September 28, 2005

My Investing mistakes

It is well documented and known that the pain of loss is much higher than the  joy of gain. I have had my share of losses (some due to greed, some due to ignorance). However, as buffet and munger have repeatedly reminded, one should try analyzing one’s mistakes and learn from it. I am listing some of the errors I have made , and the lessons learnt. My typical holding is 4-5 years and so if I am wrong in analyzing an investment, the impact is much higher for me.

An error of commission

I started investing actively 6 years ago. While reading a magazine, I come across a recommendation for SSI ltd. This was (is ??) a company in the computer education business competing with the likes of Aptech and NIIT. The key differentiator for the company was its short term courses in Java and other technologies which were useful for IT professionals to land a good job. It was selling at a PE of 50 at that time.

The balance sheet was strong , with low debt and the company had recently made an acquisition in the US using its stock (@ a price of 2200 rs / share). The acquisition enabled the company to get into IT services and would have served as a good additional revenue stream.

Shortly after I bought the stock, the Dotcom bubble burst. Recruitments by IT companies slowed down and the IT services market dried up. As a result SSI got hit by a double whammy. Their education business suffered big time and also their IT services company never scaled up in the tough environment. I bailed out of the stock after losing more than 90 %.

My learnings

  • Never buy a richly valued stock. The companies future seemed bright, however the stock was more than reflecting it. So when the downturn came, there was no margin of safety to cushion the blow

  • Do not invest in a company whose economics you cannot foresee with reasonable probability

  • Do not invest in a company whose management you don’t trust. SSI’ s management seemed to be involved with Ketan parekh in boosting the stock. This should have been a red flag for me

An error of understanding a catalyst event in unlocking value

My next big mistake did not result in my losing money. But more so, I lost out on a huge gain. The stock is L&T. I bought the stock back in 1998. The company had mediocre performance till then. Post 1998, the performance nosedived. The cement division was doing badly due to the demand supply mismatch and the engineering division was doing average due to a recession in the capital goods market. On top of that the management, stubbornly kept diverting capital from a high return business (capital goods) to Cement (commodity with low returns). There were media reports that the management would spin off the cement division (but I think it was just a ruse played by the management). Eventually I got disgusted with the management and sold off at minor profit.

A few months later, the Kumarmangalam birla group , after a corporate battle , bought out the cement division. The management (as expected) went ahead and allocated 10% of the equity to the employees and added a poison pill to prevent  a repeat takeover attempt (The management is still anti shareholder and I have not changed my mind on that). However with the cement division out of the way, and the capital goods market doing well, the  performance improved and the stock has gone up by 8-9 times.

My learning
  • I should have done a sum of part valuation. I should have valued the engineering goods and the cement division separately and calculated the intrinsic value based on the sum

  • Patience – The takeover bid had started. I simply got disgusted with the management and bailed out. Should have been more patient.

I will keep listing more of my investing miscues (which I have many) and share my learnings. Please feel free to share yours …


pey said...

Did you learn of the "nexus" between your managers & KP in hindsight? Or did you know of it during the holding period?

Rohit said...

i knew about it (though not conclusively , only through some indirect newspaper reports ). but chose to ignore it and 'hope' otherwise.
well the market punishes you if you are not rational