Recently, a Singapore based water treatment company called Hyflux ran into financial trouble. You can read more about it from the news, but in summary, they borrowed too much money and couldn’t service the loans. Investors who lent it money by buying perpetual bonds are now at risk of losing everything. You can read more about the case in news media.
I came across an article written by an opposition political figure who spoke about the need to rescue the company to save the mom and pop investors who bought the bonds. Basically, his key points are as follows.
1. The government agencies ripped off Hyflux by first locking in Hyflux into long term fixed price contracts, then distorted water and electricity prices.
2. It is the government’s fault that they didn’t do their due diligence on whether Hyflux would be a sustainable provider.
3. Not bailing out the company is not “a fair way of dealing with the losses of 34,000 investors who put in $900 million of their hard earned savings”.
I have a lot of opinions about points 1 and 2, but they are outside of this blog’s scope, so I would not touch on them. I would want my readers to focus on point 3. Here’s the quote in full.
Because the honorable minister said “no bail out”, many other people just follow and shout “no bail out”.
It does not seem to be a fair way of dealing with the losses of 34,000 investors who put in $900 million of their hard earned savings.
The key message behind this line is that the government should bail the investors out by refunding them, some way or another. In another news article, we see how some of the investors were at a public protest demanding aid from the authorities.
I feel very strongly against this mindset that you deserve “fairness”. Some people call this phenomena an “entitlement mindset”.
I want to take this opportunity to drive home a key message of my blog.
When you lose a lot of money, it is usually your fault.
When you lose money on investments, it is usually your fault because you did not do your homework.
Do you know the situation at the company? What is the debt level like? How was the income per share like? Are you really “investing” or are you gambling?
You say that you invested in this company because it is a “strategic national asset”. How much money will you pay to buy the whole company over? $1? $1,000? $100M? Or is it $100T? Do you know how to estimate the value?
To improve in anything, it is necessary to first acknowledge that you make mistakes. I’ve made mistakes in my investment journey and I will never say it is someone else’s fault. Not the management’s fault, not the government’s, not society’s, but my own fault for picking a bad investment.
Let’s say you invested in Hyflux stock or perpetual bonds and you want to review why you made a mistake. Let’s take a look at the company’s financial profile in 2016.
My colleague introduced me to Hyflux stock in 2016. He said he invested because it was an important national asset. That sounded reasonable to me and I knew that water is a scarce resource across the world. I got interested and took a look. However, what I saw scared me. The immediate red flag was the consistent, negative cash flow.
Picture yourself owning a factory and you hired a manager to run it. He tells you it is earning a profit every year. However, every year, you see the factory’s bank account decreasing. Would you believe that the company was “making a profit”?
There are rare occasions where this is an acceptable scenario. But as passive investors who want to keep things simple and easy to understand, I don’t want to get involved with a business that has a falling bank balance 6 years in a row and is asking for a loan now.
The second red flag for me was how the “Return on Equity” (ROE) figure fell and stayed really low. I usually demand that the companies I invest in have a minimum of 10% ROE. The full reason why this is so is complicated and I will not cover it in this post.
With these warning signs in place, I politely declined my colleague’s hot tip. Today, his stock has been suspended indefinitely. While there is no price quoted for the company, I suspect he has lost close to his whole investment in the company’s stock.
Lessons from others’ mistakes
Painful as this saga is for those involved, there are a few lessons for the rest of us.
1, qualitative analysis needs to be backed up by numbers. You cannot just throw around words like “strategic”, “innovative” or “monopoly” without the numbers to back up the analysis. If your entire analysis of a company consists of statements that “they are big so they will survive” or “it is important to our country”, you don’t deserve to be rich. Even if you won a $1M lottery prize, you will lose it. Pick up basic financial literacy and start having real meat on your analysis.
If you cannot understand the financial world despite putting in hours to study, don’t worry. Perhaps you are not suited for this. Even in this case, you can buy Government issued bonds and fixed deposits. Your only enemy is inflation. If you buy anything else without knowledge, your enemy is yourself and salesmen. Which brings me to the next point.
2, many of the so called financial advisors are really salesmen. Their real job is to sell you things and earn commissions. Let’s say you are about to sign the documents to invest in a junk company. You ask him whether this company is dangerous. What do you think his response to your question will be when he is thinking of that fat commission he will be getting?
Do not ever delegate the task of thinking to a salesman.
3, it is occasionally a good idea to make long shot bets on risky companies. If you want to do this, you need an appropriate risk management plan to reduce the risk of losing everything in one go. Fortunately for my colleague, he “only” invested 1 month’s worth of salary. Some of the victims in this saga were not so lucky. They bet their entire retirement savings on one company. I feel sad even just imagining it happening to anyone.
Closing remarks
I usually try to stay away from anything political in nature. However, it is difficult to stay truly away from politics because of how closely it is tied to economic policies. I cannot help comment after reading the opposition politician’s suggestions of using government money to bail out the investors gamblers .
To put it in perspective, there are 4 million Singapore Citizens and PRs. 34,000 of these became “investors” and gambled on Hyflux perpetual securities. Because they were greedy, they lost their money on some dubious financial instruments. Now, an aspiring political leader is proposing that the government to use the taxes collected from the other 3.96 million people to subsidize their gambling losses.
If your neighbor lost his money in a casino and demands that you help him with his debts, will you entertain him? If a 3rd party suggests that you help subsidize your neighbor’s losses, will you take this 3rd party seriously?
If this politician ever holds the power to set economic policies, it is time to reconsider my stock positions in any companies doing business in Singapore.
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