February 13, 2006

My Worst invesment decision till date




My decision to sell L&T in 2003 (after holding for 4 years) has been my worst investment decision till date. Although my cost basis was 190 odd (pre-divesture) and I sold at 230 odd (again pre-divesture) and did not lose money on it, I consider it to be one of my worst decisions because of the following reasons



  1. The stock has since then become a 10 bagger (sells at around 2250 without considering the value of cemex)
  2. I sold off because I became exasparated with the management. Between 2001 and 2003, they would constantly pay lip service to divesting the cement division and would then drag their feet on it. What I failed to realise at that time was that the Kumarmangalam birla group would be able to force the management to divest the business eventually.
  3. Did not appreciate the importance of the business cycle. The E&C sector was in doldrums at that time and as a result L&T (E&C) division profits were depressed. The E&C sector turned around big time after 2003 and every E&C company has benefited since then
  4. Did not do the sum of parts analysis – basically that the sum of value of the various L&T divisions was more than the complete entity.

In the end, my regret is not that I missed a 10 bagger. What clearly pricks me is that my analysis was sloppy and I did not evaluate all the factors clearly. I was looking at the company with a rear mirror view (the Margins and the ROE were poor then and I expected it to continue).

However, I have tried to learn something from this disaster. So here goes

  • understand the sector dynamics when investing in a stock.
  • Appreciate the importance of business cycle. Although predicting it is not critical, but a basic understanding is a must.
  • Focus on sum of parts versus looking at a company as a whole, especially if the company has various different businesses.
  • Have patience
  • Try to avoid a rear mirror view.

Have you had such an experience?

3 comments:

Senthilnathan N.S. said...

Isn't the main lesson to be learnt here is that the questions we pose to assess the management was incorrect?

Rohit said...

i still believe that the L&T management is not really shareholder friendly ...after the demerger they awarded themselves almost 10 % (not sure of the no.) of the company. they had a scheme by which the employees were allocated almost 10% of the company equity (through some arrangement which i do not remember).
you should have seen the kind of diversifications the management did in the late 90's and the shareholder value they destroyed.
however i definitely assessed the other factors incorrectly and paid the price for it (a huge opportunity cost)

Shankar said...

Hi Rohit,

Im sure, you'll feel better when you hear this one ... I bought BEML at 107 rupees, sold two days later at 144 rupees. Today's CMP is 1510 rupees. Thats a 15-bagger :-)

Shit happen !!! ... that's why I crudely call it "tution fees"

Warm Regards
Shankar
small2big.blogspot.com