Billionaire investor Warren Buffett often uses interesting terms when describing matters related to investing or finance. In his 2012 annual letter to shareholders, he used a tennis term called ?major unforced error? to illustrate a mistake he made when he invested in some utility bonds.
In tennis parlance, an unforced error is when a player makes a poor shot even when not under significant pressure ? in other words, it?s simply the player?s fault. It means pretty much the same in investing ? it?s an analytical error made by the investor.
(At this juncture, it may be good to elaborate on…
Billionaire investor Warren Buffett often uses interesting terms when describing matters related to investing or finance. In his 2012 annual letter to shareholders, he used a tennis term called “major unforced error” to illustrate a mistake he made when he invested in some utility bonds.
In tennis parlance, an unforced error is when a player makes a poor shot even when not under significant pressure – in other words, it’s simply the player’s fault. It means pretty much the same in investing – it’s an analytical error made by the investor.
(At this juncture, it may be good to elaborate on this a little further. When investing, good decisions can sometimes result in bad outcomes – that’s a function of luck and wouldn’t be considered an unforced error. It is bad decisions that are classified as unforced errors.)
I have been investing for more than a decade now and have made many unforced errors. What I’ve realised is that, many of these errors actually deal with my underestimation of the impact that commodity prices can have on a business.
My investment in MTQ Corporation Limited (SGX: M05) can be a good example. The Singapore-listed oil and gas services provider was a stock with a small market capitalisation back when I first noticed the company in 2009. At that time, its share price had just started recovering after the beating it took during the Global Financial Crisis.
MTQ’s operating profit was not greatly affected even after the price of oil collapsed during the crisis. The company was then trading for around 5 to 6 times its trailing earnings, which I found rather attractive.
I decided to invest in MTQ and the company’s shares then went on a good run for a few years, earning me more than 300% in paper gains when they peaked at nearly S$1.80 in price in mid-2014. I didn’t sell. MTQ’s profits had grown so significantly that even after becoming a four-bagger for me, the stock still had a PE ratio of 9 or 10.
Given that I had only invested in MTQ after the price of oil had recovered in 2009, I did not take into consideration how much the price of oil can actually affect the business. Alas! With oil falling by more than half since mid-2014, MTQ’s business started reporting falling (even negative) earnings in recent quarters. Of course, the share price followed the business and tumbled sharply from its all-time high in mid-2014. .
As of the time of writing, MTQ’s shares are trading at S$0.585 each, and that’s not far from where I first bought them back in 2009. Although I have not lost any of my invested capital in MTQ even after its recent stock price collapse, the investment is still a major unforced error on my part (with the benefit of hindsight) as I did not see the huge impact that volatile oil prices can have on the business.
With the MTQ experience in mind, I now put in even more effort to understand why a company is growing and what can help or hamper its growth. There are cases where management would think that whatever growth their company has experienced is due to their managerial talents. But, a rising tide can lift all boats too. It’s our job as an investor to separate those with real skill from those who are merely fortunate to benefit from a rising tide; it’s also crucial that we try to have a feel of whether a tsunami is on the way.
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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 writer Stanley Lim owns shares in MTQ Corporation.