As part of my recent portfolio review, I
assessed my losing “investments” of the past eight years. My losses can be attributed to one or more of the following themes:
Falling for a Fad
and Investing in Countries Without the Rule of Law
Several years ago, I threw money at
several Canadian-listed companies with operations based in China.
The “story” was good: a rapidly expanding economy; seemingly
limitless horizons for new ventures; management well-versed in the
intricacies of doing business in China.
The reality was quite different:
There was outright fraud with one
of them (Sino-Forest) and, I suspect, two others which I will not
mention for reasons of liability.
Another had a poorly focused
business plan and weak management. (Its recent share action would
suggest some underhanded activity, but it's difficult to prove.)
In the competition to get new
listings, stock exchanges did not exercise a high level of due diligence
with the result that investors suffered ... but not the underwriters
...
I suspect that the “overhead” costs associated with doing business with state
companies created an “unaccountable” and unsustainable drag on
businesses – something which never appears in company financials .
Fortunately, I limited my losses by limiting my initial investment in these beasts.
The
Lessons
I learned not to invest in
companies with most of their operations in countries without the rule
of law.
I also learned not to invest in “fads” unless I was
prepared to speculate.
I will never invest in Chinese companies
listed on North American exchanges.
Uncritical
Acceptance of the Thinking of Others
I
placed a bet on Apex Silver after learning that George Soros had a
very substantial stake in the company. It was literally a dry hole.
Development fell off the rails due to a lack of water. There was no
silver lining to this story other than a lesson learned.
I also invested in
a fracking company after a writer who I respected noted that he had
invested very heavily in the company. I should have done my
homework. A review of the company's financials, its field operations, and its competitors would have led me to reach a
different conclusion.
In both instances,
I acted precipitously and did not do my own due diligence. As an
added injury, I threw more money at those companies than normal in
my state of “suspension of disbelief”.
The
Lesson
I will think for myself and do my
own due diligence. To misquote The Great Communicator: “Do not
trust ... and if you're tempted ... verify.”
And, if I do succumb, I will manage
risks in smaller, fledgling enterprises by restricting the size of my
investment.
Bad Luck with
Timing
Polaris Minerals had everything going
for it: a great reserve of high quality aggregate, access to low cost
transportation to major markets etc. However, it was crushed by the
collapse of the housing boom in the U.S. Had I invested five years
later, I would have made out like a bandit. This stock has yet room
to rise from the pits. Waterfurnace is another example of a company
caught by the housing boom collapse and the continued low cost of
energy in the U.S. caused, in part, by the widespread implementation
of new technologies. Some of the infrastructure companies were hurt
by government budget woes and the fallout from the recent (ongoing?)
recession.
Most of these companies have
experienced recent gains in excess of market indices in recent months
and I am now above water with several of them.
The
Lesson
I will not panic. Instead, I will test my investing thesis and if it still holds, I will maintain my positions for the long haul. If, however, there are fundamental changes (e.g. technological obsolescence, gross malfeasence, unresolvable technical issues etc.) I will exit my position without regret.
I will I invest
in solid, well-managed companies with very low debt and whose
businesses are focused on enduring needs. They should be able to
weather transitory external events such as downturns in housing
markets.
Now ... if I had
only taken that approach with Cemex. Out of interest, I continued
following the company and discovered that had I maintained my
position, I would have gained something like 30 percent.
Leaving the Party Too Late
There's money to be made from the manias which infect markets from time to time: uranium, gold, rare earth minerals, fuel cells, etc. Initially, I made a lot of money on uranium - everything was rosy. By not taking profits and moving on, I was exposed to some significant losses. Further, I got complacent and did not monitor my stakes closely with the result that I ended up losing money. My losses with uranium are not likely to be made up any time soon as many of the companies were small, speculative ventures based on "potential" but not on earnings.
The experience did not deter me from exploiting the potential of manias, but it did alter my approach. I wrote about this with respect to my venture with rare earth minerals a few years ago. It was profitable.
The Lessons
I will look actively for manias.
I will not confuse speculation with long-term investing.
I will develop an exit strategy before establishing my positions.
Further Readings
Investing is largely a matter of managing one's self. To date, I have not found much useful information in the field of behavioural investing theory, although the writings of James Montier are about the best it gets. You can access his most recent pieces here:
He is a brilliant writer with much to say.
The most insightful thinking, to my mind, is present in two books: The Investment Zoo about Stephen Jarislowsky; and, Reminiscences of a Stock Operator about Jesse Livermore. The first book sets out the credo of one of Canada's most successful money managers - someone who adopted a pragmatic approach to maximize gains while minimizing losses, and importantly, one who had a duty to others. In contrast, Livermore, one of the most successful (for a while) investors ever, invested for himself. These books are well worth reading several times.
Despite their differences, the men shared a few things in common:
- the discipline to follow a system;
- a facility with figures and a good memory;
- a willingness to learn from mistakes;
- an insatiable interest in learning;
- the good sense to depart from the norm and not be held slave to their system.
In a future article, I will report on my successes and lessons learned.
