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. Here are three simple tips:
1. Knowing your risk tolerance – head here
2. Take your time to invest using small positions – head here
3. Keeping a cash cushion
The first tip is about the importance of knowing our own risk tolerance.
The second is to size our allocations appropriately. When I kept the right allocation for Super Group, it set up a platform for me to stay focused on the performance of the company’s business and focus less on the decline in its stock price.
The third tip is about enabling myself to take advantage of lower stock prices.
For that, I keep a cash cushion. I have written about the benefits of keeping a cash position here. The benefits of a cash cushion are two-fold, in my view.
Firstly, it reinforces my comfort zone. With a small position (the second tip), even a 45% fall in a stock’s price did not trouble me much. With a cash position, I felt even more confident and less fearful about the situation.
Secondly, a cash position puts me in a good position to take advantage of any stock price declines – if and when I want to. It gives me valuable optionality.
As I noted earlier, it was my second position in Super Group which made the difference between the company being a profitable investment and a losing one. This was enabled by me having a cash cushion to take advantage of situations like these.
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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.