If you haven’t gone bankrupt before, you’re probably not taking enough risks in the investment world, as the saying goes. Filing for bankruptcy is a serious matter that should never be ignored. However, investing is a game of balancing risk against potential gain. Errors will inevitably occur.
Constantly outperforming the market is incredibly challenging, with even the best portfolio managers only getting it right 55% of the time. At Expat Wealth At Work, we have a tradition of sharing our stories with our clients to encourage them, show compassion, and ensure that success is within their grasp if they keep going. Ultimately, it is the failures that enable future triumphs.
You can learn more from your failures than from your successes. It’s great if a stock you’ve bought turns out to be a good investment right away, but there’s always the risk that your luck was purely coincidental. However, when an idea fails or takes a long time to bear fruit, we learn the most. So in that spirit, we’ll talk about the money we wasted and what we learned from it.
1. Avoid narrative stocks at all costs
We invested in a cruise line early on because of a compelling backstory. The predecessor of the company was in the cruise industry. This cruise line hoped to use its protectionist maritime status to gain a monopoly on voyages to an archipelago of eight large volcanic islands.
We evaluated the tourism landscape and the cruise industry in general and saw that there was significant demand for such holidays. The necessary funds were raised, a management “dream team” was assembled, and work on the cruise ship began at a shipyard.
The last time a cruise ship was built in the United States was almost twenty-five years ago, but the yard had a lot of experience with military boats. Surely nothing could go wrong?
It turns out that it is not so easy to recover lost expertise from the sector. The company went bankrupt after spending billions of dollars on a failed shipbuilding project. It never occurred to us that they might not have the necessary expertise to build a luxury liner. The unfinished ship was eventually transported to Europe for completion. However, the investment starting point plummeted.
The conclusion is that you cannot just assume that a company can implement its business strategy without knowing exactly what that strategy entails.
2. Stay away from analysis paralysis
Investing is a field that includes elements of both science and art. If you want to make it, you have to be good at numbers and data analysis. However, you should use your own common sense and the insights gathered from experience.
When it comes to investing, we are often contrarian. As a result, we rarely join the herd, preferring to enter a market when everyone else is leaving. By 2014, the massive commodity supercycle that China’s rapid economic development had fueled had largely subsided. The price of iron ore rose dramatically from $10 a ton in 2003 to $170 a ton in April 2009 before falling to levels below $70 in 2014.
The price cut added pressure to mining stocks, causing their shares to fall. In this context, we teamed up with a stock market expert who specialized in mining after developing a stake in Brazilian iron ore company Vale. Seasoned investors in cyclical companies like Vale now know that it is notoriously difficult to predict when a business cycle will bottom out. For this reason, we regularly scheduled meetings with the analyst to discuss the data. Meanwhile, the share price continued to fall.
Because the analysts we work with have been in the industry for many years, if not decades, we believe this gives us a competitive edge. The analysts we work with enable us to access a huge wealth of specific information. But we remember sitting with the mining analyst and asking, “We know so much about this company now; will more information do the trick?”
We assumed we were well versed in the global demand environment, premium structures, penalty structures, and discounted cash flows. We don’t need another piece of information. With the available data, we must make the most informed choice possible. A financial advisor is responsible for making these often difficult choices for his clients.
The bottom line: Research is essential, but additional data can be overwhelming. To be a good investor, you need to know when to take action based on the available data.
3. Believe but check
Expat Wealth at Work values getting to know a company’s management team, which is why we encourage regular meetings and open lines of contact. By learning more about the personalities of leaders, we can better assess whether they are competent to execute the stated business objectives. It can make you less likely to think, “I wonder if I’m being lied to?” While most of the executives we work with are good individuals, that doesn’t mean they always tell the truth.
However, even the most astute investors can fall victim to a scam on rare occasions. We invested in Sino-Forest, a Chinese company that owned and managed forest lands, with the intention of selling them to other investors.
Sino’s Toronto-listed shares rose more than 500% from 2003 to 2011, based on the company’s optimistic forecasts for future earnings growth. The company was found to have made many transactions, about 450 in the first quarter of 2009.
The Ontario Securities Commission began investigating the company in 2011. In 2012, Sino was declared bankrupt, and stock trading was halted. The Ontario Securities Commission concluded that several of the company’s executives had “engaged in deceptive or dishonest conduct with respect to Sino-Forest’s existing timber assets and revenues that they knew constituted fraud.”
The bottom line: Skepticism about financial statements and the executives who process them is warranted.
4. Don’t be influenced by your own prejudices
We have invested in several companies, including Boeing, for over twenty years. Boeing has weathered more than enough storms, from the September 11 attacks to the disasters of its 737 Max aircraft in 2019 due to poor flight controls and the COVID pandemic in 2020. Boeing’s share price decline in response to the global pandemic and the subsequent closure of the transport sector came as a complete surprise to us. With the benefit of hindsight, we can now conclude that we seriously underestimated the seriousness of the situation.
We admit that no one could have predicted how terrible things would get. But no doubt things quickly took a turn for the worse, and continued problems with the 737 Max followed. We held the stock during a very difficult time.
You would think that we would have seen the signals by now, after we have followed the sector for more than 29 years and have been able to act quickly and decisively. Financial advisors, like all people, are sensitive to the influence of their own emotions and biases, making for a challenging work environment.
Confirmation bias occurs when we look for evidence that supports our previous beliefs. That certainly taught us a lot.
The conclusion: be open to new ideas and prepare to adapt quickly to changing circumstances.
5. Recognize when to abandon ship
Identifying exceptional companies whose stocks can deliver higher returns over time is quite challenging, as simple as it may seem.
However, our experience has taught us that even successful companies experience setbacks from time to time; therefore, it is crucial to maintain a strict sales regime. The most successful traders in the world routinely lose millions of dollars because they are wrong.
The meaning of weight and conviction is one of the most intriguing insights. It’s about how much money you win when you’re right and lose when you’re wrong, rather than how many times you’re right or wrong. These beliefs and weighting decisions are crucial, as we see in the client portfolios we manage.
Expert traders can be divided into five different “tribes” based on their habits and strategies; one of these is known as “killers” for their aggressive sales tactics. When a stock’s value falls, investors prioritize limiting their losses as much as possible. However, numerous behavioral psychology studies have shown that investors find it emotionally taxing to admit a loss in real life, as opposed to on paper. Simply put, we all have an irrational fear of admitting defeat and starting over.
Knowing when to cut your losses and move on from a losing investment is a critical skill for any investor. Long-term investors must train themselves to change course when their investment theory no longer makes sense. In our experience, this is one of the most challenging tasks a financial advisor has to perform.
The bottom line: Knowing when to cash in a stock and move on to the next opportunity is just as important as knowing when to buy.
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