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And that concludes my worst investment ever. By Garth Mackenzie

Posted by: Garth Mackenzie Posted on: 2014-09-16


I’ve just cashed up and closed the worst investment I have ever made. I thought I’d write about this experience to tell you about it and to extract the lessons that I have learned from this experience, in the hope that whoever reads this article might take the lessons on board and avoid making the same mistakes that I did.

 

The investment was in a company called Dawn Properties in Zimbabwe. I made the investment in 2007 at the height of the boom times in the previous bull market. I worked at BoE Stockbrokers at the time, and we took a bunch of clients to Victoria Falls where we were presented to by one of the local Zimbabwean stockbroking firms that we’d partnered with. They lined up a great weekend for all of us and we were presented to by a number of investment industry experts and analysts who sold us the story of how undervalued Zimbabwean assets were under the abysmal government of Robert Mugabe. The line of thinking was that Mugabe’s reign of power was dwindling and that even if he remained in power, his age counted against him and that the country was likely to see a brighter future.

 

The company I invested in – Dawn Properties – is a company that holds some of Zimbabwe’s finest tourism property assets. The investment case for buying this company was the fact that tourism would likely recover quickly if the political situation in Zimbabwe improved, and that the insurance replacement value of the assets on the balance sheet was nearly double what the market capitalisation of the entire company was. Hence I was buying the business well below the value of its tangible net asset value, never mind the potential upside if the tourism business in Zimbabwe recovered.

 

So I invested R500 000 into the shares of Dawn Properties and fastened my seatbelt for the ride.

 

Fast forward 7 years and little has changed in Zimbabwe, particularly in the tourism sector. Mugabe still rules by hook or by crook and the economy of Zimbabwe remains stubbornly weak.

 

My investment in Dawn Properties has been illiquid and difficult to trade out of, but I have finally managed to exit the entire investment in the past week with a loss of R233 000 or 47% over seven years.

 

I maintain that the fundamental reasons for considering the investment in Dawn Properties in the first place remains reasonable. But what annoys me about the decision that I made in 2007 was that this was essentially a punt (gamble if you will) on a number of “ifs” “buts” and “maybes” coming to fruition. These are not terms that should normally come into play when making sound investment decisions.

 

It was admittedly a gamble. And ultimately a gamble that has failed to pay off.

 

I was 27 years old at the time I made the investment. I’m 34 years old now. I still have plenty of time on my side to generate substantial wealth over my lifetime, so this loss is certainly not the end of the world.

 

What really bugs me about this however is that I should have known better and should have stuck to sound investment principles. Sound investment principles take a long term view on a bunch of fairly high probability outcomes. No ifs, buts and maybes.

 

The loss is fine and I accept it. But what is really hard to swallow is the opportunity cost of this investment. There were several other opportunities to make safer, sound investments that would have yielded significantly better returns, even after the market crash of 2008 and 2009 is taken into consideration.

 

Imagine if I’d instead invested in Woolworths at R23.00 per share (up 250% since then), or Aspen at R37 per share (up 800% since then). These are just two examples of companies that have yielded solid returns and were sound investments back in 2007. There are many others.

 

A common line of thinking is that you can take greater risks when you’re young as you have more time to recover if things go wrong. This this is actually nonsense reasoning that people use far too often to make poor investment decisions with unnecessarily high risks. The counter argument to this is that you have time on your side when you’re young and therefore a slow and steady approach to building wealth has more time to work for you, and to consequently generate greater returns over time, with less need to take unnecessary risks.

 

I like the latter approach. Simon Brown of JustOnelap.com recently wrote about this very point in his weekly column in the 11 September edition of Finweek. Youth is no reason to take excessive risks.

 

So the lesson I want to pass on to anyone reading this article is to remember that you don’t need to try and find “the next big thing” when making investment decisions. Usually companies with a long history of delivering reasonable returns will yield better results over time than trying to pick the next big thing. Unfortunately for every “next big thing” investment that succeeds, there are hundreds of others that simply destroy investor capital. Slow and steady compounded returns add up over time and you can get very wealthy if you harness this approach to investing correctly.

 

By Garth Mackenzie (Founder and Editor of TradersCorner.co.za)

 




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Reply to this post 1 hendrik möller Thanks for sharing your worst investment. There is no better teacher than experience. We are a little bit older than you and sincerely hope that the trading experience we gain also via your website is adequate to turn our short term investments into positive grades!  

Reply to this post 2 makbul  your are an honest. 

Reply to this post 3 Johan Thanks for sharing Garth it means a lot to new traders 

Reply to this post 4 cumstad You were even lucky to get something back in the country of Mugabe! 

Reply to this post 5 Dick One day the original reasons for your buying the share/country are going to come true. Opportunity cost is your real loss! 




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