Sunday, May 13, 2018

An Intervention and Some Lessons Learnt

While on a weekend getaway a couple of years ago, I received a message from a friend, whom I shall name “H”. H was a relatively new investor and wanted to seek my opinion on a blue chip company whose share price had fell drastically. From H’s entry price, the fall was about 40%, and H was worried about holding it.

As I did not bring my laptop or tablet along, I had to use my smartphone (and the hotel’s free Wi-Fi) to do some rudimentary research on this company. After a few rounds of reading from a small screen, the factors that contributed to the fall was due to sectorial (namely oil) and customer risks. Yet despite these setbacks, fundamentally wise the company still looked healthy, and some parameters looked promising, especially on the NAV and dividend yield.

Usually I do not do “what-to-dos” on other people’s investments, but this incident was one of the few that I came in, noting H’s desperation. I texted back H and recommended to buy up the same number of shares that H had at that fallen price, thus making an averaging down move. Either way, H could buy up the shares on the cheap, or alternatively H could just sell them off when it neared or reached the average price, thus minimizing the loss.

I did not follow up until some two months later, when the shares did reach near the average price. I asked H about the status of the shares. To my surprise, H told me the shares were sold off just a few days after my recommendation, overwhelmed by fear and panic. And as expected, H regretted the sell decision back then.

The above true story provided some interesting lessons for H, and I shall share with you what they are.

Lesson 1 – Do Not Panic

It is natural to feel panicky when your investment securities had gone south. After all, this behaviour is associated with the term “loss aversion” (coined by renowned psychologists Daniel Kahneman and the late Amos Tversky), in which the impact of a loss of an amount is felt greater than a gain of the same amount. While nobody likes losses, the key thing is to remain calm and detached from emotions. Gains and losses are part and parcel in the investment journey.

Lesson 2 – The Loss Is Not Realised Yet

While some of us will go ga-ga with the loss of capital, as long as it is not cashed out, it is still not realised yet. Unrealised losses in your portfolio are deemed as paper losses, so do not be too uptight about how much you MIGHT lose. 

Lesson 3 – If The Fundamentals Are Healthy, Why Sell

If the share price suddenly took a nosedive, it is logical to find out what was going on with the company. Most of the time, some bad news or some poor financial numbers are the causes of the downward heading, and these must come to your attention. After analysis, if you conclude these events are non-threatening or having a short-term only impact, then it is safe to keep the shares.

Lesson 4 – View Them As A Sale

If a fundamentally sound company’s share prices go down, what would be the next step? Buy more, of course! The valuations and the yield would be seen as a bargain, and you could deploy cash from your Bedokian Portfolio or excess spillover from your emergency fund to buy them.

Remember not to have a knee-jerk reaction when things do not go your way. Keep calm and adopt different perspectives to the situation.

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