Admitting to our own mistakes is one of the toughest things for an investor to do.
Why do I say this?
Because it’s human nature to believe that what we do is right. Most of us also tend to hold a strong belief towards how investing should be done.
Changing our minds can be tough we, as human beings, tend to suffer from pride and inertia.
Pride prevents us from learning from mistakes or admitting we were wrong. Inertia holds us back from making changes as it feels comfortable cruising along with the status quo.
Both are enemies of the rational investor and should be actively rectified.
Being an investor for more than a decade, I like to pride myself on being an active learner, imbibing lessons from investors around me, as well as from my own observations and actions.
With that in mind, here are three important investment lessons that I picked up from last year.
Short-term disappointments can create great opportunities
Investing may be a long-term endeavour, but in practice, what we are dealing with is actually a chain of short-term events.
Our goal is to ensure the companies we own in perform well. However, there will likely be hiccups along the way.
A good example of this scenario happened in July 2019.
Airlines caterer SATS Ltd (SGX: S58) had just released its fiscal 2020 first-quarter earnings. The company’s revenue was up 5.8% year-on-year but net profit declined by 14.4% year-on-year due to higher expenses and consolidation of its subsidiary, Ground Team Red (GTR).
On the following day, the share price plunged from S$5.40 to around S$4.96. On the same day, I managed to pick up some shares at S$5.01.
I made that decision because I felt that there was nothing was fundamentally wrong with the long-term investment thesis for SATS.
In my view, the bad news merely resulted in a knee-jerk reaction, thus opening up a great opportunity to purchase more shares at a better price.
While shares have not recovered, I believe that shares of SATS will trade higher over time.
It’s important to know that the road may sometimes be bumpy, but that should not detract us from continuing to invest in great companies.
Rights issues are not always a bad thing
Companies use a variety of methods to fund future growth.
These include secondary share placements, the taking up of debt from financial institutions, and rights issues. Some investors may feel that rights issues are a negative event as companies are asking for additional cash from existing shareholders.
However, I’ve learnt that rights issues are not always a bad thing — in fact, it depends on the purpose of the issue and the financial terms and conditions attached to them.
In mid-September last year, Keppel DC REIT (SGX: AJBU) announced the acquisition of two data centres in Singapore for a total of around S$585 million. The acquisitions were to be funded by a combination of debt, a private placement and a preferential offering (i.e. rights issue).
As this rights issue was principally for the funding of distribution per unit (DPU) accretive acquisitions, I saw it as a positive for existing unitholders.
The rights issue was on the basis of 105 new units for every 1,000 units held and was priced at S$1.71 per unit, below the then market price of around S$2.00, allowing unitholders to participate at a discount.
Since then, Keppel DC REIT’s unit price has moved up to S$2.25.
Even large blue-chips can continue to grow
The final lesson I learnt is that large companies can continue to post impressive growth numbers despite their size.
I would point to two examples here — Nike Inc (NYSE: NKE) and Facebook Inc (NASDAQ: FB).
Nike is a well-known sports footwear and apparel brand with a market capitalisation of close to US$130 billion, while Facebook is a social media giant valued at US$633 billion.
For Nike’s fiscal 2020 second-quarter earnings (ended 30 November 2019), revenue rose 10% year-on-year while net profit jumped 32% year-on-year. The quarterly dividend was raised from US$0.22 in 2Q FY 2019 to US$0.245 in 2Q FY 2020, an 11.4% increase.
Meanwhile, Facebook’s 2019 third-quarter earnings showed a jump in revenue of 29% year-on-year, while net profit rose 19% year-on-year. The social media giant continued to post growth in monthly average users, up from 2.27 billion a year ago to 2.45 billion.
The two examples above demonstrate that size might not be always an obstacle if the runway ahead remains long for the individual companies.
Get Smart: Being receptive to learning
The three lessons above show the importance of being receptive to learning.
Investors may not always have the right answers, but if we are willing to learn and evolve over time, there is so much more we can achieve in order to improve our performance.
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Disclaimer: Royston Yang owns shares in SATS Ltd and Keppel DC REIT.