Saturday, June 16, 2007

My Investing Journey: Stamford Tyres 5 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
My episode with Stamford Tyres was, overall, a profitable one. But even when an investment is profitable, the way one handled it may not have been optimal. It was the case for this stock.

I bought Stamford Tyres in July 2003 after it announced a better-than-expected set of full-year results and revealed plans to go into wheel manufacturing, adding a new dimension to its rather staid, though recession-proof, tyre distribution business. By a serendipitous turn of luck, the stock rose immediately after I bought at 80 cents, doubling over my purchase price (split-adjusted; the stock split 5-for-2 during this period) within 9 months, no doubt aided by a bull market in its early stages. I let the profits run.

In June 2004 the company announced a strong set of results but expressed caution about performance for the coming year due to tight tyre supply from principals and setup costs for its new wheel manufacturing plant. The market chose to ignore the results and focused instead on the gloomy company projection: stock price steadily declined post-results announcement. Taking the view that its long-term expansion plans were intact, I held on to everything and waited for the selldown to abate.

The wait took two years. There were no surprises for the FY05 results, it was significantly weaker than FY04 as the company had projected. By FY06, the results recovered to above FY04 levels, as the wheel manufacturing plant came online. But in the meantime, due to lack of newsflow plus lacklustre FY05 results, market enthusiasm over the stock had completely died and trading liquidity had slowed to a whimper; with it the price gradually drifted downwards. The continuing bull market of 2004-06 had completely passed it by. When the recovery in Stamford's operations were confirmed by its strong FY06 results, it was trading at a split-adjusted 25% above my 2003 purchase price. Now that's scant reward for my investor's patience!

I used to scoff at those who exited a stock which was experiencing short-term slowdown but with long-term fundamentals unaffected. But I have come to realise that opportunity costs are the most insidious costs of investment that constitutes significant, albeit invisible, drag on portfolio returns. A non-performing stock locks up funds that can be re-deployed elsewhere to investments that show more probability of short-term return. In the time that one waits for the long-term fundamentals of the long-term hold stock to sink in over the short-term slowdown, one could have turned over the locked-up funds several times into stocks with more obvious short-term catalysts. Of course, this is not always true, and one needs to view different circumstances in their context. But the episode of Stamford Tyres taught me not to default to long-term fundamentals when the stock suffers short-term problems; I had fallen into the value trap, the classic symptom of which was intellectualisation: I continually rationalised the reasons why I should hold on to the stock. The problem, of course, was that these were all long-term reasons.

Another reason that explained why I had difficulty selling the stock early on was due to my comparing the considerably lesser returns I would obtain on the stock if I sold with the earlier 100% gains in late 2003/early 2004 (when the problems hadn't surfaced). This was the problem of anchoring: I had fixed the gains I "should" get to a certain target based on historical experience, and was not willing to settle for less. And of course, the more I dithered, the further the "target" drifted away.

It is not so easy to cut emotions out of the decision-making process. Ideally, one should pick stocks that would not put one in an awkward position of deciding whether to cut loss or not. Given that it is inevitable, I have learnt to view opportunity cost as the greatest enemy of an investor/trader in a bull market; I have also learnt to employ techniques to neutralise the effects of emotions, for example by selling the stock in stages such that the mind becomes more neutral with each successive sale.

For the record, I eventually sold out of Stamford Tyres in July 2006, right after its announcement of its strong FY06 results. I have not regretted the decision; the unlocked capital was put to better use since then. Although the results were good, it was in a business that was recession-proof but would never provide supernormal profit growth nor upward valuation re-rating in a bull market and hence I had to take the two-year wait (for its profit to recover) as sunk cost and move on.




Anonymous Anonymous said...

Great comment. I can relate entirely (as I am sure can all who have ever tried practising fundamental analysis sotck investing)

The thing about Stamford though was that although its very long term prospects remained untouched, its short (or medium term) prospects had been affected when you held it (due to contraction of supply, expansion costs etc) which affected its 1-2 year earnings. So arguably it could be construed as a shift in fundamentals?

Would like to know if you have any counter-examples? ie stocks where you held based on long term reasons despite near term falls, which later proved to be correct? I would find it immensely helpful if you could share one.

by the way, great articles here. :)

7/29/2007 11:01 AM  
Blogger DanielXX said...

Well there definitely are .... yes think I'll talk about it in my next article. It is also the longest holding stock in my current portfolio.


7/29/2007 4:22 PM  
Anonymous Anonymous said...

read with interest on your stamford tyres article. have a similar stock (somewhat related to automobile industry) in china bearing.

been holding it for the last yr.
did some research before going in, as it manufactures bearings for auto and heavy industries.

looks good to me, yet the price is drifting and little liquidity.
quite similar to stamford tyres as well.

can i know whats your take on this as well?

9/25/2007 8:37 PM  
Blogger Unknown said...

This comment has been removed by the author.

9/26/2007 2:10 AM  
Anonymous Anonymous said...

Hi anonymous-2,
China Bearing's actual earnings post-IPO seemed to have declined from its last results pre-IPO and I have observed many such occurences for IPOs in the past where they optimise earnings for IPO or proforma earnings are somehow distorted since they need not be in strict accordance with financial reporting standards. Frankly, whenever I see this kind of things, it turns me off the stock straightaway. My view is that the sector (China automotive industry) looks promising but doubts persist about the company. Unless you feel the company has a defensible niche (I'm not sure, nvr really researched the company thoroughly), otherwise not really worth holding. Especially when low liquidity suggests lack of accumulatory interest as well.

9/26/2007 2:12 AM  

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