The calendar year 2022 has been a rough one for ASX small-cap growth investors. With the benefit of hindsight, selling aggressively on January 1 would have been a good way to start the year. For the first six months of 2022, small cap growth stocks, especially those lacking profits, really tumbled hard. It is fitting therefore that my most costly error, and biggest mistake of 2022 was an unprofitable growth stock named Eroad (ASX: ERD).
You can see all my Eroad coverage here, but I’ll quickly explain the mistake I made, with reference to my past publications.
Essentially, what happened was that Eroad stopped growing, and so there was no operating leverage, and so whereas I had expected the company to cross over into profitability, it did not.
However, what makes my Eroad losses such a glaring mistake was a breakdown in process, not just a failed analysis.
I noted my first red flag from Eroad in October 2021, when the company downgraded its guidance. After this happened the stock was still trading above $4.50. In hindsight, this would have been the perfect time to sell all my shares, or even any of them. Instead, I wrote:
“All in all, it is not surprising to see the Eroad share price down today, as this weak quarter and guidance downgrade is likely to shake out many shareholders who are in it for a good time, not a long time. Personally, I think that the next act of the Eroad play will be to see if it can consolidate and leverage Coretex. If so, we may finally see the company find enduring success in the USA, which will likely pay off for shareholders. We won’t know about whether the Coretex acquisition succeeds for a while yet, and until then I’m inclined to hang on for the ride.”
Terrible call! However, unfortunately the story gets worse.
In November 2021, I found some evidence in the half year report that caused me to reduce my position. I said: “While I still believe that Eroad is an interesting investment trading below its intrinsic value, the factors above have sufficiently undermined my trust in management that I no longer believe it is appropriate for Eroad to be such a large position in my portfolio.”
In hindsight, I should have sold out completely,
By January 2022, I was getting annoyed with Eroad using the pandemic as an excuse for poor performance. In covering its quarterly update, I wrote: “I thought these numbers were decent but the commentary around the pandemic goes against my philosophy of not accepting it as an excuse any more. Therefore, I may look to reduce my position slightly.”
Again here, I did just that, slightly reducing my position size when I should have sold aggressively. At this stage the stock was still above $4, and once again, I missed a glaring opportunity to sell all my shares, since I was picking up on the early warning signs of disappointing performance.
By April 2022, I wrote an article called “Eroad (ASX: ERD) Founder Resigns, and My Thesis Is Broken”, finally making clear that the stock was one I would sell. However, I once again reacted too slowly, writing:
“I’m just going to wait and see if the share price rebounds at all. If it does, I’ll probably sell out completely. If it doesn’t I’ll probably just sell slowly.”
This was the crucial error. Because the share price didn’t really rebound much, I only started selling slowly, and only sold another small part of my holding, this time at just below $3 per share. I should have been selling quickly, regardless of the price, because my thesis was broken. Instead, I put too much emphasis on trying to sell for a higher price, and not enough emphasis on the fact that my thesis was broken.
By the time I published my analysis of the FY 2022 Eroad results, the price had dropped closer to $2. Foolishly, I was still focussed on the fact that I thought the shares were fairly cheap, not the fact that my thesis was broken and I had no reason to hold the stock. I wrote:
“I remain a shareholder for now, but I still plan to sell my shares if and when the market ever offers me a sufficiently more attractive price.”
Well, dear reader, the price shortly thereafter fell below $2, and has now descended to $0.83. In classic bagholder fashion, I’m still holding some shares, waiting for that fantastical “more attractive price” that seems to get further and further away as time goes on.
I think the lesson here is obvious. When an investment thesis is broken, in the future, I will just sell my shares. I’m not saying I’ll panic and sell on one day, but I think a practical limit, such as about a month, is probably reasonable.
We can see lots of psychological issues with my Eroad mistake in 2022. The most obvious was I was anchoring to past prices, and thus hoping (without luck) that I would be able to sell at something closer to those past prices. Instead, I should have been selling at the prices available after I realised my thesis was broken.
A new investing rule for 2023
For me, investing is something that is always a learning process. Due to my own psychological blind spots and anchoring, I was too slow to sell my Eroad shares once I first realised the thesis has broken. I do not want to make this mistake again.
Therefore, from now on, when I realise my investment thesis is broken, I will aim to sell all my shares in a company within one month. This one month window is arbitrary, but should at least ensure that my hesitance and inaction with Eroad is not repeated in the future.
Meanwhile, Eroad itself is undergoing a cost out process to reach profitability. If it can earn net profit margins of just 5%, then the current share price looks far too low. But that’s a big if, given the company operates in a very competitive environment.
At this point, my small Eroad holding is not really consequential. As a consequence of my various sales, plus the massive share price decline, Eroad is now well under 1% of my portfolio. Today, I hold on to my remaining Eroad shares mostly to spite myself.
I am holding on to the hot rock of anger at my own mistake, in the hope that the (mental) scars will stop me making the same mistake again. As a friend of mine drummed into me after I made a (real life) mistake more than a decade ago: “don’t lose the lesson.”
At some point, I’ll stop punishing myself and simply crystallise the loss on my remaining Eroad shares. I don’t know when, and I don’t know at what price, but when I finally forgive myself for this one, I’ll sell my small remaining Eroad holding at whatever the price available. To my readers; I’m sorry I got this one wrong.
Thanks for reading and I wish you a very happy and successful 2023 ahead.
Disclosure: The author does own shares in Eroad, and will not trade them for at least 2 days following this article. At some point in the future (after that) the author will sell likely his remaining Eroad shares without further notice. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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