As noted a few times, one of the mandates I gave myself in this blog was to examine previous trades, including trades not taken. As a stock market investor, I see my job simply as to produce low-risk alpa as cheaply as possible; just like a German car manufacturer aims to produce quality cars while always minimising cost. So to do that, part of my process is to analyse past decisions and see what could be done better.
The purpose of this post is to conduct a postmortem of my decision on HHY.
I bought and sold HHY last year and made zero profit.
My last note on HHY was September 2013 and the price was then 37.5c, so let's use that as the base line for analysis.
HHY is now 17.5c, however there have a been further capital repayment of 3.59c (ex 24 September 13) and 25.8c (29 July 2014). The Internal Rate of Return (IRR) of what I have left on the table is 27.4% p.a. That's huge!
HHY has performed has a lot better than expected: it has chunked out lots of capital return quickly, thanks to the repayment of the Maher Terminals investment which I may or may not have determined might occur if I did more homework. So while I knowingly left money on the table, I had no idea I was leaving 27.4% p.a. behind.
Anyway, from a return perspective, I made a mistake.
From a risk perspective, I feel a little better about my decision. Looking back at that last post, my decision to exit was based on not being comfortable I would not get the return I want if everything did not work out fine and not having a big enough position to warrant the time to get to know the underlying investments better.
To minimise risk, one approach that has worked very for well me has been to pyramid into positions... I buy a bit if my initial research stacks up, a bit more as I get more comfortable and keep buying all the way up to my target allocation. This has the dual benefit of helping to overcome paralysis by analysis (I actually tend to get on with my decision a bit quicker now as I'm only starting with a smaller stake) and if I realise I am wrong after doing further research, the overall % damage to my portfolio is very small. The flexibility of fluidity in my decisions has been a fantastic addition to my investment process.
So I was clearly wrong to dump HHY on the basis of having a small position. This ought to have been the trigger point to do more research and buy more stock if I believed the story was sound, and not just flippantly say I can spend my time better elsewhere.
This is not the first time I have left a stock because I didn't think the upside was enough only to be surprised by how well the stock performs. AIX and GPG come to mind immediately. So perhaps, I need to get a little better at trust, which also means doing more homework. Often cigar-butts are not massively underpriced, but underpriced just enough to be of little interest to people yet actually provide solid returns.
And to be honest, one of my personal problems is I get bored with situations. Often, the better thing to do is be patient and just walk away and let competent management do it's thing.
Kristian
Disclosure: no position in HHY
Refreshing to see a post from an investor about opportunities missed, don't see that very often. I can relate to this for a few reasons. First the pyramid approach has improved my performance over the years. I find that although I think I know a stock well at time of purchase often in hindsight I don't. My better performers often start well with handy gains after a smaller purchase. Then after a few months I dig a bit deeper and find I still think the stock is cheap and buy more because I know the company better at this stage. On the other hand sometimes I find the stock doesn't start well, which forces me to dig really deep and occasionally I will see that perhaps it wasn't the great buy I originally thought. Because my stake is smaller it is though much easier mentally to take a loss and get out. HHY I used the pyramid approach to build a big stake and did well. However GPG I fell into the trap you described. I waited for probably over a year for the gap to NTA to reduce and nothing happened. The GPG structure was a bit complicated. I should have done the research and could have got comfortable. However I got impatient with the situation, lazy about the further research, and overcome by self doubts and just got out only to see the stock perform very well!
ReplyDeletecouldnt agree more...
ReplyDeleteTalking about GPG, have you noticed that the new GPG - MVT - has recently been building a stake in HHY? Its last disclosure indicated that MVT held 6.1% of HHY's issued capital. Who knows, there may be a puff or two left in the HHY cigar butt after all !!
ReplyDeleteI have noticed as I own HHY and MVT. It is worth noting MVT is only $40 mill and would like to grow in size so shell companies like HHY could be the answer like they used MMX for recently. I also own AKF which seems a more likely target first.
ReplyDeleteThe share price is 17c v. NTA of 23c. However, the underlying assets are now mostly Corey and Hyne. The largest investment is Corey, which looks to be uncertain, at least in timing, judging by the latest annual report. Hyne has a marked down value in the balance sheet. Possibly, the economic NTA is higher than 23c, which would be a good reason for MVT to be buying.
ReplyDelete