Pop quiz! Say you bought rig builder Keppel Corporation Limited (SGX: BN4) at the beginning of the year. Sadly, the shares would be about 25% from the beginning of the year. So, what would you do now? Would you double down on your investment and hope for the best? Or do you just sit this one out and wait? Doubling down on an investment is not always a straight-forward thing to decide. So, here are some guidelines to help. 1. Don’t anchor on your buy price Unfortunately, I have let one uncomfortable truth out first — and that is, the…
Say you bought rig builder Keppel Corporation Limited (SGX: BN4) at the beginning of the year. Sadly, the shares would be about 25% from the beginning of the year. So, what would you do now? Would you double down on your investment and hope for the best? Or do you just sit this one out and wait?
Doubling down on an investment is not always a straight-forward thing to decide. So, here are some guidelines to help.
1. Don’t anchor on your buy price
Unfortunately, I have let one uncomfortable truth out first — and that is, the share market does not care what you paid for the shares. Going back to our example: this means that when you look at Keppel Corp today, you have behave as though it was the first day you found out about the company and the share price.
It’s not easy, I give you that. But it’s necessary.
Bottom line, the basis to adding to an investment should not be to “get back even” with your buy price. It should be on basis of its business shape today versus the price that share market is offering today — regardless of your previous buy price.
2. What have you done for me lately?
Going back to our example with Keppel Corp: if we bought it at the beginning of the year, there has been three reported quarters since. Our job as investors is to get updated to the business developments of the company. Are there new risks that have emerged? Can the company sustain its advantages? Has the industry environment changed? Is there sufficient information in the last three quarters?
Thereafter, compare it with the share price offered today. Does the share price today sufficiently compensate any new risks that you see?
It is important that if you choose to add to Keppel Corp today, it should be on the basis of the updated knowledge of the business developments of Keppel Corp, coupled with fresh look at its industry.
Beyond that, Foolish investors should also weigh in on how much space Keppel Corp should take up in your own portfolio. No one company is infallible, so this is critical that you don’t over-commit your investment portfolio on any one company.
3. How well do you know the company and its industry?
One of the greatest advantages of the Foolish investor is to learn about a company over time. It is the accumulated knowledge that will make us better at our decisions down the road.
In line with this, the last question you should ask yourself revolves around how well you know Keppel Corp, and its industry. Gaining familiarity on the business cycles of the oil and gas industry may take years to understand. Have you studied the company long enough to commit a sizable portion of your wealth into it? If not, then perhaps you would be better off with a smaller stake.
Take heart that Keppel Corp is not the only investment opportunity out there. There may be other investment opportunities that can help to overcome your paper losses. And, if Keppel Corp turns out to be multi-bagger over the long term, you’ll always have the chance to add to it later on.
As investors, we cannot avoid all investing mistakes. Some factors, like the price of oil, will be outside our control. As such, there will come the time when we are confronted with the question of what to do with the investments that turn against us and goes into the red.
When that happens, do remember to ask yourself this question: what if I found out about this company today? Would I buy it?
Answering it truthfully (for yourself), could reveal your conviction on the company in a heartbeat. If you wouldn’t buy it today, you have to ask yourself why you continue to hold it. If you would, then you might be content to hold or add to it.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.