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Three Shares That Have Cost Investors a Fortune

Besides being penny-stocks, can you name one other similarity that these three companies, Ley Choon Group Holdings (SGX: Q0X), Manhattan Resources (SGX: L02) and United Fibre Systems (SGX: P30), share? The answer: for those who had invested in them since 24 May 2012, these three shares would have lost their investors at least 45% of their capital.

During the same period, the Straits Times Index (SGX: ^STI) had increased by 22%, as shown in the graph below.

3 shares cost investors fortune

Source: Yahoo Finance

Every $1,000 invested in Ley Choon, Manhattan Resources and United Fibre a year ago would have shrunk to $530, $375, and $333, respectively, today. In contrast, $1000 invested in the STI through a simple index tracker like the Nikko AM SG Singapore STI ETF (SGX: G3B) would have grown to $1220.

So, if you consider the opportunity costs of not investing in the STI, the losses for investors in those penny-stocks would have been even greater.

Now, Warren Buffett, chairman of American investment-holding company Berkshire Hathaway, once said, “Unless you can watch your stock holding decline 50% without becoming panic stricken, you should not be in the market”. He was implying that investors should be prepared to see such big declines in stock prices even to fundamentally strong companies.

But, these penny-stocks were not fundamentally strong businesses and they made shareholders lose capital because they couldn’t turn in a profit.

If we dig deeper, we’ll realise that in the five years prior to 2012, Manhattan Resources only managed to eke out some profits in three out of those five years. To compound the problem, that period resulted in cumulative losses of $23.7m.

It seems that Manhattan Resources, which provides management services to other companies involved with shipping, property development and lumber products, can’t really manage its own business well enough to churn out profits as it once again made a loss of $10.7m last year.

It was not difficult to see that Manhattan Resources was having trouble in earning some income even in May 2012. Investors who realised that the intrinsic value of a company’s shares increases over time with per-share-earnings-growth would likely have steered clear.

The other two companies were also having similarly difficult problems with their businesses. Ley Choon, which is in the business of providing underground utilities such as pipes, electric cables etc., had the same ratio of loss-making and profit-making years as Manhattan Resources had in the five years prior to 2012.

United Fiber Systems, which has a confusing number of businesses that includes provision of wood pulp, construction services and coal mining, had the worst record – four out of five years prior to 2012 were mired in red ink, with cumulative losses of slightly more than US$200m. The company continued to turn in a poor performance last year and had to be placed under judicial management in March 2013.

The three shares are available for purchase at very low prices; Ley Choon’s selling for S$0.195 apiece; Manhattan Resources can be bought for S$0.295 a share; and United Fiber is trading at S$0.017. Even though a low share price might make it seem like investors are getting their money’s worth with each purchase because they can accumulate a lot of shares, the low share price alone tells us nothing.

As investors, we really have to scrutinise the underlying businesses. A business that sustains chronic losses will very likely make shareholders lose their wallets in the long run. We’ll leave you with another nugget of wisdom from Buffett that seems patronisingly simple, but which carries valuable insights – “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns Berkshire Hathaway B-Class shares.