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Breaking free from toxic investments - Part 1

Updated 19 Oct 2018 – By Contributor - Focus Malaysia


Risks and mistakes are part and parcel of life – investing is no exception.

It is inevitable for investors to face the decision of having to cut loss at some point in their lives. It may be painful to our wallet (and ego), but much like breaking free from a toxic relationship, it is a necessary evil. In the long run, making a sound judgement to cut loss will help us avoid graver financial losses, dodge opportunity costs and keep our sanity.

A common dilemma, however, is whether we should sell now or wait for our investments to rebound. In a FocusMalaysia exclusive, here are some signs that cutting one's loss may be a better alternative, according to some of the industry players.

Your own circumstances

When your investment is taking a toll on your financial and emotional wellbeing, consider disposing it, says Peter Yee, property coach and author of property-related books like 'Property Secrets: Create Massive Passive Income and Build Immense Wealth'.

Yee recalls having a 60-year old student with a property that had a negative cash flow of RM1,000 a month. Although the property price had appreciated, the rental was still not able to cover the loan installment, and it ate into her savings for one to two years.

“Properties are supposed to support someone financially, but in this case, it became the opposite. The person is supporting the property,” said Yee. He advised her to sell the property, which would net her a gain of RM150,000. She could then use the proceeds to buy a RM150,000 apartment that gives her a monthly rental income of RM600-700. “This property will support her retirement needs and thus become an asset to her,” added Yee.

The quality of asset

Understandably, there are times when the situation isn’t so straightforward.

Yee acknowledges that there are property investors who are willing and able to forsake cash flow temporarily for future capital gain. In this instance, the soundness of their decision will hinge on the location of the property. “Some properties have a negative cash flow and also no hope for future potential capital gain. If you have this kind of property, you should cut your loss and reinvest the proceeds, even though your financial situation is strong,” he said.

How can you tell whether a property is promising or otherwise? The future pricing of a property depends on supply and demand. “There may be a high supply of high-rise properties near you, say thousands of units within a 5km vicinity, and demand for your property is very limited. It will take many years for the property to appreciate,” he explained.

The current property downtrend is leading to the formation of a renter’s and buyer’s market, creating a very competitive environment for many sellers and landlords. While one can lower rental prices and wait for the property market to rebound, this is contingent upon one’s holding power throughout the period of negative cash flow.

In Yee's experience, the oversupply situation can take three to five years to recover. Investors who want to keep their properties would need to ensure that their finances are able to tide them over during that timeframe.

Check the fund manager’s performance

If you’ve invested in a unit trust, the person who manages your investment also plays a key role in your decision to cut losses. “For example, you have decided that you would like to invest in a Chinese equity fund. There are a number of Chinese equity funds out there – who do you choose to put your monies with? After you have decided on a fund manager, we would advise investors to give the fund managers sufficient time to perform, say two to three years,” explained Fundsupermart Malaysia general manager Wong Weiyi.

“If the fund is losing money, do look at the performance benchmark of the fund, which can be found in the factsheet. If the fund manager is performing better than the benchmark, then the fund manager is still doing a good job,” she added.

If the reverse is happening consistently, then the investor should cut his/her losses and select a better Chinese equity fund.“An analogy that I like to use is to imagine that you are a football team manager, and you have a striker who has been performing poorly over a long period of time. Would you still pay for his hefty salary and hope for him to turn around, or would you just fire him and hire another better striker available (cut loss)?” advised Wong.

Personal story retold: What I learnt from cutting my losses

33 year old pharmacist Loh Sao Voon has been investing in fundamentally sound and dividend-paying stocks that he calls growth stocks, in addition to speculative stocks for six years.

A diligent student of the stock market, he’s been making a decent profit with his investments all these years, until a year ago, when the stock market was inundated with negative news flow.

“In August 2015, the 1MBD financial scandal was exposed, causing our Ringgit to fall to more than RM4.00 against the US dollar, and our stock market was badly hit – I remember the KLCI index fell 200 points in just two or three weeks in August 2015 alone, which was a lot,” recalled Loh.

Unfortunately, the stocks that he was holding onto were not spared from the equity bloodbath. His portfolio plunged by some 30% within a month. “It was my first time encountering such poor sentiment, there was just so many bad news. The market usually recovers shortly after a negative event, like the disappearance of MH370, but this wasn’t the case. Everybody was saying how ringgit might fall to RM5 against the greenback, and how oil prices might reach a low of USD20 per barrel.”

In spite of this, Loh bought more speculative stocks at lower prices, in the hope of averaging down his initial investment cost. When their prices continued to head south, he felt the need to change his strategy. “I realised that something was wrong, and I had to do something. It was emotionally draining to see your share prices going down every night,” he said.

Finally, in September, he sold all his six shares consisting of growth and speculative stocks.

He might have lost some money from the saga, but he gained a greater appreciation for some of the classic investing wisdom. “I remember that in August, a lot of people said that with the financial scandal going on in the country, our country was going nowhere, it was better that we sold everything. I followed their view,” mused Loh.

“Looking back, I should have kept the growth stocks. It is true that when investing in the stock market, you must be a contrarian – when everyone was fearful, I should have been buying more stocks that were fundamentally sound. I appreciate this saying even more, now that I have experienced it for myself.”

He felt that he did the right thing by disposing speculative stocks during market turbulence, as the prices had still not recovered as at this writing. On the flip side, he wishes that he was rational and focused enough to keep stocks of good companies, which have withstood the test of time.

After losing a five-figure sum last year, the humbled investor could now fathom why some investors do not touch speculative stocks to begin with.“I was lucky in the past few years, I made money from buying such stocks. But this one incident from last year alone wiped out more than what I had gained over the last few years,” he confessed. He now avoids speculative stocks, and says that even if he were to touch them again, he would implement a very stringent cut loss point.

After liquidating his portfolio in August, Loh took a few months off to reflect on his mistakes and strategise his next move. He entered the stock market again after Chinese New Year. This time, his strategy was to invest in fundamentally strong companies that award shareholders with dividends. Among his favourites are consumer-staple companies like Nestle and Dutch Lady.

Loh bought Nestle and Dutch Lady for about RM74 and RM49 respectively in February. Both stocks have appreciated by about 19% and 21% respectively to around RM88 and RM59.52 as at writing. “I focus on stocks that I can relate to,” he explained.

“I noticed that people are still buying Milo every year even though Nestle has increased the prices. Milo’s competitors are nowhere as strong as they are, and Nestle’s Nescafe is a household name and market leader. The same is true for Dutch Lady. This is in contrast to telcos, where the phone and data plans are getting cheaper by the year, and yet they have to give customers more value,” he enthused.

This article was brought to you courtesy of Focus Malaysia, a leading business weekly that publishes authoritative news and analysis on issues relating to corporate affairs, personal wealth, economics and current affairs.

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