MEG Case Study: 3 Investing Mistakes I Made And What I Learned From It
This week, I decided to liquidate my position in Megaworld (MEG) at a premium price of 14% based to what I believe is its intrinsic value.
I held the investment since July 2015.
I tracked my overall performance on a year-on-year basis versus to a buy and hold strategy and here's how I performed.
Overall Results From MEG
Tab. 1 Overall results vs. my results
In reference to Tab. 1, I managed to beat MEG's performance by 6.5 and 12.4 points in the first 2 years respectively. But in the 2nd half of 2017, I lost by 17.1 points.
Overall Results From MEG
Tab. 2 Cumulative return overall results vs. my results
But looking at the cumulative returns in Tab. 2, I managed to beat MEG's performance by 6.7 points until the time I sold my position.
I also managed to beat MEG's performance by 8.1 points in terms of CAGR. If you bought MEG in 2015 and held it until the time I sold my position, your investment would have declined by 0.5% annually compared to my actively managed gain of 7.6%.
In addition to this, I also got double the returns of a 3-yr LCY gov't bond (currently at 3.8%) during the period.
Even though it sounds I did a good job of beating MEG's performance resulting to a realized gain of 14.8%, a 7.6% annual return is not something to cheer about. So I deserve all those tomatoes.
The reason I said this is because in retrospect, I realized I did 3 investing mistakes.
In this post, I'll discus the 3 investing mistakes I made and what I learned from them so that you can avoid committing the same mistakes I made.
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Mistake # 1 - Not Excluding The One-Time Gains/Losses From The Valuations
I bought my first few shares of MEG in July 2015 based on a 13% earnings yield and a P6.49 intrinsic value. So I bought my first few by applying a 25% margin of safety.
The problem is that in 2014, MEG recorded a one-time gain of P9,384 million. Have I done a deep research and excluded that gain, I would have made a more accurate estimate of intrinsic value of P4.28/share.
This is the first mistake I made. I initially thought that I'm getting a bargain at P4.88. But it turned out to be wrong. I should be buying the stock at Php 3.21.
But in retrospect, MEG's price didn't trade at those price levels. The lowest traded price happened on August 2015. It traded at P3.80/share - a 12% discount to intrinsic value.
I found myself in the other side of my valuation. MEG turned out to be overvalued.
The next thing I know, the price dropped and continued for a couple of months. I did a lot of buying to lower my average. I was thinking that I was buying at a bargain. But as the days passed, I realized that the continuous price drop was a way for the market to efficiently price the stock near its intrinsic value. And it did eventually. Price equated to value.
As more days passed, the price went down further at P3.80/share - From overvalued, it became undervalued.
- Lesson learned - If you're valuing stocks, consider excluding one-offs that can give a significant impact on earnings. You should look at the core business itself and determine how the business is generating cash. You should also be keen on companies that has a lot of one-offs that make it look like a normal part of the business' earnings.
Mistake # 2 - Not Selling When The Price Meets Intrinsic Value
I revalued the stock in 2016 based on 2015 annual filings and arrived at an intrinsic value of P3.35/share. The lower valuation was based on owner earnings calculations. It turned out that MEG burned P1,331 million of cash in 2015 compared to prior year's generated cash estimated to be at P3,318 million. This resulted to a lower estimated intrinsic value.
In Fig. 2, you can see in retrospect that the best time to buy the stock happened in January and the best time to sell happened around August.
Due to my high average price, I just bought more shares at lower prices to lower my average cost and make it close near the intrinsic value. With almost no margin of safety considered, my investment was subjected in a high risk situation.
Most investors would just cut their losses, wait for the bottom and grab that opportunity to buy. But we all know that there's uncertainty in the market. We really can't predict where the stock will go - or where the bottom will hit. What I'm certain I can do during those times is to manage the risk as the price moves. I don't like the thought of losing money so I bought and bought more to lower my risk.
When the price hit at P5.xx/share, I knew back then that I had to sell but I felt greedy at that time and wanted more gains. I didn't sell.
When it started to drop, I went along with the ride. Price met value again around December. Had I sold before the drop happened, I could have realized some gains. I made a mistake of not locking in gains.
- Lesson learned - If intrinsic value is met and the stock continued to rise, ask yourself if you feel satisfied in the gains, if so, it doesn't hurt to sell and repurchase when value meets price again.
Mistake # 3 - Not Being Able To Do A Better Job Of Risk Management
When I bought my first shares at P4.88, I bought more everytime the price dipped a few points. I also didn't consider the fees and commissions. I bought for a minimum of P5,000 just to drop my average down a few points. This is a mistake I realized during the course of the period.
- Lesson learned - Averaging down should be done if a significant drop is measured during the investment period. It's more effective to buy huge quantities at very low prices than buy small amounts at a not-so-significant price declines.
That being said, I did a bad job of managing my risk.
Fig. 3 illustrates the prices and the months where I should have bought and sold for maximum returns.
If I had patiently waited for the market to price the stock at discount to intrinsic value, I could have saved a lot of money and bought a significant amount of shares on a one-time transaction rather than buying shares every month.
I could have done a better job of capital allocation if I bought around August 2015, bought more on January 2016 and sold around August 2016. After that, I can accumulate again from January 2017 up to May 2017 and sell around this time - or possibly hold and wait for a better opportunity to sell.
- Lesson learned - Always consider applying a margin of safety for maximum risk management.
To become a better value investor, these 3 mistakes I made should be avoided at all cost. To avoid them, a stricter rule should be followed no matter what happens. Emotion is also a big contributing factor and shouldn't get in the way when deciding for your investments.
Despite all these mistakes, I still managed to make a decent return out of it. But thinking back, I could have done a much better job if I had sticked to my own rules.
Now let me ask you, have you felt these mistakes at some point in your investment journey? If you do, I want to know your thoughts about it. Share them in the comments section below.
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