Learnings from key losses over last 12 years

(Update 9 mths later, I just wrote the article on learnings from wins too).

About S$3.5M from the more memorable badly made investments. That's since Jul 2011 when we actively started to track and run our portfolio of bonds, equities, forex and private equity. I am sharing because there are too few articles that discuss about investment losses and learnings. And I believe there is as much to learn from losses as there are from winners.  And a good investor needs to take into account both in order to succeed over time. 

Losses have always been on my mind esp since 2014 when we completely exited our business and switched from an entrepreneur mindset to an investor one. Prior to that, losses mattered less as our invested capital was always a small portion of our total net worth since most of our monetary net worth was tied up in human capital in the form of future salaries and in the company we owned. But once our invested capital becomes the main cash generator, tracking and analyzing losses and wins in investments becomes critical. 

Of course, as active investors, it’s not realistic to expect to make a gain in every investment. In fact, it is normal to have many bad calls/decisions and to lose money on some investments every year. What is desirable is to have strategies and policies that end up with more winners and maximize those winners while minimizing quantity and quantum of losses. And the big goal overall is to eke out a good return over the long term across entire portfolio value.

In the points that follow, I will attempt to group the key losses by asset type and reasons for the loss. Then I will share the learnings we gathered from that loss.  Also, to set the context, our investing experience has been good but not great (own yardstick) over the last 12 years to end June 2023.

1) Equity returns better than ACWI ETF 8+% total annual returns.

2) Fixed Income returns better than JNK ETF 3.5% total annual returns.  

3) PE investments (which are majority VC and startups) at  25-30% IRR which is strong but a lot of unrealized gains. 

So we feel we are doing fine because our returns more than pay for our annual expenses and are also above the financial planning targets we set 12 years ago. And the main internal controllable reason we achieved this is due to consistent asset allocation discipline. We are almost always fully allocated or even overallocated using leverage. So we never have cash dragging down returns. And almost always >>50% equity allocation. Second reason is a few decent single stock (eg. SEA, SHinvest, FB, GOOG etc)  & ETF selections with consistent & appropriate bite sizing . Would love to add a third on being able to cut loss quickly but cutting loss is not yet our strength as readers can see below.

Bearing all that in mind, here are our bigger memorable losses (in SGD). I exclude direct startup losses because the considerations and learnings are quite different but include PE or VC fund losses because fund manager selection mistakes can be pattern recognized more easily.

1) 500k - Bad fund manager selection on famous FMCG PE and a brand name European hedge fund. The 2 funds above were bought thru a private bank and they promptly went on to grossly underperform compared to peers and benchmark. So they had grossly negative alpha. 

The PE fund is still ongoing- sitting on 380K or about 50+% loss after 9 years of investing.  The fund did so much that don't make sense. Supposed to pick more stories like Charles & Keith, more china plays... instead they picked 2nd tier brands in australia, europe, SG , Middle east. And they reported greatly improved TVPI and IRR just when raising next fund a few years later - only to write portfolio back down once fund 3 was raised. And then later mgmt exited to a new buyer. Lesson here is fund managers are aligned to AUM which pays 2% annually much more than aligned to our returns. And be very skeptical of mark to market if it is not realized. Esp don't trust the numbers when fund is using it to raise new fund. Their incentive is to window dress their old fund numbers. 

Also one vintage does not prove anything. Go for fund managers that really have long track record. It implies a lot in terms of internal bench strength, professionalism etc.

The famous European hedge fund lost 20+% within 6 mths and closed down. Even the private bank that sold it had to say sorry. Lesson here? Beats me! for some reason the manager didn't even want to continue it. 

2) 900K - From 5 single bond & 1 recent fund losses. Back in 2013-2017, we were happily borrowing USD at 0.7% and then buying IG bonds at 3.5-4+%. This was a winning strategy until we decided to go after a bit more yield and went in Brazilian USD denominated IG credit and regional BB junk bonds. Unfortunately operation car wash hit,  there was the oil & gas crash worldwide and the regional single issuers had internal cash flow problems.

The first bond was the worst as we thought bonds can rebound and price action may behave like stocks. One huge learning is that bonds plunge at the slightest whiff of insolvency. And the risk reward is very poor for holding on or doubling down. At least for novice investors like us.  We watched the bond go down from 90+ to 70+ to 50+ to 30 and no buyer.  Could have sold along the way but did not. Big learning here.

Next few bond failures came over next 1-2 years. This time we learned to cut loss and got out at 70, 50 and one at 30+. 

Bigger lesson is individual bond failures sting badly and its better to get lower yield but be in really safe names. And safe means names we really know well in terms of their finances and jurisdiction.  So no EM bonds for us anymore even if IG grade. Bond professional investors are smart and they price risk reward carefully. So don't get too carried away by the absolute high yield of junk bonds.

Then after 5 years of careful bond investments that did well, we got greedy and listened to a CIO from a Swiss PB and got attracted to good YTM in Asian junk credit this year and bought early without conviction and multiple bites. We even levered for it as expected return over leverage was 7%. Just cut loss as it was never our intention to own more FI. Didn’t feel comfortable to deviate from plan esp once the fund fell by >5%.

