Saturday, July 15, 2006

My Investing Journey: Global Tech Part 2 4 comments



(P.S: Sorry for any disturbances the advertisements above may have caused you)
By February 2003 the bomb had already been dropped, in the form of shock losses in Global Tech's FY02 results announcement. Someone asked me (see Comments section in Part 1 of this article) whether certain signs of fundamental weakness could have been spotted in their cashflow statement and balance sheet before the collapse, and my post-mortem revealed that I had probably been too careless with cash flow analysis, as FY01 financials had revealed a large increase in receivables and inventory despite the rather benign overall operating cash flow. But the business seemed to have been growing, which partly justified increases in working capital investment (especially given that this was a trading company). Furthermore, I had been seduced by high dividend yield (forgetting that this was due to rapid price drop rather than anything else) and low PE.

That marked a turning point in my stockpicking approach. No longer would I base my decisions too heavily on low PEs, or even a consistent earnings track record. In terms of philosophy, I had reached the view that there was no sacred cow that could not be slain. Low PEs, of course, were still useful for stock screening down to a shortlist, but there were two parts to fundamental analysis, the second part of which might sometimes be obscured: the first is an understanding of sector demand and supply, company positioning and competitive strengths, the whole works; the second is valuation, why the stock is currently valued the way it is. I had underestimated the market and its pricing efficiency, and it had in turn undercut me severely. The key problem, now it appeared, was management problems --- the arrest of its chairman Johnny Sze for tax evasion had thrown open the whole can of worms and writedowns had to be taken on all manners of working capital (inventory, receivables), which presumably he had earlier kept under wraps.

Another reason I chose to highlight this stock is because it illustrates the emotional struggles following a huge price collapse in a key stock of one's portfolio, that one will never experience until he has been through it (a reason why I think virtual trading is a waste of time simply because it does not subject one to the pain of making "cut loss" decisions). When shit hits the fan, what does the individual heavily vested in the stock do?

This is where selling is extremely painful. The stock corrected down from 5 cents to 3 cents, a drop of 40%, within one week; while I had many opportunities to take loss, I did not. The only reason, on hindsight, must have been the "deer caught in headlights" syndrome --- the default reaction was thus to wait and hopefully, the car would swerve. But why would Global Tech recover, when the business trend was clearly on the decline? Its projections for the future were no longer rosy; margins, the company warned, would be continually eroded by keen competition. What I should have done was to assess the situation and fundamentals, decide whether it was a one-off loss with no compromise in general business competitiveness, and act swiftly to eliminate opportunity costs if the (unbiased) conclusion was negative. Hindsight is 20/20. (By the way, it did not help that I had accummulated the final 200 lots just a few days before the clunker dropped)

And so indeed, the share price languished and dropped further to 2 cents during the SARS period of early-2003. Eventually it managed to climb back to 3 cents in June 2003, the beginning of the market uptide that has, arguably, sustained itself all the way till today, and I finally mustered the conviction to sell. And immediately I felt like a huge burden had been lifted off my shoulders, a sign that I had delayed the decision too long. It is similar, in some ways, to a couple hanging on to their relationship even though things are not working out; eventually the breakup is a great relief to both parties.

How much had I lost? I had accummulated 350 lots of Global Tech at a total sum of $23K, and I sold off the entire line at $0.03, getting back $10K. $13K had been lost for my over-confidence that Mr Market had been less than efficient. Additionally, a "wait-and-see" attitude following the shocker results had cost me an indefinite amount in opportunity costs, an amount which would definitely have yielded positive gains in the strong market upturn that started in the May of 2003 when the market showed its bottom.

Well, as an epilogue, my conviction to sell ultimately served me well. Global Tech suspended trading voluntarily in early 2004 due to corporate concerns leading to board members resigning; there had also been some auditor changes earlier. Today it is still suspended. The last traded price was ~1 cent. The company has been in the red ever since. Final lesson: don't try to pick a bottom.

One learns more from a losing trade than a winning one. Besides getting a stronger sense of what things to look out for, the most important thing is: he learns to be humble. Whenever I consider the merits of any potential high-risk high-reward investment, the experience of Global Tech will always be at the back of my mind.

By the way, for those interested in reading the full story of Global Tech, I can direct you to an excellent article titled "Global Tech's Wreck" from a Hong Kong website.

 

 

4 Comments:

Anonymous Anonymous said...

Oh the horrors of being too heavily exposed to a failed stock! I think you did ok to salvage what you did. Everyone talks of cutting loss quickly but let's face it, more often that not after a share price dumper the business is not fatally wounded and the price does in fact recover (albeit sometimes with painful slowness) - if there is no sign of impropriety I am not sure that cutting loss is such a sure thing as it seems. Isn't the answer to look at whatever is the problem quite dispassionately. If the business is not performing and one has made a mistake (United Food is another that comes to mind here) then just sell. One's buy price is irrelevant because one has made a mistake (which might or might not have been one's fault). If there is any impropriety then certainly just sell. (By the way I try and sell either very quickly or on temporary rebounds if I wasn't quick enough).

If the problem genuinely seems just a temporary glitch, then that is a different story - one might even average down cautiously.

7/16/2006 1:43 AM  
Blogger DanielXX said...

Yes indeed the crux is to look at the issue dispassionately and assess whether the fundamentals have genuinely deteriorated. Nowadays if there is any sign of management instability, I will straightaway sell --- no questions asked. It can be quite difficult --- it basically involves a 180-degree turn from optimism to pessimism about the stock. No place for romanticism in the market.

7/17/2006 7:24 AM  
Blogger Raymond said...

Hi Daniel,

When u were losing that kind of money in GlobalTech, did you ever get freaked out? I mean, didn't it ever occurred to you that perhaps you were not cut out for this? I'm sure you made good now, but was wondering about your mental outlook at that particular moment when this GT invesment went terribily wrong.

Regards,

8/07/2007 10:32 PM  
Blogger DanielXX said...

Raymond,
It was demoralising because I had just gotten my bonus and put part of it straight into GT. But because I could afford the money, I just took it in my stride. The disappointment was partially vindicated by the suspension of GT several months after; I'm glad I cut early, and ultimately the money I got back was put to much better use in the emerging bull market of mid-2003.

The other thing from this episode of course is that always diversify (intelligently). You never know when something will hit your stock just like that. Sure, you make more money by focusing, but your degree of portfolio focusing must be proportional to your confidence about the company and most importantly, its management and its sector risk.

I was actually more worried about family members to whom I had talked about on GT. They had subsequently bought into the stock and made bad losses together with me. To this day I feel bad. And that's why I seldom make stock recommendations to anyone nowadays.

8/08/2007 1:52 AM  

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