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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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Anonymous Anonymous said...

Important thoughts and insight
I’ve many times over the past few years with Sarbanes oxly thought to give up on my nano cap deep value investing as many have delisted. Crooked management has been the driving force. DCU was recently attempted to be taken away from share holders at .70 from management.

Good luck

22 June 2009 at 11:52  
Blogger Market Uncle said...

I won't give up on value investing too. Its just another risk I got to live with.

23 June 2009 at 21:35  
Anonymous Anonymous said...

Though I have given up on value investing, I will still share my views, and see if you can take back something.

If the price of the stock keeps going down, in my humble opinion, the main culprits are supply, demand and psychology. If there is no demand for a stock, the price plunges, no one picks it up again despite the undervaluation. So what happens? The company chooses to delist and does it successfully. So what do you do? Well, I can say one thing, accept it. It's part of value investing. All these delisting comes as a package, don't get discourage, value investing requires persistence, and strong belief. Continue reading, and monitor the company like a hawk. Guard yourselves against fraudulent practises. If you manage to do the last phrase, you protect most of your capital and save yourself some heartaches. But, pls, next time when price goes down, there is a underlying reason for supply and demand, monitor it like a hawk. Don't take it for granted. A dear mistake I made in the past, don't blame value investing.

Hope this helps

6 July 2009 at 22:53  
Blogger Market Uncle said...

I'm not disheartened or blaming anything or anybody. I'm still as hopeful as always and will continue to stick with value investing. That's the only rationale approach I agree with anyway.

6 July 2009 at 23:03  
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22 October 2009 at 09:27  
Anonymous Dennis The Menance said...

Yes their is a downside to value investing. It requires thoughly researching each and every stock to determine if their is some very good reason why a stock is trading at a very low price.

2 December 2011 at 05:17  
Anonymous Penny Stock Reviews said...

Their are stocks like petsmart that traded at 2 dollars a share 11years ago now the stocks almost fifty. Also pricesmart traded at about 7 dollars a share about seven or eight ago now its almost around sixty dollars. Their are other examples Apple computer traded ar only 5 dollars a share in 1998 now its over 400. These stocks are being held quite a long time generally speaking I would say four to six years would be about right as far as buy and hold go. I have a website where I have been following stocks under five dollars. I generally hold my stocks anywhere form 2 to 6 years.

2 December 2011 at 06:43  

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