Wednesday, June 16, 2021

Lesson Learnt on Capitulation

At the height of the pandemic in early 2020, my portfolio was bleeding red ink (as with everybody else's portfolios) and I thought I should take measures to stabilize the portfolio. I looked across the stocks I owned and assess if there were any names that would have bankruptcy risks. I did own pandemic related names such as SIA Engineering and SATS. Some of which are still being affected today. 

STI's collapse and rebound, as per global stock markets

I took the opportunity to restructure the portfolio, sell out some names in the same sectors and deployed new money into interesting names which I always hoped to own. By and large, I believed I made good decisions and the portfolio has since rebounded. There was one name which I took a major loss because it did have bankruptcy risk. It has debt to equity ratio of more than 300% and net-debt-to-EBITDA almost doubling from 4x to 7x. 

I bit the bullet and sold it, taking losses only to see it rebound 50% from where I sold. Well, that's investing. You cannot predict the future. But this post is not about lamenting how I got whipsaw-ed. On hindsight, it is still the right decision to sell because if it did go belly-up like Hyflux, then I would have lost not 50% of my capital but 100%. This was the second biggest realized loss in my portfolio after Hyflux, which I did lose 100% and with these two painful memories, I hope to write down the lessons learnt on capitulation. Here's the process:

1. Reassess the situation.
2. Cut loss if the situation is bad.
3. Redeploy to a better name playing the same theme.

Reassessing the situation means looking closely at the business and the balance sheet. Has the business environment changed so much or is the business being disrupted such that there is no chance for the business to come back? Do they have the strong balance sheet to weather the storm? In Hyflux's case, it didn't have the balance sheet strength. It was obvious since the day I invested, yet I held hope that maybe the Singapore Government will lend a helping hand to save Olivia. It did not happen. Hope is a dangerous thing in investing.

So the related lesson is also never to hope. When things are looking bad, don't procrastinate. For this second name, which is a small resource company listed in Europe, I did not have the determination to cut fast enough. Thing started to unravel in early 2020 and the share price fell from EUR15 to EUR10. I should have cut then but again, I procrastinated. It fell all the way to EUR6.8 and I decided enough was enough. Remembering my experience in Hyflux, I figured that if I don't cut, it might go to zero.

For a while, the decision looks right, it continued to fall to EUR5 and I felt good. But has the stock market started to rebound, it rally past EUR 6.8 and is now back at teens. So, looking at it now, the outcome is such that even more procrastination would mean earning back a bit of money (it is still below my buying price though). However the business situation has not changed. It is still laden in debt, its position is further weakened by the pandemic. At this moment, my decision to cut was not great, but it could still turn out to be right in a few years. 

But more importantly, was my decision to redeploy the money.

The resource name was invested years ago with an investment thesis that certain niche commodities would be vital as the world develops and China was leading the boom at that time. There are actually bigger names to play the same theme. So while I cut losses and completely sold out of this name, I redeployed the capital into similar stocks. It turned out the be a great decision as these higher quality stocks also recovered as global stock markets recovered. 

As such, reassess, cut loss and redeploy would be a good strategy the next time you made a mistake and would like to move on. Do not let loss aversion cloud your mind. That said, it is much easier to invest a smaller amount to make sure your losses are never too big to begin with.

One final note on resource companies and high debt companies. Perhaps it is just much easier to avoid them. If you have to buy resource, commodities and energy names, then just go for the biggest fish or use an ETF. Hope this helps!

Huat Ah!

Friday, June 04, 2021

Books #13: Chris Voss' Never Split the Difference

Chris Voss was a FBI hostage negotiator turned consultant and I chanced upon his book on Kindle. It took quite a while to finish as I was busy with other stuff. Overall, it was a somewhat satisfying read although I probably need a lot of practice to become a better negotiator. Here's his lessons for winning negotiations.

1. Listen, mirror and label. Chris first lesson was simply these three words. We should listen to what the other party wants. Then mirror and label their emotions. Once they feel that they are heard, we can then negotiate. He encouraged to use phrases like, "it seems like..." and "I hear that you are feeling...". These are labeling techniques to confirm what has been said. It validates the other party and allows for the conversation to progresss.

2. Accommodator, Assertive and Analyst. The next three words are as stated. They should all be read as nouns to describe people. Once we understand their style, it is easier to negotiate with them. Accommodators are people who likes to agree. They tend to be silent when they are actually angry. Assertive people needs to be heard before they can hear anything and analysts can be won by numbers and facts. Most people are multi-facet so it is important to know when they change from say assertive to analytical.

3. Ackerman model. The best part of the book is probably the introduction of the Ackerman model and other tactics to negotiate salaries or when buying cars. There are a few interesting rules like let others go first and then when you state your price, be prepared to raise it just a little each time. The final number should also be an odd number like $35,505 to give the impression you are being squeezed to the last dollar.

It was just a somewhat satisfying book because I felt that it did not capture everyday negotiations. We do not negotiate for the release of hostages in our daily lives. We are negotiating with family members, bosses, colleagues and it takes a slightly different attitude because in the end we want win-win solutions. That said, hopefully the three lessons above are useful enough and can be applied at work or at home successfully. 

Huat ah!