Contributed by: Warriortan
Before I begin this, I like to pen a short eulogy for our family dog, Nicky, who passed away yesterday morning after giving us tremendous joy, generous companionship and steadfast loyalty for 15 years. Nicky joined us soon after he was born. Until recently before he was plagued by one illness after another, he has been a bubbly, fun and understanding member of our family. We will miss his energy, his sharp but friendly barks and vigorous wagging of his tail whenever we returned home. Thank you for everything Nicky. Rest in Peace.
Reading the news on Rickmers Maritime winding up after it failed to reach a deal on debt restructuring prompted a few reflections on me as an investor. I can fully empathize with the unit and bond holders of Rickmers Maritime who are going through this challenging period. I had personally experienced the same. It was absolutely painful monetary and stressful psychologically.
Over the last two decades that I have dipped into the deep water of the investment world, there had been several instances that I was nearly “drowned” by the weight of the problems it threw at me. However, each problem was also a great learning lesson that shaped my current investment philosophy and made me a more grounded investor today.
In this posting, I will like to share these mistakes/lessons with you so that you can reduce your chance of stepping on these very same “landmines” in your own investment journey.
#1 Lesson Learned for Me: Do not be tempted by High Dividend
… Or in the same vein, any high return investment without knowing the risks involved. Always understand the business that you are investing fully and appreciate what does it take to sustain this high level of dividend – can it continue forever?
After the initial few years of “playing” in the stock market and when I thought I had grown “smarter” by going after dividend instead of speculative plays (see below), I got lured and fell into the trap of buying high-yield dividend stocks. Those monstrous yields made me threw caution to the wind and went big time into them. In no time, I realised that the “promised” high yield was no longer there and in some worse cases, the companies were gone.
I believe many unit holders of Rickmers Maritime were lured by the high dividends at one point. I was too!
I went big time into Rickmers Maritime, Pacific Shipping Trust and First Ship Lease Trust in the early years of their listings. At first, it was all good and the high dividends were great but when things in the shipping world started to become challenging, it became clear that the high yields could not be sustained. But I was already heavily trapped. I realised that I did not understand the shipping business at all. After a difficult internal struggle, I finally hardened my heart to sell Rickmers and Pacific but I kept First Ship as it was still doing okay and I was naively still holding to the faint hope of a recovery (which I regretted). Well, the rest is history. I still have First Ship shares but mentally I have already written them off and no longer track it.
Lesson Learned #2 for me: Do Not Speculate in Penny Stocks
… I would define Penny Stocks as those companies with shares that are valued at a few cents per share
This is a very common phenomenon even in today’s stock market. It is quite common to read about the share price of some penny stocks making incredible gains when an apparent news/rumours emerges that they have struck a “gold mine” opportunity. It is understandable that many of us would be tempted to make those gains especially when it seems so easy to double the value of your investment by a single movement of half a cent or a cent on the share prices.
But always remember that the stock market is not a casino!
We must realise that by buying a company’s shares, we are investing in a real company and believe that it will earn money and then give us a decent return (via Dividend) on our investments.
Some people think that as long as they are disciplined enough to get out after achieving a certain percentage of gain, they are ok. (sounds like gambling?) But generally people are greedy and there is no limit to greed. Do we think we can beat the big boys in the market? Do we have the resources, information and money that they have? Soon, we will find ourselves trapped and the big boys are already out of the market and laughing to the banks.
I believe some of you will remember the crash of Blumont, Asiasons and LionGold a few years ago. Fortunately, I learned my painful and expensive lessons earlier during the “dotcom” years and thus I was not trapped in the more recent crashes.
Lesson Learned #3: Do not chase stocks – Don’t Believe in Buy High Sell Higher
This is the latest buzzword in town, especially when it seems gravity has no impact on the climb of the various stock indices and share prices around the world.
Well I am not a real believer in it but this wisdom was gained only after getting my hands burnt many times. Yes, many times and I don’t discount the possibility that I may suffer from this again.
Always beware of the herd mentality. When you see your neighbours and friends buying stocks even at those “lofty” level and still making money and smiling, don’t you feel you will be tempted. The speculation of the Chinese stock markets the previous year was an excellent example. Even my Chinese technicians told me that they made thousands of dollars over a few months. Boy, wasn’t I tempted? Yes and the rest is history. My hands were burnt charred black.
Like they said when the guy on the street starts buying the stock, it’s time to consider selling it.
Again, realising that we are buying into a company and its earning potential will help us to avoid falling into this trap … but say is easy, having the discipline and not get influenced by others is extremely difficult. Enough said.
Lesson Learned #4: Do not think that interest rate will remain low
… Our memory is short but it wasn’t that long ago when interest rate was high.
Some of you will remember 10 years ago when Singapore interest rate spiked from 0.5% to 4.0% in a short 2-3 years and peaked at the time of the financial crisis of 2008. Several Reits collapsed during that time under the weight of the huge debts that they took on to fuel their growth. Obviously, they thought that the interest rate would always remain low. Me too!
Within a blink of an eye, I saw my investment in highly leveraged Allco Reit, MI Reit dwindled down drastically. In the end, I had to accept the meagre offer from those business savvy “white knights” who came to our “rescue”. It was extremely painful.
It taught me a valuable lesson on how leverage can benefit you but also hurt you badly when interest rates turn. So, always watch out for highly leverage companies who seek growth at all cost. They may be making a lot of money now, but what if interest rate rises. Do they have a solid plan to counter that?
Just a few weeks ago, a young financial planner (she looked like she has just freshly graduated) from a local bank invited me to invest big time in a high yield product by extending a “generous” low-interest rate loan to me. I declined politely but she was very persistent and claimed that I was going to miss out big time in making good money. When I countered her by asking what if the interest rate goes up to 4-5%, she said it will NEVER happened. Never say NEVER, my girl!
Lesson Learned #5: Do not panic and sell at the first moment of a crisis
Over the years, I have learned that the crisis is the BEST moment to BUY and not SELL.
I managed to get a few good bargains last year during those moments of crisis – like the Chinese stock markets meltdown, Brexit etc. But before I gained this “wisdom”, on several occasions of financial crisis, I had experienced panic and sold at the first instance, sometimes at a huge loss. I guessed I wasn’t experienced enough to know that the market will eventually recover and businesses/lives will carry on. Adding to this, I wasn’t confident that the companies that I had invested in were strong enough to withstand the crisis. I hadn’t done sufficient homework.
Today, I keep a “war chest” waiting to deploy it at a time of crisis and to benefit from a market panic. It is the best time to buy good companies at rock bottom bargains. But we will need to do our homework during peace time to identify those well-run companies and what their fair values are. If you start doing this only at time of crisis, you would have missed the boat completely.
Make financial market crisis your friend and not your enemy!
In a nutshell,
Always remember you are investing in a real company. It is not just a counter or a number on the stock exchange. Spend time to understand and learn about its business, how it earns its money, what are the risks it is exposed to, how does its balance sheet looks like, who are its competitors and what can disrupt its business. Study historical performance and determine its fair value.
Yes, its a lot hard work – there’s no free lunch. But I guarantee you that your efforts will pay off once you see that you are not only preserving the value of your investment but growing it diligently and conscientiously from year to year – taking one step at a time towards financial freedom.
For me, it always brings me great satisfaction to see the progress that i have made on my portfolio each month, each quarter, each year. I am sure you will find the same satisfaction and motivation if you start tracking the performance of your portfolio.
I hope you will find these 5 lessons above a useful reminder of the pitfalls and “landmines” to avoid in the investment world.
Good luck and all the best!