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Thursday, 18 June 2009

Downside to Value Investing?

The story

The controlling shareholder, Wong's Brothers, decided to delist Tsit Wing at an offer price of 27 SGD cents. The rationale behind the delist is due to poor interest in its stock (low market valuation that does not reflect its worth) and to facilitate restructuring by easing capital investment into the business as a private status.

Downside to value investing

Entering my 4th year of investing, I finally experienced a downside to value investing - voluntary delisting of an undervalued company. I have myself to blame (or at least someone, or something to blame) if I wrongly valued a company and overpay for the business. I will be glad to analyse what went wrong and avoid making similar mistakes.

But when a company is to be delisted just because its value is not recognised (that's precisely the reason why I invest in it), then I really feel like banging the wall all these years for nothing.

Delisting unvalued firms not equivalent to value trap

I must stress here that such misfortune is not tantamount to a value trap. Value trap occurs when an investor overpays for a business with the wrong assessment that it is undervalued.

The risk

Thus I just realised another risk of value investing - voluntary delisting. Though I did not suffer any loss on Tsit Wing, in fact I made a meagre profit of a few hundred dollars after factoring the lucrative dividends all these years, I am obviously not please to make a few percentage gains after these years of patience - the ROI is too low!


I pondered with the idea of not investing into companies with low liquidity and/or those whose controlling shareholder holds a unfair majority, but after cooling my head and thinking it through, I rejected this idea.

Firstly, one common attribute of an undiscovered gem is low liquidity. If many know about it, the volume will not be so low and the potential upside (or rather the margin of safety) will not be so high.

Secondly, even if the majority shareholder does not delist an undervalued stock, there is no stopping them from selling the business if an offer is deemed good enough.


I can only control what I can control. Those that I can't, I leave it to my two trusted aides, margin of safety and diversification to help me.

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