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Everyone made mistakes in investment. It makes no difference whether you are novice or experienced investors, mistake is simply unavoidable. Even legendary investor like Warren Buffett, made a mistake in investing in airline companies and dumped his airline stocks in 2020 during COVID-19 pandemic.

While mistakes are unavoidable, the likelihood can be greatly reduced by improving one’s knowledge about stock investing. In this article, I will not be talking about general mistakes such as not doing homework before investing, investing without a plan, treat stock investment like a game of gambling etc. These are very specific mistakes that made me lose money in specific stocks, so I reckon it can be very useful to share with readers.

1. Over-confidence in the industry that I’m working in

In case you do not know about my background, I’m an engineer working in oil and gas industry. In this regard, I do know more about how the oil and gas business work compared to others. This should put me in an advantage to make money from oil and gas stocks. However, the reality is just a complete opposite.

I have only ever invested in one oil and gas stock, and that is Armada (5210). I made the investment back in 2016, that was the time when oil price started to stabilize following huge plunge in 2014/2015.

During the period of oil price crashing in 14/15, all big oil companies were slashing capital investment. As an engineer working in the industry, I understand it takes years for a oil and gas project from early feasibility study until readiness for oil production. I was in the opinion that this would create a gap between supply & demand in future when existing oil field starts to age, so I strongly believed oil and gas stocks will make a strong comeback some day.

And back in 2016, Bumi Armada was doing a big FPSO project called Kraken. I did have some knowledge about progress of this project. So I decided in invest thinking that Armada would benefit following completeness of this project and comeback of oil and gas industry.

Well, was my logic wrong back then? No really. But because I already know the industry naturally from work, it made me over-confident to not looking into full picture of the company. When I said this, I meant the overall business and financial aspect of the company. After I bought the shares, Armada continued to slip into red because of performance in another business sector (OMS) and also their debt issue.

Employee is like a screw in the operation of company, important but small. As an employee, it is very easy to get insight into certain details of the industry, but that do not make you an expert in investment.

2. Getting too obsessed with NTA (net tangible asset)

Net tangible asset (NTA) is total asset of a company, less all liabilities and intangible assets (such as goodwill). You can also think of NTA as value of the physical assets can be liquidated inn case of company goes out of business.

By this definition, by buying a stock with price trading below NTA, it gave me a secured feeling. But think about that, what gives value to an asset? Asset is valuable because it can generate return, so value of an asset depends on how much return it can generate.

For Bumi Armada, when I bought in 2016, the share price was below NTA. Over the past few years, Armada has done so much impairment on assets because those assets are not able to generate the amount of profit that anticipated initially. As a result, NTA of the company continued to decline.

So in summary, value of an asset is merely a representation of sum of all its future discounted cash flow. Similarly, for a stock its value depends on how much money can be generated instead of how much asset it is holding.

3. Too much expectation about prospect from OEM to OBM

OEM stands for original equipment manufacturer and OBM means original brand manufacturer. An OEM company does not carry own brand name, their business is only to manufacture products on behalf of others.

When an OEM company grows until certain stage, it makes sense for them to think about switching to OBM, i.e. create own brand and manufacture for own brand. As you can imagine, OBM would have a much better profitability compared to OEM.

But there are two challenges here. First, creating own brand simply means you started to position yourself as competitor of your current customers. Second, building a brand recognition requires a lot of resources, in terms of both money and time.

The company that made me fall into this trip is IQGROUP. This is a company in LED lighting business. Another typical example is KAREX, a famous condom manufacturer in Malaysia. I never invested in KAREX, but it was a very famous stock back then. At the time of writing, these two companies are still not showing sign of recovering.

Don’t get me wrong, I’m not against company for putting their effort for switching business model from OEM to OBM. But from lesson learned, I would rather wait until the OBM started to bear fruit before investing.

4. Blindly follow investment gurus

I mentioned above that I made a loss from investing in IQGROUP, and I initially knew about this stock from famous Malaysian investor Cold Eye. In 2016, Mr.Cold Eye shared 30 share counters that worth to take a look, and IQGROUP was one of it. Given that this is a stock that is recommended by Cold Eye, this has also become one of the reasons that I put my guard down.

By writing this, I do not mean to offend Mr.Cold Eye. In fact, I wrote an article last month to recommend his book here. But there are two points I would like to make. First, everyone make mistakes, investment gurus are not exception. Secondly, the word of business is ever-changing. While advice from investment gurus might be correct at the time of recommendation, it may change due to unforeseen circumstances. There is no obligation from anyone to tell you that things have changed!

In my opinion today, investment gurus or bloggers are still a very good resource to search for stocks that are worth looking into. But that is just the starting point, thoroughly understand the company yourself and keep following up is own’s responsibility. 、

5. Rely on target price given by analysts / investment firms

I can say, for any stock investment that I’ve made, my buying price is lower than average target price given by all reputed analysts, investment firms or brokerage firms. But I still have stocks that make me lose money.

The people behind the firms writing the research reports are just like you and me, they are estimating value of a company. When I say “estimating”, that implies that can go wrong.

Don’t get me wrong and stop reading these research reports. On the contrary, if you intend to invest in a stock, I strongly recommend to read all of the reports for that stock. But it would be a big mistake to only ready the target price and just be it. Value of these research reports is the content, not the target price. The investment banks or brokerage firms have better access to resources to know a company better, such as directly to talk to management of a company. So make good use of those reports, and make your own judgement !

Summary

One of the most popular quote from Warren Buffett is: “Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1”. The most effective way to learn, is not from story of success but instead story of failure. I hope you find my stories useful to you. If you also have a mistake that you think can be helpful to others, do not hesitate to share and I would love to hear from you !