As I cross over to a new year, it seems like a good time to look back at the investment decisions that I have made over the past year to find lessons that could be useful for other investors.
One standout event from 2016 was the buyout of Super Group Ltd (SGX: S10). In early November, a subsidiary of Jacobs Douwe Egberts BV (JDE) offered to fully acquire Super Group’s shares for S$1.30. At the buyout price, my total profit (including dividends) will be around 20%.
A 20% increase seems like a fair gain, but my investment in Super Group did not always look in good shape.
A look back at what happened
In May 2014, I purchased my first position in Super Group at around S$1.48 per share. Yes, that’s right; this is a stock price that is above the buyout price of S$1.30. On 23 June 2016, I added to my position in Super Group at a price of S$0.81. The second position I took has delivered an overall gain of 58%, thereby resulting in a positive return of around 20% for my total investment in Super Group.
If you had looked closely though, you may have noticed that my initial position in Super Group had fallen by a gut-wrenching 45% when I bought my second position.
How to invest fearlessly
It may seem like I have an iron stomach given that I had withstood a loss of 45% on my initial Super Group investment.
But the trick to keeping calm is much simpler than that, in my view. A long time ago, I found out that I had a lower risk tolerance than I had initially thought. I wrote about it in this article here. The gist of it is this: We might not know much losses we can take until we experience the real thing for ourselves.
As an analogy, think about falling off a bicycle.
If you have never fallen off a bicycle before, I can describe the level of pain that you may experience. But until you do fall from a bicycle, you would not feel the pain or know how you may react. Similarly, until we experience our stocks being crushed, we may not know how we will feel or react to it.
Understanding our risk tolerance is the first step to investing fearlessly.
From where I stand, it is important to come to terms with our own personal risk tolerance. Everyone is likely to have a different answer. If we do not know where we stand when it comes to stomaching losses, we may react the wrong way and sell our shares out of fear. In doing so, our portfolios could be damaged.
Stick around for the next tip to investing fearlessly.
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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 Chin Hui Leong owns shares in Super Group.