How to make recovering from investment losses easier?

Although we might feel quite clever or even smug from time to time, it is good to remind ourselves that we are not infallible and that we make mistakes.

In the same vein, it is quite impossible to make money in all our investments. Sometimes, we lose money. It is only natural. 





Of course, I always say that if we know our motivations for being invested, we will know what to do when thrown into any situation.

However, what if we were to suffer massive losses? 

Is the decision making process going to be any different?

Well, from a principled perspective, it shouldn't be any different. 

If an investment is no longer the investment it was, if it no longer fits our motivation for being invested, then, it should be removed from our portfolio. 

For many, this might be hard to do.

Avoid investing with borrowed funds.

I am assuming that no one likes a hard time. Normally, anyway. It could mean lots of stress, depression and sleepless nights. 

So, how do we avoid situations like this?

This might not be new to regular readers but if I were to distil what I have to say to just two points, they would be:

1. Do not invest more money than what we can afford to lose.

2. Recovery is made easier when we have a war chest ready.




Yes, AK sounds like a broken recorder but when the same things keep popping up, they are probably very important in one way or another and deserve some repeat mention.

Now, some might remember my experience with China Minzhong. 

I was convinced it made a good investment. 

The outcome was a good one but what if things had gone bad instead?

I said, "it might come as a surprise that I am not too affected by the possibility of a total loss if all allegations by Glaucus Research were proven true in due course...

"However, for people who have invested much more than they should have in China Minzhong, this could be a tall order. This is why I have said time and time again that we should always only invest with money we can afford to lose and not more."




For anyone who might not know what I am talking about or who might be interested in the blog post, here is the link: 

China Minzhong: What could happen and what to do?

In a reply to a reader and guest blogger then, I said,

"It is fortunate that I limited my exposure to S-chips to no more than 10% of my portfolio. It is unfortunate the exposure to S-chips at this point in time is in a single stock."

So, what was the worst case scenario then? 

10% of my investment portfolio could have gone down the toilet. 

Painful? Yes. 

Catastrophic? Not really. 

I could probably recover the potential losses in a year, give or take a couple of months and this brings me to the next point.

Losing 10% of all our bananas?

Not investing more money than what we can comfortably lose in the worst case scenario makes it easier to have closure in case things go wrong. 

However, it is my experience that it is easier to have complete closure if we are able to make up for the losses through future gains.

"Remember, we do not have to be 100% invested all the time although it is easy to feel a bit left out or a bit regretful that we are not putting more of our money to work as stock prices climb higher. Now, it might not be a bad thing to have a war chest full of cash and not do anything with it."

See related post #1.




I have had my fair share, maybe more than my fair share, of bad investments in my life as an investor. 

What I have shared in this blog post, distilled really to just 2 points, will hopefully be useful to anyone who is realistic enough to accept that investments can turn bad and how closure does not have to be too hard a process.

Related posts:

1. Revisiting AK's simple strategy with Charlie Munger.

2. Achieving $1 million in retirement funds.
"... without any money put aside, there is no way we would be able to take advantage of opportunities to buy on the cheap! Indeed, we might not even have to wait for a bear market to buy bombed out stocks as mispricing by Mr. Market could happen anytime ... "

Profitable Plots, EcoHouse, A2A and Macro Realty (The thought process of EcoHouse scam victims.)

UPDATE (3 AUG 17):
Macro Realty Developments Pte Ltd promised returns as high as 18 per cent yearly.

Singaporean police are investigating a property company believed to be involved in a ponzi scheme that conned hundreds of Malaysians investors out of millions.

According to an ABC report, the company is controlled by Australian Veronica Macpherson and received over A$110 million (S$119 million), mostly from Singaporean and Malaysian investors.

Although based in Singapore, Macro Realty Developments Pte Ltd offered investments to fund property developments in Pilbara, Western Australia.

Investors were promised returns as high as 18 per cent yearly.

The investment scheme was reported to have been heavily promoted in Singapore and Malaysia since 2014.

However, KPMG liquidator Hayden White told ABC that the scheme collapsed last year with creditors owed more than A$200 million.

...the alleged Ponzi scheme raised almost A$110 million from its 1,700-plus investors who were told their funds were being used for property developments but were instead used to pay the company's expenses, including the interest payments to early investors.

Source: http://www.asiaone.com/singapore/hundreds-singapore-and-malaysia-investors-duped-millions-property-company

Remember what is the question we must ask?
"How in the world is your company able to pay me XX% per annum when the properties are still being built and not generating any income?"

UPDATE (6 APRIL 17):
Profitable Plots, EcoHouse and now A2A. Why do people keep falling for these?

Lesson:
Marketing presentation plus a well decorated office is enough to make some people part with their hard earned money.

Lesson:
This is tragic. In our golden years, don't be too adventurous with money. It could turn out to be a case of misadventure.
-----------------
Remember Profitable Plots? It was a huge Ponzi scheme and money paid by Singaporean investors were used to pay investors in the U.K.

Timothy Nicholas Goldring, 60, was sentenced to seven years.

"Investors lost some $3.1 million in the Boron bonds scheme between November 2008 and August 2010. The two directors of land banking firm Profitable Plots promised 12.5 per cent in returns within six months. Most of the money ended up being used for unrelated purposes, including paying off debts to investors from the firm's UK business."

Source: AsiaOne, June 2014.

EcoHouse Group was international too and there were investors who gave money to EcoHouse in the USA as well:

Click to enlarge

Source: Alternative investments.

The blogger and investor has woken up to the fact that it is a scam, I believe.

I share this because I think it is useful to see what an average and reasonably intelligent investor's thought process might look like before he plonked down not an insignificant amount of money in an investment proposed by EcoHouse.

In summary? The investor

1. Liked the promise of very much higher returns.
2. Liked the relatively short investment horizon.
3. Noted a booming economy.
4. Noted the purported track record.
5. Noted the purported backing by the government.
6. Noted the purported 100% security of the investment.

EcoHouse Group was an elaborate scam and they knew how to push all the right buttons to get people to part with their money.

Most investors sucked in by the scam are probably swayed by points 1 and 2 above and were just nudged into the cooking pot by points 3 to 6. They probably didn't even bother verifying the truthfulness of points 4 to 6.

To me, all the justifications made to invest in projects by EcoHouse should have taken a back seat because the most important question to ask should have been:

"How in the world is your company able to pay me XX% per annum when the properties are still being built and not generating any income?"

Now, if we should be approached by salespeople or "advisors" promoting similar investments and I dare say that there are still quite a few around, what should we do?

"Seek as much transparency as possible. If they do not understand exactly how a manager is making money, do not invest. If there is a secret process that cannot be explained, run."

Read:
Samuel Israel, hedge fund manager of a Ponzi scheme.

Related post:
EcoHouse: Questions we must ask and people I detest.