My Investing Journey: Global Tech Part 1 10 comments
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Now I digress to a particular stock investment that I made over the course of 2002-2003 which is to date, my greatest loser both in absolute and percentage terms. It actually marked a turning point in my investment approach, and I shall devote two parts to this. I have actually written about the story of Global Tech in my StockTalesLot blog already, but here I shall concentrate on more personal aspects to my investment in this stock.
What could be more obvious an investment to make than Global Tech in 2002? As a handphone distributor (Nokia, Motorola, Samsung) in China, it was in one of the hottest sectors around (one handphone for every of the 1 billion Chinese!). In terms of earnings track record, it earned HK$300M, HK$450M and HK$550M over FY1999, FY2000 and FY2001 respectively, on steadily growing revenue. There was this little niggly issue of a report that one of its senior management had been detained in Guangzhou for tax evasion, which was denied by the company. Yet despite the strong track record, the stock kept sinking from >$0.20 in mid-2000 to $0.10 in mid-2002. The trailing PE by mid-2002 had become <5X, while the dividend yield had become fantastic: close to 10%!
And so I bought in my initial line, 50 lots at 10.5 cents in mid-2002. It conformed to my ideal of conservative small-caps as outlined in a previous article: steady track record over the last 3-5 years, growing earnings and revenue, and good dividend.
It seemed one of the surest bets. My subsequent experience in this stock has convinced me that there is no sure thing in the stock market, explaining why a red alert sounds in my head when anyone claims there is one (previously United Food, Anwell, New Lakeside, Zhongguo Powerplus, Eucon, and current flavour of the month: CG Tech). Unless one is aware of the reason why the stock is trading at a low multiple despite strong earnings, and chooses to invest despite this reason, he should be extra careful towards such stocks; comprehensive research (and hence work) should be done, to justify the greater potential reward.
Two months after my initial purchase and the stock still had not been "discovered" by the market and bid to the "rightful" multiples Global Tech's track record deserved. On the online forums, "fundamentals"-based investors vested in the stock were also voicing the same thoughts. The thing about stock buying that your attention is focused on the most recent purchase, and so my attention was riveted on Global Tech among my whole stock portfolio. When the stock fell below 10 cents, I thought a good bargain had just become better (that's what Buffett says: take advantage of Mr Market's irrational price quotes), and bought another big line of 100 lots at 9 cents. In August 2002 I received my dividend of $800 from my 150 lots, and with cash as proof that Global Tech's cashflow was genuine, I bought my final line of 200 lots at 4.5 cents (half my initial purchase price) in January 2003, with part of my bonus money.
I had averaged down and taken increasing proportions of my final position as the price dropped, trying to catch the bottom. That was a heavy gamble and I paid a heavy price for it. The bombshell dropped in early-2003 in the release of the company's FY02 results, where massive provisions were made for doubtful debts and slow-moving inventory leading to a loss of HK$200M. Things got worse; later it transpired that earlier rumours had been right: the company's chairman eventually admitted to tax evasion and had to step down from his positions to be taken over by his brother Timothy.