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Why China Minzhong’s Investors Are Not Necessarily Right

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The recent drama with vegetable processor China Minzhong (SGX: K2N) looks like it might come to a close soon.

Indonesian company Indofood Sukses Makmur Tbk is looking to acquire China Minzhong at S$1.12 per share and currently holds almost 60% of the vegetable processor.

It’s been a real rollercoaster ride for shareholders of China Minzhong. On 26th August, short-seller Glaucus Research released a report which contained damning allegations of misconduct on the part of the company.

Its shares proceeded to tumble by 48% to S$0.53 on the day itself before trading was halted. The halt was eventually lifted on 2nd September, which saw China MInzhong’s shares jump by 112% to S$1.13 on the back of Indofood’s acquisition offer that was announced just prior to the lift of the trading halt.

Putting all questions on the accuracy of Glaucus’s allegations aside, it seems increasingly unlikely that China Minzhong’s shares would face anymore declines given the amount of shares that Indofood already controls and the intention of the latter to continue buying up shares of the former at the price of S$1.12.

In this scenario, China Minzhong’s investors who did not sell in the initial panic would no doubt have given themselves a pat on the back for a job well-done. Those who were fortunate enough to snap up some shares of the company when it was free-falling on 26th August would also likely have made out like a bandit.

So, it’s great to have made some money but that begets the point. It’s perfectly fine for investors to pat their own backs, but only if they did so for the right reasons.

You see, investing, at its core, is a game of probability. There is nothing that is certain in life, which is why, when we invest, we aim to utilise tools we have at our disposal to stack the odds of success in our favour.

Even Warren Buffett, who’s arguably the world’s best investor, thinks in terms of probability. Buffett’s long-time business partner Charlie Munger once described him as “automatically think[ing] in terms of decision trees and the elementary math of permutations and combinations” which are all hallmarks of probabilistic thinking.

The probabilistic nature of investing brings me to an important chart for investors that was shown in James Montier’s book Value Investing – Tools and Techniques for Intelligent Investing:

Good Outcome Bad Outcome
Good Process Deserved Success Bad Break
Bad Process Dumb Luck Poetic Justice

We all want to be in the quadrant in the top-left corner. But, when there’s a roll of a dice involved – as it is with investing and life in general – there will be times when a good process leads to a bad outcome.

It’s just a fact of life. But, that doesn’t mean we shouldn’t focus on a good process. In fact, we should focus on the process. More often than not, a good process will likely to good outcomes.

Going back to China Minzhong’s case, the key question for investors then should have been: ‘Was my process good?’

If they felt that China Minzhong’s business model was sound and that Glaucus’ report was lacking, then holding or even buying more of the shares of a company with a fundamentally sound business – but temporarily depressed share price – would likely have been the ‘Good Process’. Enjoying the subsequent price rebound would then rightly deserve the proverbial pat-on-the-back.

On the other hand, if they felt that Glaucus’ report was strong and brought up glaring red-flags about China Minzhong’s business model that they hadn’t noticed beforehand, then the better decision should have been to sell the moment they could. It would still be the right decision even if they had missed out on the price rebound.

The fact that China Minzhong’s price recovered after the short-attack does not necessarily mean that the decision to hold at that point in time was right.

Focusing on the viability, quality, and legitimacy of its business based on the presented evidence and then coming to a conclusion to buy, hold, or sell – that is right.

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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 doesn’t own shares in any companies mentioned.