“Learn from the mistakes of others. You can’t live long enough to make them all yourself.” — Eleanor Roosevelt
I started investing in June 2009.
Over the years, I’ve learnt a lot from my experience in the stock market, through the many ups-and-downs.
Here are 11 major lessons I learnt from the past 11 years of investing…
so that you can learn from my mistakes, and not make the same ones yourself.
1. Selling Winners Too Early
I’m glad I made this mistake very early on in my investing journey, and it was with Raffles Medical Group Ltd (SGX: BSL).
But before I touch on my mistake, let’s look at one of my favourite investing lectures that I’ve come across.
In a podcast at the end of 2018, David Gardner, one of the co-founders of The Motley Fool, shared his takeaways from 200 months of stock picking for an investment newsletter service in the US.
One of his learning was you lose far more on a potential winner than you can on a loser. He said in the podcast (emphases are mine):
“But the real biggest loser for you, if you’re an investor and if you’ve been acting over the long term, I bet you realize that it’s not the bad-performing stocks. It’s the megawinners that you sold too early. It’s that you didn’t stick with big winners…
If you ever have had a wonderful winner in your portfolio and you sold it too early, that is by far a more criminal act on your portfolio. You’re doing far more abusive damage to your own financial future than if you pick a really bad stock and watch it lose most of its value.”
A bad-performing stock can only lose 100% of your money, but a winning stock can make you lose out on massive amounts of gains.
I first bought Raffles Medical shares in June 2009 at a pre-split share price of S$0.97 (or S$0.32 after accounting for the three-for-one share split that occurred in 2016).
Two months later, I sold the company’s shares at S$1.24, booking a gain of around 28%, excluding commission. What a criminal act that was!
If I had held on to the shares till now, my gains would be 153% instead, even at a depressed share price of S$0.81 right now. And that is not counting the dividends that I would have received over the years.
I sold Raffles Medical shares as according to my intrinsic value calculation, the company was fairly valued then. But the healthcare company has strong business prospects over the long-term.
Following that episode, I learnt never to sell a great company if the business fundamentals are still intact.
Selling off a company just because it is at fair value will incur re-investment risk on my part as I need to look for a new company to re-deploy the proceeds. It will also make me miss out on the upside, as mentioned in Gardner’s quote above.
2. Fear of Missing Out (FOMO) and Researching Hastily
In October 2010, I bought shares in a Singapore-listed company called Dapai International. It’s involved in designing, developing, manufacturing and selling backpacks and luggage under the Dapai brand in China. It apparently was the top backpack company in the country with a 35.8% market share.
I analysed the company and liked that it was growing its revenue and cash flow at a decent rate.
I also thought it had further growth ahead with its plans to open 500 new stores by the end of 2010 and to dual list on another exchange.
But something the company did should have made me think twice about investing in it.
Dapai did a share placement in May 2010 even with lots of cash on hand and negligible debt. It raised money and diluted shareholders holdings without the need to. This should have been a major red flag.
Luckily, I realised my mistake and sold off Dapai shares two weeks after I bought them at a slight profit.
The mistake I made here was being blindsided by the rosy picture the company painted and having a FOMO mentality that if I didn’t invest in the company, I would lose the opportunity to make money.
I learnt from this experience that I shouldn’t be too hasty in my analysis and to question everything that seems peculiar.
Many years later, independent probes into the company revealed that Dapai “had made non-factual, false and misleading statements about the supposed opening of 500 retail outlets in China, as well as payments to certain distributors and contractors involved”.
3. Timing the Market
In August 2011, I saw the first major stock market decline since I started investing.
The fall was due to uncertainty in the US over its debt ceiling and the country’s first-ever credit downgrade by S&P. There was also a debt crisis in Europe.
Out of fear that some of the paper gains in my portfolio will turn to losses, I decided to sell off some of my stocks.
It was an emotionally-draining mistake as it made me check on the stock market and stock prices every day, afraid that I would miss on the rebound when it happens.
What actually happened was that the stock market started rallying on optimism that the debt crisis will be solved eventually. And I was forced to buy back the shares at a higher price.
I learnt from this episode not to time the market as it’s a really tough job. No one can know for sure when to exit the market before a crash and when precisely to buy just before a market upturn.
Various studies have also shown that being out of the market and missing the best market days can significantly reduce long-term returns. So, it’s far better to stay the course.
4. Investing Only in Undervalued Companies
I was educated in the school of value investing by reading books that talk about how Warren Buffett and Benjamin Graham invest.
This school of thought mainly states that we should invest in companies that are selling below their intrinsic values. Due to my exposure to the discipline, I was only keen on investing in companies that were selling at what I perceived to be undervalued prices.
When I started off investing in 2009, it was easy to find high-quality stocks that were also undervalued, largely due to the depressed prices from the global financial crisis. However, as time went on, it was hard to find such hidden gems.
Through many mistakes of investing in mediocre companies only, I realised that it is indeed far better to buy a wonderful company at a fair price than a fair company at a wonderful price, as alluded by Warren Buffett.
Great companies trade at fair or high valuations for a reason. It could be that the company has a sustainable competitive advantage that it accords paying a premium for.
This is not to say that I won’t invest in cheap companies anymore. What it means is that I have learnt that I don’t have to invest in cheap companies only; it is fine to invest in expensive companies too, provided they are not exorbitantly overpriced.
5. Too Much Focus on the Headline Dividend Yield
Back in 2014, I invested in a company called Second Chance Properties Ltd (SGX: 528), which is involved in retailing of Malay traditional wear, property investments, and retailing of gold jewellery. I first invested at a share price of S$0.46.
I noticed that the company had a lot of assets on its balance sheet, and it was selling at a reasonable price-to-book ratio of around 1.2 and a high dividend yield of over 7%.
