This is the second part of a new series featuring several investment mistakes that investors may commit.
These examples are taken from my personal experience as a rookie investor.
I hope that you can imbibe the lessons from these mistakes so that you avoid making them yourself.
You can refer to the first three mistakes over HERE, while here are another three mistakes that you should be wary of.
4. Weak management
This mistake relates to a company back in 2005 that was planning to raise money to fund an acquisition.
The company carried out a share placement to institutional investors to raise funds for the purchase.
All was well and good until I realized that the new shareholders will be entitled to the same dividends as the existing shareholders, even though they became owners at a later date!
To explain this situation, let’s take a hypothetical example.
Imagine a company that pays a dividend for the period from 1 January to 30 June (a six-month period).
The new shareholders (from the share placement) buy the shares on 1 April, so technically they should only be entitled to the dividend declared from 1 April to 30 June (i.e. a three-month period).
However, the company somehow allowed these new shareholders to enjoy the full six-month dividend.
Unsurprisingly, this practice caused disgruntlement amongst the existing shareholders.
When quizzed, management could not provide a convincing explanation for its behaviour.
I ended up selling my shares in frustration.
It’s therefore important for investors to review management’s track record and actions before investing in the company.
The key is to avoid investing in companies with poor management as they will end up destroying, rather than building, value for shareholders.
5. Listening to hot tips
When I first began my investment journey, I listened for stock tips without relying on any due diligence or research.
Blame it on ignorance or laziness if you will, but this is the absolute worst method you can use to “invest” in a stock.
Not only are you putting your money at risk because you know nothing about the company you invest in, but you may also damage the friendship you have with the person who offered the tip.
When I heard that a friend had made a profit on a Singapore-listed Chinese pharmaceutical company, I got tempted by this news and jumped straight in without thinking.
The company ended up reporting a decline in earnings due to regulatory measures imposed by the Chinese government.
The stock plunged as a result and I ended up selling it at a loss.
Lesson learnt: Do NOT rely on tips and rumours; instead, do your research and understand what you are investing in.
6. No competitive moat
You should list down a set of reasons as to why you wish to buy a stock.
This list forms part of your investment thesis that you can use to check back later to avoid hindsight bias.
One important attribute you should watch for is that the company should have a durable and sustainable competitive moat.
Going back to 2006, I put some of my money into a technology company.
This company appeared to have a durable competitive moat with its best-selling product, but I later found out that they did not patent the technology behind the product.
This glaring omission resulted in other companies quickly copying the company’s core product and then selling it at much lower prices.
With the company’s key product being commoditized, a price war then ensued.
The result? The company’s margins and profits plunged, as did its share price.
The lesson to learn here is that you should dig deep into a company’s business model to properly define its competitive moat.
Do not make the mistake of buying into a company with an illusory moat, as it can be both a costly and time-consuming error!
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Disclosure: Royston Yang does not own any of the companies mentioned.
