Tuesday, February 07, 2006

My Investing Journey- Bottom Fishing 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
In the early years of investing I find that a common experience, not just of me but also of many others based on anecdotal evidence, is the tendency to try to anticipate and catch the bottom price of a stock. This often involves buying the stock on its price downtrend, with the thinking that "it can't go much lower". Usually it is associated with a price peak that was 2 times (or even more) that of the current price, triggering the "can't go lower" thought. And eerily, more often than not, the price does go lower; the newbie has just "caught a falling knife" and cut himself badly.

Bottom-fishing may be a benign or even profitable exercise in a buoyant market such as now, especially if one had, for example, been in selected China stocks. However, it tends to be a fatal exercise in a bear or even stagnant market, such as the one commencing in 2000. It is one thing to buy with the opinion that price has fallen significantly below intrinsic value, it is another to buy with the main reason being that the stock has fallen tremendously from its peak and that if (and that's a big IF) it returns to that peak the lucky buyer could reap handsome rewards.

In September 2000 I looked at Horizon.com (the .com should have been the warning sign...) and decided that it had gone so much below its post-IPO price of $4.50 (!!) that it should have stabilised. If the dot-com economy recovered, there could be so much ground to recover. So I bought in 1 lot at $1.60. The rest is history. The stock kept falling, bought some Malaysian education service provider and changed its name to Horizon Education, and sank to the pits on a series of writeoffs. Now, of course, it has been reverse takovered by Global Voice, another new bubble. After 5 years, all I have to show is a 60% loss of my capital (there was a 3-for-1 split); I'm still holding on to it (brokerage commission is substantial).

In December 2000 I bought into Stratech Systems, a highly touted IT systems developer whose shareholders included IDA and EDB. The company had recently secured a huge contract to provide a Bus Travel Info System by the LTA, which boosted its order book to $70M, 7 times its pre-IPO turnover. The stock IPOed at $1.10, I averaged down 10 lots at an average price of $0.70 (hitherto my biggest investment) thinking what a bargain I had got. The danger signs were there: the dot-com crash, the company was a recent IPO, it announced an interim loss... I didn't care or didn't know. Since then, Stratech has been bleeding red ink, its contract with LTA has been cancelled, and it has been lurching into different sectors from transport systems to security systems, searching for sources of recurring income but finding only sporadic projects that hardly allow it to vertically integrate and build on solid foundations. What is left of my investment today is one-tenth of the original capital --- my worst loss in percentage terms.

The more painful the experience, the clearer the lesson is imprinted in one's mind. I learnt that price movements, once established, often follow a momentum that defies timing of its turning point. There is an underlying reason: price momentum is driven inherently by earnings, and indeed, earnings trends once established are hard to break (whether upwards or downwards). I learnt to be more wary of recent IPOs given the propensity for earnings to sag post-IPO.

I must sound really like a loser in my earlier investing years with my numerous examples of loser stocks that I can cart in to support my points. I had started cautiously with my picks of GLC stocks, then I got more adventurous and got into small-cap stocks where I acquired a marvellous capability to pick loser stocks in loser sectors (construction and Internet/technology). I knew I had to adapt that admirable caution which I exercised at the beginning to my picks of small-caps which were inherently more risky but which bore more reward. If I wanted to make good money I would have to concentrate my judgment of stocks in this particular segment. That entailed adopting a consistent manner of picking good small-cap stocks. That was the resolution I made in early 2001.

(To be continued...)




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