My Investing Journey: Global Tech Part 2 4 comments

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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.