I have been doing some thinking about my investment in SGH, it has had a significant negative impact on my SMSF, I am up over 14% on my benchmark, but would have been up 22% without the impact of SGH - so its pretty important for me to understand what went wrong.
Was it a bad decision or bad luck?
When I go back and look at my spreadsheets, research and analysis for my initial parcel bought in September 2014 for $6.14, i had decided they were the best of the businesses in the sector and also the best value at that price. I dont think it was a bad purchase at that price at the time, so to that point, not a bad decision.
I briefly considered selling out when SGH hit $8, it was then trading well above my calculated IV, but after some consideration I decided there was future growth likely to support the share price and I stayed in.
Then I bought more in the retail allotment in April 2015 at $6.37 - at the time SGH had recently hit its high of $8.00 and was still trading at over $7.50 so it looked a sensible decision to pick up another parcel - in hidsight it made things worse because I had averaged up into a company that was about to fall off the edge of a cliff.
I was away overseas on our gapyear when events started unfolding with the Quindell acquisition, so my focus may not have been as sharp as it should, but reading back thru the announcements around late June 2015 there is not anything too alarming coming into the public arena. I obviously wasnt happy with the price drop and issues arising but felt that the company would be able to ride them out.
The next big fall came in late November 2015 when the regulatory/legislative changes were proposed by the British government and was shortly followed by guidance about profit downgrades, by this time the market had enough and the end was nigh!
In hindsight the opportunity for me to exit and take a substantial loss, but protect my remaining capital was between June & November 2015 - but I chose not to and left my capital invested in SGH.
So the big question for me is, can I avoid future capital losses like this and if so how?
I guess step one is should I have invested at all? In hindsight I still think it was a reasonable decision with the information I had at the time, I think I have improved my analysis over time and I am not sure I would buy into a company with similar metrics now. So my increased rigour, expanded metrics and better understanding of businesses may be enough to avoid another SGH - but i have no real certainty about that!
Step 2 is should I have sold at $8, was that my big error? Again, in hindsight I dont think so, if I sold out of companies where their price had exceeded my initial IV then my portfolio would be much worse off. You dont get multi-baggers by selling when they go up 50%!
Step 3 is should I have not taken up the retail allottment? Given what I knew at the time, and the range of recent trading it seemed like a good opportunity and as per the prior point, if I had not taken up similar offers from other companies I have invested in my returns would be much lower.
Step 4 Should I have sold in Jue 2015 when SGH first gapped down significantly? The same problem arises, if I assume that is where I went wrong and in the future sell out of businesses that are subject to some bad news and the share price falls heavily - if I applied that retrospectively to my portfolio the losses would be much larger. (NWH is a good example)
Step 5 Was the mistake in not selling when the final straw came in late 2015 and any support for SGH evapourated? By then the capital loss was so significant that it wasnt something I even considered, trouble is that fall came pretty quickly and there is no certaintly that I would have been quick enough to get out anyway.
Writing down these thoughts has probably helped clear my thinking and my summary would be that there is probably not anyway for me to avoid the risk of a catostrophic outcome like SGH, sometimes I will get it wrong and lose money, but overall my strategy still sees me performing well ahead of my benchmark.
The main thing is that my initial analysis was probably sound enough, but there are a couple of aspects that I think were poorer thinking and I have already eliminated them, one was a sense that it was a sector that I should have exposure to, so I went looking for the best business to buy in the sector. I now no longer consider sector exposure as a metric. I only look at the quality of the business. I am also much more wary of debt and while it wouldnt have stopped me investing initially, it may have prompted me to exit sooner.
(in hindsight I could have avoided the whole debacle by paying better attention to what Tony Hansen had to say about SGH!
http://www.eternalgrowthpartners.com/node/205