Its dividends had been growing over the years as well, from 2.4 Singapore cents per share in 2006 to 3.5 Singapore cents in 2014.
However, I didn’t realise that the dividend was not sustainable as it was paying out way more than it could afford to in terms of its free cash flow. Its balance sheet had way more debt than cash as well.
In 2016, its dividend collapsed to just 0.2 cents, and so did its share price. Right now, Second Chance is selling at S$0.16 per share.
From this episode, I learnt that I shouldn’t focus on the dividend yield alone but dig deeper into its sustainability.
That’s when I realised that when it comes to dividend investing, we have to look at a multitude of factors, including a company’s balance sheet strength.
6. Not Spacing Out My Stock Purchases
The stock market was volatile in 2015 due to slowing economic growth in China and the Greek debt crisis.
On top of general market weakness, industry headwinds also hit the share prices of some of the companies I owned shares in.
Upon seeing their falling prices, I purchased more and more of these shares, since my reasons for investing in them in the first place were still intact.
However, with the increasing purchases, the companies took up a large portion of my portfolio, skewing it vastly. One such example was Kingsmen Creatives Ltd (SGX: 5MZ); its position in my portfolio got bigger than I was comfortable with.
The lesson I learnt here was that I have to space out my purchases to ensure a specific company doesn’t take up a huge part of my portfolio in a short period.
No matter how great the company is, if its position is not sized correctly (according to its risk and reward), the whole portfolio can be distorted and suffer as a result.
This can cause massive underperformance against the stock market benchmark.
7. Buying Commodity-Related Companies
I wrote about this mistake in an earlier article of mine. I wouldn’t reproduce it here, but in summary, I made a mistake by buying into Sembcorp Industries Limited (SGX: U96) after the 2014 oil price crash.
From that episode, I learnt to avoid commodity-related business as it’s hard to predict the price trajectory of a commodity like oil.
8. Trusting Management Way Too Much
One of the things I like to look out for is whether a company’s management is honest and competent.
On top of reading company announcements and annual reports, I also attend company briefings and attend annual general meetings (AGMs).
Attending AGMs allows one to observe subtle clues about management that may not be possible to know just by reading annual reports. It also allows the investor to meet management face-to-face and ask them questions and observe their body language when they answer them.
However, we also need to know how to read between the lines as management teams are likely to paint a rosy picture of their businesses. There’s a saying that goes, ““Never ask a barber if you need a haircut.” So whatever management says has to be taken with a pinch (or maybe truckloads?) of salt.
I learnt this the hard way after trusting the management of a few Singapore companies too much than I should have.
9. Buying Companies That Are Order-Book Based
A lot of companies I started investing with were order-book based companies. This means that the company goes out to pitch for a contract or project, and if it’s successful, it wins the contract and adds the contract value to its outstanding order book.
The revenue from the contract is then slowly recognised throughout its span, and the order book slowly winds down. To replenish its order book, the company has to go out to win more contracts.
Some of such companies I had invested in were OKP Holdings Ltd (SGX: 5CF), Hock Lian Seng Holdings Limited (SGX: J2T), and ISOTeam Ltd (SGX: 5WF).
Over the years from talking to more experienced investors, I learnt that it’s better to invest in companies that have recurring revenues and are not order-book dependent.
A business model that brings in recurring sales is far superior to an order-book based one as the company doesn’t need to constantly spend time and money to make a sale.
10. Not Venturing Out of Singapore
I started my investment journey with Singapore stocks. I was comfortable with investing in local stocks since I was born and bred here and was familiar with the various businesses listed here. Therefore, I didn’t see a need to venture overseas.
However, by only investing in Singapore, I accumulated companies in my portfolio that may not have that wide an economic moat. Due to that, my portfolio suffered when the companies did not do that well.
I realised that I had to get out of my comfort zone and invest internationally since there are many growth companies in other parts of the world as well. Local companies are after all limited by their total addressable market in Singapore.
So, what I did was to pull out the weeds on the poor-performing companies, taking huge losses at times, and redeployed the capital into better companies in the US.
I came across the approach of resetting my portfolio through my ex-colleague at The Motley Fool Singapore. He pointed out an article to me on a novel strategy employed by American investor Michael Steinhardt:
“Perhaps Steinhardt’s most interesting tactic was selling his entire portfolio when he was frustrated with his performance. As he explained: “I did not think we were in sync with the market, and while there were various degrees of conviction on individual securities, I concluded we would be better off with a clean slate…. In an instant, I would have a clean position sheet. Sometimes it felt refreshing to start over, all in cash, and build a portfolio of names that represented our strongest convictions and cut us free from wishy-washy holdings.””
I’m happy I invested in the US stock market in early 2018, after nine years of solely investing here.
11. Don’t Worry About the Stock Market Noise
After investing in US shares, I realised that the US stock market is way more volatile than the Singapore market.
It’s not unusual to see shares in well-known companies falling by 10% or more after an earnings miss.
On top of company-driven events, general market weakness (such as the one seen earlier this year due to COVID-19) also tends to drive stock prices of great companies down drastically, creating lots of opportunities. Recovery is also usually swift.
The lesson I learnt earlier in my career about not timing the market came in very handy in March 2020, when the stock market saw a bloodbath.
It isn’t easy to stay sane during volatile market periods when almost everyone around you is fearful that you end up doubting your own conviction.
11 on 11
There you have it — 11 lessons from my 11 years of being a student in the stock market.
Kudos to you if you managed to patiently (a trait we need plenty of in investing) read everything written above.
Even if you didn’t, it’s fine as I find the article a bore myself… not! 😉
With that, happy compounding and stay safe!
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.