Investment mistake Part 1 - Hold on to loser

Since I started doing stock investment, I have gone through several market cycles. During this time, there were few money losing counter in my portfolio. Although I have cashed out from them already, I think it is good to reflect on the reason why it didn't perform as expected and what actually went wrong.

1. United Food
The story started as early as 2003. Back then, Uni food was listed not very long ago. As people are searching for undervalued gem, uni food was discovered as an undervalued china food producer. Key investment merit were good industry growth potential as growing affluence increase pork consumption, vertical integrated business model, new star health care product, cheap valuation with low PE and majority of stock price backed by cash and good dividend.

SARS and bird flu came. Business was hit badly as farmer hold back spending. Rising cost and dimmer industry outlook cause earning to come down. I thought it was a one off event and keep believe that it is still a undervalued play, I hold on and even average down a small amount. Only after sometime, I realised that the business is not going to recover strongly. Not in the foreseeable future. The problem with food producer is ever increasing cost and intense competition which prevent you to raise price. Finally, I decided to cash out with more than 50% of capital lost.

I believe many retail investor also have the same experience as me, holding on to a stock which they think is undervalued and below initial investment value. Hoping that some day it would turn around and earn a profit. However, one day the stock outlook is not good, it won't generate any investor interest. No interest means the stock price is not going to move, no matter how undervalued it is. Market give premium valuation to high growth company. Company with low growth or unfavourable outlook would remain undervalued for very long time.

Moral of story: When the tide turns, don't pray, don't hope, get out! There are better opportunities around. Undervalued is not enough, you need investor interest to keep the price up.

2. Bio-Treat
Bio-Treat was listed in 2004. Since its listing, it has attracted many interest from the market. At the beginning, one broker after another issued buy call for the company. The key investment merits were severe China pollution situation, unique proprietary treatment technology and taking on more BOT, TOT project to improve the earning stream.

In the meantime, the company also attract the market attention for the wrong reason. First was the stock option issue, option issued at cheap price. This causes the share price to go down. After the share recovered, other incidents occurred like ex-chairman claimed document forgery, project delay and the unexpected slow quarterly earning.

I bought the share near the peak and average down during one of the cycle. It did recover and I was sitting on a small profit. I thought of holding this as a long term investment. When the management problem surfaced and market confidence shakened, I reckon that it is time to cut loss, sold it at lower price. Now, the share price is some what recovered, but the investor interest is not so strong as compared to previous time. Also, market has learnt that project delay and unexpected event could hurt the water treatment company.

Moral of story: When there is a sign of management trouble, stay away from the company.

3. Full Apex
I bought into the company after analysing that being a key supplier to Coke and Pepsi, it is a good proxy to growing soft drink consumption in China. A strong consumer play. Looked at the valuation and aggressive production capacity expansion, I reckoned it to be a good buy.

Not long after, because of the oil price hike, the share price keep decreasing. I thought the fundamental didn't change much, so continue to hold on to the share. True enough, the oil price actually hurt the company bottom line. It just keep sliding. Early this year, based on the assumption that oil price is going downtrend, there should be a strong earning recovery. I bought some more. Only to realise in the coming quarterly result that the earning didn't increase or recover significant enough though the oil price has came down. I finally cut loss to move fund to other more profitable counter. Lose more than 50% of the capital.

Moral of story: Don't bet against the trend, when there is uncertainty in the earning. Move to something more predictable.