Peter's Perspective
12th February 2015 by Peter Churchouse

My Top 5 Worst Investments… Number 1

Originally I thought we should title this series “Five Investments I Would Rather Forget”.

But I can’t…

First, because I can’t forget them. They annoy me. Mainly for my own lack of attention and discipline.

And second, because those who don’t learn from their mistakes are bound to repeat them. So perhaps these disasters might help some of my readers from making the same mistakes that I made.

We all like to think we are pretty smart sometimes…

In my experience people love to share their stories about the time they made a lot of money.

Very few people own up to the disastrous investments they have made.

So I guess an investment that goes to zero qualifies as up there in the ranks of worst investments.

But it could be worse than that.

You think losing your investment is bad. But think about the investments that might have lost you a lot more than your original investment. That happens when you play with leverage.

Think about those retail investors who lost multiples of their investment in the recent Swiss Franc fracas. That’s what leverage and margin financing can do for you.

Fortunately I have managed to avoid that kind of “worse than zero” disaster. But I’ve still made some very costly mistakes along the way.

So in this edition of Peter’s Perspective, I’m going to share with you my first worst investment.

I hope you can learn something from my screw-ups!


#1: A Big Loss by Neglect


Many years ago I put some money (not a great deal fortunately) into an Australian listed company in the agriculture/natural resources space.

I was alerted to this opportunity through an investment research recommendation.

The investment case was compelling.

I did a little research into the company, made a few calls, but clearly nowhere near enough.

The company turned out to be a classic ponzi scheme… take in money from mom and pop investors, use that cash to repay and service earlier investors… then go out and do it all over again.

As with most Ponzi schemes it took quite awhile to come unstuck. Each round of new money coming in was being used to service the earlier loans and earlier investors.

The company finally blew up after a few years of this.

The Australian regulators undertook a detailed investigation of the company years later when the company collapsed. They found nothing wrong with the company’s behaviour. Give me a break!

About 43,000 investors lost approximately $1.8 billion Australian dollars.

I was one them.

Not quite in the Bernie Madoff league but big enough. And the court cases are still dragging on.

We equity investors are standing to lose about 99.9% of our investment. But the lawyers are doing well though! (Note: the lawyers always win)

A great many people who were very close to the company did not see what was happening. So perhaps I could comfort myself with this?

No, I should be kicking myself for my laziness.

Did I do a lot of detailed research into the company at the time of investment or subsequently?

No.

And perhaps I would not have seen anything amiss anyway. No else seemed to do so.

But that’s not actually the point to be made here.

Even the world’s best investors with unlimited research resources still get caught out. How about hedge fund legend John Paulson and Sino Forest for example?

No, my critical and costly error here was not following a basic stop-loss discipline.

By adhering to that simple rule, I would have limited my downside to between 25 to 35 percent at most of my investment.

In fact, I would have made a small profit as the shares soared before they crashed.

As it stands, my loss was total.

We wrote about stop losses in more detail earlier last month. You can find out more by clicking here.

Please consider implementing this strategy in your portfolios. It’s such a simple way to limit your losses.

I’ll tell you a bit about my next worst investment next week… in a nutshell, I didn’t listen to my own advice… and it cost me. A lot.

Until then…

Good investing,

Peter

P.S. In the upcoming edition of The Churchouse Letter, I’ll be bringing you one of the absolute best-in-class blue chip companies that you’ll find anywhere. It’s a must-have for any portfolio so don’t miss out.


Peter Churchouse Peter Churchouse is a widely respected analyst and commentator on financial markets with well over 3 decades residing in Asia. He spent over 15 years as Asia Strategist and Head of Research for Morgan Stanley as well as running a hedge fund. He shares his knowledge, insight and investment recommendations through his subscription publication The Churchouse Letter, along with his free newsletter Peter’s Perspective.
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