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
- The stock has since then become a 10 bagger (sells at around 2250 without considering the value of cemex)
- 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.
- 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
- 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?