3) 300K forex losses. Mainly due to long positions in the underlying asset which is overseas. For us it was mainly MYR, AUD, BRL. The first 2 were unavoidable as we owned a property in KL, have a malaysian startup stake in RM. We also invested in ASX stocks.  For the MYR, we already tried to hedge it by borrowing 70% but for AUD we did not as borrowing cost felt high compared to USD. But these 2 not so bad as our capital gain on the underlying assets more than offset the currency losses. But for BRL, it was a disaster as we used it to invest in IG credit from 2 Brazilian issuers. So while the issuer did not have any problems, the Brazilian real fell 30% or so. Ouch. 

Big lesson here is other than SGD and USD, we now don't want to own other currency as currency risk is totally unpredictable and foreign to us. Unlike equity risk. I would also add owning some JPY or EUR or GBP or AUD is a world apart from EM market currencies. The latter i will avoid at all costs. But the former, i am looking at JPY assets now as leverage is very cheap. Though I am reminding the tail must not wag the dog. Meaning leverage cheap is one plus but it is secondary to choosing the right asset, entry price and bite. 

4) 400K Option losses. We sell puts on stocks we want to own. We also buy calls on esp bullish positions. The losses come mainly from selling puts without enough research and using Private Bank ELNs. ELNs need min 100-200K. So we can't implement our multiple bites and average down strategy. This is very damaging if the ELN gets triggered as if we average down, the position gets very large for us. And if we lack conviction/get thesis wrong, the losses can be big. The other option losses come from averaging down on call options. Its the gambler mindset to want to average down and see a huge win if one gets its right. However, we have learned that call options must be used very carefully.  We now use the full value of the call as our position size and not just the option value. This prevents us from building too large positions in options that have time decay.  

5) 1.2M Equity Losses. This segment is largest but it’s put last as these losses come from 12 trades. So it’s $100K loss per trade. Smaller compared to bond or fund errors. And the reasons for the loss almost all boil down to 1 reason - 

Bought without enough research leading to a lack of conviction on the company. Insufficient research also means no strong opinion on fair value and momentum of company. This leads to us buying in too high and frequently too early and too many times. The above when combined with option losses is what accounts for most equity losses. And number 1 reason for lack of research is listening to  experts or friends. Most of the ideas that come from our internal synthesis and analysis tend to be good. Eg, our own call on QQQ/SPY last  year, call on SEA back in 2018, call on Shinvest, ifast, FB, lulu... etc etc. The ones where a smart professional does a smooth presentation and shares what they recommend tend to be disasters. The latest being the call on asian high yield early this year. 

6) 100k - crypto hedge fund invested in late 2021. Felt rich, joined too late, follow friend and without conviction. After 2 years, it’s also clear the managers aren’t good at generating alpha… riding the Alt coins market down in 2022 and failing to ride even eth and btc up this year.

So that's the sharing we have. The learnings from them can be summarize into

- Don't listen to experts or friends. Never buy because someone else said so and without deep knowledge. Buy because we formed a strong thesis on our own. Interestingly this is different from startup investing where following professional investors tend to be ok..

- Then research and think more until have conviction of where asset is going in near and longer term. 

- Have an entry and exit points for the asset

- Make sure ultimately correct bite sizing for that asset so we can stomach the ups and downs.

- Coldly execute and monitor. Don't ever panic sell or buy. Exception is single bonds, cut loss quick if have chance of insolvency. 

- If using fund managers, esp PE/VC,  go for tried and tested managers with long histories. Not just 1-2 vintage managers who may not have conviction and/or were just lucky to have big winner in one vintage. Also, don't blindly believe what they say esp on mark to market unrealized returns. Real distributions count not unrealized gains.

- Learn to cut loss faster. Applies to all assets except PE funds which cannot exit. This is one of our greatest weaknesses and we are trying hard to always clean house annually and keep to set rules on allocation. For single stocks, constantly review the stocks to reaffirm conviction to hold or add.

- Always stick to overall portfolio allocation which is planned and rebalanced every few mths. Don’t be tempted to move out of it if it’s working as expected.

- don’t borrow to go after smallish or mid size gains. Only leverage if returns are potentially huge to justify the fixed cost of leverage. Gains are not fixed, but interest payments are. 

-for cutting losses, treat each loss in isolation. $50-100k is still a lot of money to lose even if you made 2+m in gains this year. Don’t fall into the bad habit of saying overall made money, feel rich so it’s ok to hold out for rebound on a losing investment. Cut loss quickly once no conviction to hold. This is key to cutting loss well and right now, we are mulling over our China holdings thru this lens….

I hope the above sharing is useful to readers in that it exposes how much can go wrong when one is investing across multiple asset classes. Of course, we have many more profitable investments than losses last 12 years too. And we also have many more learnings from these winning trades/assets. The key is to combine the lessons from the winners and losers to get a sustainable long term investing strategy.