Ben Graham, the father of value investing, once said that investing is most intelligent when it is most businesslike.
However, human beings are, by nature, emotional creatures.
Where money is concerned, our emotions can overwhelm rational thought.
The most pertinent example is when we fall in love with our stocks.
Let me share two examples so you can learn from them.
The love affair begins
The year was 2010 and I discovered what I thought was an interesting company called Kingsmen Creatives (SGX: 5MZ) on an investment forum.
Kingsmen runs a design and fabrication business that helps with interior fit-outs for offices while setting up corporate booths at road shows and refurbishing attractions for theme parks.
The group’s clients include reputable names such as Universal Studios, DBS Group (SGX: D05), Gucci, and Ralph Lauren (NYSE: RL).
I invested at a cost price of between S$0.50 and S$0.575 as I was enthralled by stories of the founders’ struggles to grow the business, their keen eye for detail, and their focus on quality.
I was so in love that I missed out on the fact that t Kingsmen was merely a glorified contractor with no competitive moat.
To be sure, Kingsmen was not an easy company to follow.
The business itself saw lumpy revenues as it was order book-based and gross margins often came under pressure when it came up against smaller contractors who bid aggressively for projects.
The final straw came in 2019 when Kingsmen reported a weak set of earnings and stopped paying dividends..
The experience taught me that having a candid management team at the helm does not trump what was, at best, a mediocre business.
As Warren Buffett once said, when a manager with a good reputation meets an industry with a bad reputation, normally the industry leaves with its reputation intact.
Heart like a wheel
My next “sweetheart” was Straco Corporation (SGX: S85), a company dealing with tourism that owns assets such as the Shanghai Ocean Aquarium (SOA) in Shanghai and Underwater World Xiamen (UWX) in Xiamen.
Back in December 2014, I scooped up shares of the tourism-related company at close to S$0.74 after it had announced the acquisition of The Singapore Flyer the same year.
At the time, Straco’s management promised to revamp the Flyer to improve tenant occupancy and to request permission to renovate the Flyer, thus giving me the hope that the financials would improve.
However, frequent visits to the property over the years showed various tenants slowly vacating the premises.
Along the way, the Flyer was also hit by “technical difficulties”.
Operations were shut down for two months back in 2018 and were suspended again for more than two months in 2020.
Disappointed with the lack of progress in revamping the Flyer and with COVID-19 forcing the shutdown of its China and Singapore attractions from 2020 onwards, I sold my shares at S$0.55 in March 2021, thus ending my love affair with Straco.
In hindsight, I put too much hope in what I saw as an iconic piece of the Marina Bay skyline.
Get Smart: Reality bites
Owning up to your mistakes is the first step to becoming a good investor.
While it’s painful, it’s better to be aware of your errors and avoid them in the future rather than ignoring them and repeating them over and over again.
To avoid these pitfalls of emotional investing, it’s crucial to approach investing with a rational and disciplined mindset.
Here are some key strategies that we, as investors, can use instead:
1. Set Clear Investment Goals
Before you start investing, it’s essential to define your financial objectives. Are you saving for retirement, a child’s education, a down payment on a house, or simply building wealth? Knowing your goals will help you choose appropriate investment strategies and asset allocation.
2. Diversify Your Portfolio
It’s important to remember that despite our best efforts, not all of our stock picks will be the next multibagger. By spreading your investments across different industries and companies, you can reduce risk. Some companies that seem interesting can be tempting to invest in but higher in risk. What we can do instead is to limit our investment in and prioritize investments in companies with solid fundamentals and a proven track record.
3. Regularly Review Your Investments
The competitive landscape in which a company operates is constantly changing. It’s important to regularly review your portfolio to ensure it aligns with your goals and risk tolerance. Consider factors like market trends, economic indicators, and your personal financial situation.
Disclosure: Royston Yang owns shares of DBS Group.
