This series continues to explore different types of investment mistakes.
It is very useful to keep a diary of your investment mistakes as a way of documenting them.
I have kept such a journal since 2005 (when I started investing) to avoid repeating the same mistakes.
Here are another three types of mistakes made and what investors should do to avoid them.
7. Industry characteristics
This mistake relates to an investment I made in a Singapore-listed Chinese pharmaceutical distribution company.
At the time, there were no fixed regulations set by the authorities on the prices for drugs sold by distributors.
Meanwhile, the company in question had also just completed an acquisition of another drug company to expand its drug product pipeline.
The rationale for my purchase is based on the company’s enlarged distribution network and product portfolio, which should garner a higher level of sales and lead to higher profits.
What I did not count on was for the Chinese government to implement price controls on key drugs.
As a result, selling prices ended up being capped, thus limiting the profit potential for its new product portfolio.
Hence, it is always important to carefully study an industry to assess the economic, legal and political risks.
8. Insufficient competence to understand the industry
Back in 2006, I invested in a company that was in the business of manufacturing semiconductors.
This company had reported 11 consecutive quarters of revenue and earnings growth.
It also acquired a subsidiary in Thailand which further boosted its overall capacity.
Because of these developments, prospects looked bright for the company.
Although I sold the company for a small profit, I still classified this investment as a mistake.
The problem I faced was that the industry was tough to understand with a lot of technical jargon and technological changes.
I am not an electrical engineer by training and this fact made it all the tougher to understand terms such as “DRAM” (dynamic random-access memory), the competitiveness of the product line(s) and how competitor moves may shift market share away or erode the company’s competitiveness.
Remember that if the industry does not fall within your circle of competence, it is best to avoid it.
9. Selling too early
This may not sound like a mistake at the outset but it will snowball into a major one if you realise the opportunity cost of not being vested in a big winner.
I purchased a shipping company back in 2005 but later sold it at a meagre profit of 10% despite the company enjoying strong tailwinds and reporting healthy and growing profits.
By mid-2007, the same company was acquired and taken private at a share price which would have yielded me a 340% gain had I held on for another two years.
Investors should beware of falling into the trap of selling a great company just to “lock in gains”.
You would be missing out on the massive upside (in terms of both dividends and capital gains) in the years to come if the business continues to grow without stopping.
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Disclosure: Royston Yang does not own any of the companies mentioned.