The Motley Fool

My 12 Big Investment Mistakes

This investment mistakes series carries on with another three embarrassing mistakes I made during my investment journey (you can find the previous part here). By highlighting these mistakes in detail, I hope investors can learn from what I had done wrong and take these lessons to heart to improve their investment process.

10. Cyclical industry

I invested a shipping trust just before the Global Financial Crisis (GFC) struck. Suffice to say that I had done my homework by reading up on the presentation materials offered by the trust, and also reviewed the associated material relating to risks and rewards. During the time I invested, there was booming trade across China and Asia, and shipping was doing extremely well. The Baltic Dry Index (a measure of the cost of transporting raw materials) at the time was also hitting a new all-time high of around 10,000 to 11,000+ in late-2007, signifying bullishness in world trade. The index is currently trading at just 850 as of this writing.

What I did not realise, however, was just exactly how cyclical the shipping industry was. When the GFC hit, global trade collapsed and so did the shipping industry. Needless to say, the shipping trust also performed very badly, and I sold out at a significant loss. From this experience, I have learnt to be extremely wary of cyclical industries.

11. High debt levels

High debt levels are always a problem for companies, especially those who either cannot manage their debt well or who are faced with competition and business issues. I invested in a company which operated in the oil and gas industry, and its business model was to gear up with a lot of bank borrowings and bonds in order to provide the working capital it needed to service its clients.

There came a point where I became extremely uncomfortable with the level of debt on the company’s balance sheet, as the bulk of their profits were literally being sucked away by finance costs. I sold out of the position (at a profit) but still classify this as a mistake as I was blinded by the strengths and merits of the company’s position within the industry but failed to account for the high amount of leverage needed for it to operate on a day to day basis.

12. Too many rights issues

One major red flag investors should watch out for is persistent rights issues. Companies may, from time to time, announce a rights issue to bolster their cash resources and strengthen their balance sheet. This allows investors to have a chance at buying shares at a discount to market price to increase their stake in a company.

However, a company I had invested in was doing regular rights issues to raise capital, and its business was also floundering. This indicates that the rights issues are actually value-destructive as the capital is being sucked up by operating expenses (and in this case, also finance costs). I decided to divest the position as I did not wish to throw more good money after bad.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.