When you get investments wrong
The horror of Pick n Pay’s update threw into sharp relief the risks that come with investing and what to do when you’re caught on the back foot
As an investor, being wrong is something that happens — often.
What matters is how you know when you’re wrong and what you do when you are.
Recently, I was buying some
Pick n Pay shares. Yes, they’d been beaten down and a rights issue was possible. But the price action was looking good and if anybody could fix this former blue chip it was the new/old
CEO, Sean Summers.
To me the risks were a possible R4bn rights issue (at the upside, I thought it would be less than this), the struggling consumer (though this is improving) and, of course, Shoprite*, South Africa’s food retail juggernaut.
Yes, maybe fixing the retailer was harder or would take much longer than even Summers expected, but …
All was good and the price was moving higher, hitting R27.77, putting me nicely in profit and leaving me feeling very smart.
Then came the horror update. A R4bn rights issue, debt doubling, breach of debt covenants and the listing of its crown jewel, Boxer. This was bad — way worse than I’d expected and way worse than the market expected, as we saw from the selloff.
So, I was wrong. This was an easy one to spot.
The key point is how you know you’re wrong. For this, I always follow the same strategy in my investing: I write down what I like and what I think the risks are.
With Pick n Pay the key risk was a possible rights issue at R4bn. The Sens update told me I was wrong, there was no need for me to revisit anything or try to understand what was happening.
I had a theory about the business and had acted on it and the reality quickly showed me that my theory was in tatters.
It’s immensely useful, having the two lists; when you’re faced with a collapsing price you don’t have to think just check your notes and act accordingly.
So now what? Well, exit. I sold all my Pick n Pay shares, taking the loss nice and quick. Since my selling, the stock is another 15% lower, saving me a bunch.
This is an important point. When it’s time to panic (and here it certainly was), panic quickly. Don’t wait around wondering if you should get out; get out quickly and live to invest another day.
Sometimes a price falls and you check your notes, and you’re not wrong. Now what?
Here, I double down on my research, checking my theories. If they hold up and the news hasn’t thrown them out the window, then there are no worries. This is more about a market reaction and frankly, maybe the market is wrong though that’s a bold statement.
I also list good things, so I can see what I like and if they’re starting to break. Both lists help me know what to hold and what to bail on.