were not interested in the type of products we were offering.

Believing in a business and acting with dedication are crucial for success

What I learned from this was to never invest in a business in which the team members are not fully committed; that there always needs to be at least one team member who is really into the industry or has accumulated experience in it. And finally, apart from commitment, passion from the management team is essential.

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

Investing in a start-up – just don’t do it!

Investing success is hard enough, start-up investing success is nearly impossible. All odds are against a start-up. Why would you trust your hard-earned money to such a high-risk investment? Oh, I know, “It just feels right”, or “it’s a hobby, I don’t mind if it fails” or “Nobody has come up with this idea”, etc. The reality is that survivorship bias is acting so strongly in this area that it will empty your wallet. All those successful start-ups you see, they are the very few survivors. What you don’t see is the graveyard of dead start-ups, trust me, it is an ugly place. So, about start-ups, remember my advice, don’t do it!

But if you must, the key to a sustainable start-up is a visionary leader

Key-man risk is a major risk in investing. If the key man exits, for most businesses the company collapses and all money quickly evaporates as the remaining staff fumble and fiddle to try to recover from the loss. But in this story, the opposite is the case – there was simply no true leader, no visionary. Without that person, most businesses will eventually fail. So, if you have the choice, invest with someone like Steve Jobs, the key man.

And what puts this company’s goods or services ahead of its competitors?

When it comes to start-ups, the founders and managers will be pulled in all directions and resources will quickly disappear. So, if you do invest, at least make sure that the company has one little niche where it has a competitive advantage. Finally, it is critical to stay on top of your investment, keep information flowing about what is happening, if not you could wake up one day to a big loss.

Mistakes in this story

5. Failed to monitor their investment

• Failed to review investment strategy regularly

6. Invested in a start-up company

• Invested in a start-up that lacked a clear leader
• Invested in a start-up that lacked a competitive advantage

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

The post Lack of Commitment Can Deal a Death Blow to an Investment 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.