Friday, October 07, 2022

Lessons Learnt from 4 Biggest Losses - Part I

Most people brag about their investment wins. It is just human nature. We need to show we are better, so we get status, pride and get to lead and enjoy the benefits that get accrued to leadership in tribes. In prehistoric times, alpha males who can hunt, have muscles, can fight well tend to get the best food, the best shelter and the women and produce more offsprings and win the natural selection competition. 

As such, bragging is biological.

Alpha male primate can even get cookies!

Today, it is about money. You can be bald and fat but if you are a billionaire, then prestige and goodies and some women will come your way. So we brag about investment wins to showcase that. We buy cars, watches, houses and NFTs to display wealth. It is imperative, biologically and socially.  But what is truly and fundamentally beneficial is to learn from our losses. That is how we get better as investors. That is what this post and the next is about. 

As I look at my portfolio, there are now four big loss-making positions which I felt compelled to write about. The losses amount almost to six digits and you can imagine how it pains to write about them. But I believe there are many lessons learnt and I hope readers can really takeaway some of these so as not to repeat them. But trust me, it will be easier said than done! Here are the losers in no particular order:

1. Overseas Education, negative c.30%, I have blogged about this stock.

2. SIA Engineering, negative c.20%, pandemic victim, I have also briefly blogged about this.

3. Under Armor, negative c.70%, hit by overvaluation and the pandemic.

4. Cinema related small cap name, negative c.80%, looks like I will never recover my capital.

As I looked at the four painful names, I see similar mistakes and recurring lessons. While all four names were somewhat impacted by Covid-19, it was not just the pandemic. It was overpaying i.e. valuations, it was ignoring small cap risks and not understanding all the issues and most importantly, it was not getting the sizing right. Actually, sizing is so crucial so let's talk about that in more detail. 

What I got from Google wrt to sizing

For me, the sizing mistake relates to all four names but it had the biggest absolute damage in the first two. As such, despite the percentage loss was only 20-30%, the outsized impact on the absolute damage was big and this is the nutshell lesson about sizing:

We must size the bet such that we can still sleep if we lose 80% of the amount invested. We must also think in terms of percentage of the portfolio. In most professionally run portfolios, there are hard limits like 10% for one position but for personal accounts, we may want to size it lower depending on our own psychological construct and the amount of absolute loss we can bear.

Let's use so numbers to illustrate the above. First we must determine how much we can afford to lose in one position. I will arbitrary put that as S$40,000 which is close to half of Singapore's median household income. (Imagine when you need to tell your better half that you lost half a year's income on one stock. This should be good pyschological threshold ;) Looking at my actual losses, since a position can go down 80%, that means the maximum bet on one stock should be c.S$50,000. Of course that also depends on your portfolio. If this is more than 10% of your portfolio, then perhaps it should be smaller. 

There is also a minimum size for a position which relates to transaction costs. When I first started, round trip (buying and selling) transaction cost can cost minimally $100 which means that any position should be c.S$10,000 otherwise it doesn't make sense as it costs 1-2% every time you do some buying and selling. Well, the world has changed and transaction costs can go to zero with some brokers, but still, sometimes it's not and it pays to know what is the optimal minimal size for you.

Going back to my mistakes, if I sized the bets correctly, I could have reduce my absolute losses by half and the pain will also be halved and I would not have to endure the wrath of my better half! When you can size correctly, losses cannot hurt your portfolio and your family peace and you can sleep better at night. There is a lot more to talk about sizing which perhaps deserve its own post but let's stop here for today and we shall discuss in the next post:

1. Valuations 

2. Small cap issues

3. Unknown risks

There are two rules in investing. First rule: don't lose money. Second rule: don't forget the first rule.

Huat Ah!


  1. hi, could you explain about the small cap issue?

    1. Hi nafis, basically the small cap issue is the additional risk that comes inherently with investing in small cap stocks. This could be low liquidity, less alignment of interest between managers and minority shareholders etc. Sometimes we can express the same bet by buying the bigger names so it doesn't make sense to buy the smallish players. Eg why buy Under Armor if you can buy Nike or Adidas?

      I have explained more in the follow-up post below: