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This week I want to share an investment lesson with you, one that still stings.
The goal is simple: to help you avoid a costly mistake I made by understanding that it’s never too late to sell—even when your investment is in freefall. Let me know if you had a similar experience, and what you learned from it.
My Costly Mistake with SCS Upholstery
The company is SCS Upholstery (SCS), a small UK retailer of upholstered furniture. You won’t find them listed because the company was eventually sold to a private equity firm. Shareholders like me got nothing.
I had been watching SCS for a while, and things really got my interest when a competitor issued a profit warning, which caused SCS’s share price to fall by 54%.
What really got me to act, though, was the fact that, just a month before the drop, the company’s directors bought 524,802 shares at a higher price. Insider buying is often seen as a positive sign—if management is putting their own money into the company, it’s easy to believe they know something you don’t. This proved to NOT be the case.
So, on January 10, 2008, I bought SCS shares at 41p.
Why I Thought It Was a Great Buy
At that time, the fundamentals of SCS looked great. The stock was trading at a price-to-earnings ratio of just 2.5x based on 2007 earnings and 1.2x based on 2006 earnings. It seemed like an absolute bargain. Moreover, the company had no debt, and it held cash equivalent to 46% of its equity. In theory, that meant the company was in a solid financial position to weather any storms.
However, I was also aware that SCS had benefited greatly from the property boom in the UK—people were buying more sofas as they bought new homes. That property boom was slowing down, so I decided to invest only half of my usual position size.
What I didn’t foresee was just how devastating the upcoming credit crisis and the bursting of the UK housing bubble would be.
A Brief Rebound and My Missed Opportunity
On March 26, 2008, SCS released its interim results for the period from August 2007 to January 2008. Sales were down 13%, and the company reported a trading loss of GBP 8.8 million, compared to a profit of GBP 3.3 million the previous year. To top it off, the dividend was cancelled.
Despite the gloomy numbers, the market reacted positively, with the share price jumping to 62p, a 51% gain from my purchase price. At that point, I had a chance to lock in a substantial profit.
But I didn’t sell. Why?
At a price-to-earnings ratio of 3.8x based on 2007 earnings, I convinced myself that SCS was still undervalued. In hindsight, I was too focused on the numbers and not on the bigger picture.
The Blow That Took SCS Down
The real disaster hit on June 11, 2008, when SCS announced that a credit insurance company had cancelled its insurance for the company. This may not sound like a big deal but for SCS, it was the beginning of the end.
Here’s why it mattered: suppliers to SCS, like sofa manufacturers, relied on credit insurance to make sure they got paid, even if SCS didn’t have the cash immediately. With credit insurance cancelled, SCS could no longer finance its operations through suppliers, which meant they would have to pay for inventory upfront, something they didn’t have the cash to do, despite having no debt.
From there, the company’s situation went downhill fast.
A Devastating Loss
Following the credit insurance news, SCS’s share price fell 62% to 11p. I lost confidence and decided to cut my losses.
On June 18-19, 2008, I sold 62% of my shares at 11p, locking in a 73% loss.
Why didn’t I sell all my shares at that point? Honestly, I can’t remember my exact reasoning.
Perhaps I thought holding on to a small portion would allow me to recoup some of my losses if the company recovered. But even at a 73% loss, I should have realized that the remaining investment was still real money that could be put to better use.
On July 3, 2008, the business was sold to a private equity company, the listing was cancelled, and the company was liquidated. Shareholders, including myself, were left with nothing.
What You Can Learn
So, why am I telling you this? Because we all make mistakes in investing. What matters is learning from them and ensuring we don’t repeat them.
Here are two key lessons you can take from my experience:
- It’s never too late to sell. No matter how much of a loss you’re facing, the money you still have invested is real. Don’t let the fear of "locking in a loss" cloud your judgment. The money can always be better used in other opportunities rather than riding a sinking ship all the way down.
- Establish a stop-loss strategy. After this experience, I developed and now strictly follow a trailing stop-loss rule. These rules prevent emotions from dictating my decisions and ensure I cut losses early before they spiral out of control.
I hope you never face the kind of losses I did with SCS, but if you do, remember it’s never too late to sell. Protect your capital and don’t let hope turn into a costly mistake.
For more on when to sell, you can read my detailed guide. Just click the button below.
Quant Value Newsletter Update
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