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.
One dangerous bias to avoid
When a 45% fall happens to a stock we own, there could be a temptation to double down on our investment.
But, the term “double down” – or “averaging down” – implies that we are taking into consideration the price that we paid for the stock before. In my case with Super Group, that would be the aforementioned price of $1.48 per share. If I had considered my initial purchase price of Super Group, it would have acted like an “anchor” for any subsequent decisions when it really shouldn’t.
As investors, our main consideration should be what is happening to the business of Super Group, not what stock price we had paid before.
If Super Group had suffered a permanent damage to its business, I might not have invested in the company again. But, as positive signs had started appearing at Super Group’s business, I decided – on the basis of the performance of its business, not the stock price I paid before – that it was worth additional funds from me.
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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.