I have previously written a few articles on Focus Lumber and the timber industry and the links are below.
Examining the earning power of Focus Lumber
Finding the real numbers in timber & furniture stocks and some key observations
Timber to furniture – The thing with currency, on value chain, Hevea, Homeritz & more
I think there’s plenty of opportunity to make us a better investor by learning from our own mistakes as well as others. Talking about our own mistake is never an easy thing to do because admit mistakes is always hard. Our reputation is on the line and it is like opening an old wound. We would rather bury it and move on. However, if we treat it as a failed experiment, an opportunity for growth, it will make it easier for us to introspect what has happened, how it happened, and how we can prevent it from happening in the future.
Here’s a brief history. Focus Lumber needs little introduction. They are involved in plywood manufacturing and export a majority of their products to recreational vehicle industry in US. I bought Focus Lumber around Feb-March 2015 when it was selling for an average of $1.40. My investment thesis was that they should worth at least $2-2.50 with all those cash sitting in their balance sheet plus their earning power of $10-13 cents per share, as you can refer to the link above. This was all before the export stocks euphoria.
USD to MYR exchange rate stayed sideways for much of the 1st half 2015 before beginning its ascent rapidly starting in June and in particular August and September, skyrocketing from RM3.70 a dollar to the peak of RM4.40 in a span of fewer than 2 months.
Since the currency trend is favorable to businesses that export their products overseas (especially US), there was a huge sudden surge of interest for export driven stocks sweeping through the market. And rightly so, most exports stocks subsequently report a better than usual quarterly result. Furniture stocks were the epicenter. With some rising as much as 300% within a few months. As rising tide lift all boats, Focus Lumber went from RM1.50 to RM3.00 at its peak.
The rapidity of the surge caught most investors by surprise, especially me. I am not a macro investor so I never factor them into my investment thesis, not that I have the ability to predict them accurately anyway. But I quickly adjusted to this surprise and treat it as a positive catalyst and decided to sit back and let the market does what it’s best at.
When FLBHD was marching its way towards RM2.00, breaching it, hitting RM2.50, and making its stride towards RM3.00, I was checking the share price everyday, perhaps more than usual to make sure I don’t miss the action. By night I would update my portfolio to see how much paper gain have I made for the day. Sitting back and feeling proud of myself. Or rich I should say.
This is the timeline of what I was telling myself during the period.
The rest is history.
So what went wrong? How did I talk myself into holding it at $3.00 when I valued the whole business at no more than $2.50 just 10 months before that? Because I did not write the whole damn investment thesis down. But how can I forget something that I’ve decided 10 months ago? It’s not 5 years but 10 months. And I realized it is not the length of the time that matters but what I’m stuffing into my brain that turns out to be the problem.
Throughout that whole 10 months, in fact only 5 months (August to December 2015), that’s where all the actions are, I was stuffing my brain with useless information – junk like daily price movement, absorbing news talking about price, feel good writeup written to extrapolate, and other useless prediction. None of these had anything to do with the business. The business has not changed. They still bring in logs, peel, dry, trim, and sand them before those trucks sent them to the port. All these things crowded out my initial thesis because I failed to write it down and allowed price movement to seep into my investment process.
Although I was constantly running figures in my head during the surge, crunching enterprise value, earning power and average earnings, trying as much to stay prudent and remind myself the quarterly figures are distorted by currencies, the movement of the share price somehow impaired my ability to think rationally and make decisions. The only thing that went my way is the entry price that provides enough margin of safety. This could have turned out to be a lot worse.
The takeaway here is not what’s the fair price of FLBHD (Munger and Buffett couldn’t agree what’s the fair price for Berkshire Hathaway), but the importance of having a solid investment process and how market movement can easily affect our ability to make rational decisions. Writing down investment thesis before buying gives you many advantages. It serves as a checkpoint to make sure the buying decision is sound and prevents madness buying. If you can’t put the reasons into a few sentences, that’s a no go. It also prevents you from anchoring your decisions to price movement, like how it happened to me. Decisions should be based on price relative to its value, not the movement of the price. And lastly, by writing your decisions down, it becomes a great opportunity to learn what went right or wrong, and how you can do it better the next time. If you can’t measure, you can’t improve.
Nowadays I would write down my decisions before buying any stock, including stocks that I have bought and still own over the years. As the old saying goes, prevention is better than cure, I abstain myself from checking the share price to just once a week and being selective with what information I put into my brain. No doubt I will continue to make more mistakes down the road, but hopefully not the same thing twice.
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Ricky, I think your decision to hold may not be necessarily bad. True, you’ve missed out the chance of realizing a huge gain through a catalyst event, but I think so far you’ve made an annualized dividend yield of 7.5% on your cost (correct me if I’m wrong) plus a “modest” annualized capital gain of approx. 10%, not bad at all!
Unless, subsequent to the plunge, you found other multibagger opportunities that you can only watch, then you might wanna consider it a costly mistake. Otherwise, I’d actually congratulate you on this investment.
I know, it’s always psychologically disturbing if Mr. Market came offering you at RM3 yesterday but you didn’t take it and he comes back today and offers you at only RM1.70. Your “neural algorithm” told you not to sell for very objective reasons (at least according to you in your post), so there’s no need for regret at all. If anything, many value investors’d agree that FLBHD is still undervalued at this price, on top of your 17.5% annualized returns so far.
Thanks Fung. Yea you are right, result wise, it is still a decent return, but process wise, I think plenty to reflect and improve on, hence this post as well. I tried not to let the outcome (the fact that FLBHD is less than $3.00) affect my assessment of my investment process. Means even if FLBHD is selling above $3 today, I hope I can come to the same conclusion that I should have done better i.e writing thesis down & not influenced by price movement.
Be honest, I don’t think you have a process problem. You DID write it down anyway, at least in your blog.
I think the lesson from this case is about the big-picture thinking. To me, the big-picture conclusion on FLBHD and other wood-based manufacturers from their performance over the past 2 years is: over the long term, their earning power is subject to many fluctuating factors, hence it has been and will always be lumpy, therefore a sensible investor should pay a lower-than-average P/E multiple on the estimated earning power. Consumer-staple stocks have been fetching higher P/E valuation for an obvious reason — their earning power is much more predictable and smoother in growth pattern.
Sometimes we may be too meticulous in research and forget about the bigger picture, which is akin to longer term thinking. I think that is very very important when it comes to investing. Detailed research is a process to help us making big-picture decisions. If decision making also become too meticulous, it is self defeating.
I strongly recommend “The Base Rate Book” authored by Credit Suisse, especially the CFROI section. It is really helpful in developing our bigger-picture analysis on companies. https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&source_id=csplusresearchcp&document_id=1065113751&serialid=Z1zrAAt3OJhElh4iwIYc9JHmliTCIARGu75f0b5s4bc%3D
This is one of the best posts I’ve read at i3investor in a while (decided to write a comment here instead because a blog platform’s archiving system is way superior). Posts are only useful to myself and others when the writer writes honestly and sincerely – there will definitely be important lessons and insights to be learned. Quite unlike the braggarts who only write about their profits, and never about mistakes.
My opinion: I’d say you holding out and not selling at the lower price of 2.50 was okay. Because we simply don’t know how high it might go. We have seen this kind of movement before – of a counter doubling, AND THEN tripling in price. But there “should have” (always easy to say) been a Sell when the rebound hit a brick wall…and then fell below the 2.50 support.
Hi Mat, thank you. Yea overall it turns out okay so far. I wanted to focus on my process, in a sense, even if today FLBHD is trading at $10, I should still admit mistakes on my end due to my broken investment process. So this reflection is process focused regardless of the outcome.