No shame in exiting failed investments in search of better rewards elsewhere

THE winding up of commercial robo-advisory firm MoneyOwl came as a surprise to many market watchers. Perhaps it shouldn’t have.

A review of the “bionic” financial adviser found the business to be not commercially viable, given its high operating costs and low revenue generation.

With profitability expected to be elusive, MoneyOwl’s shareholder NTUC Enterprise Co-operative decisively opted to redeploy resources to other areas where it can deliver “greater social impact”.

To some, the shutting down of the social enterprise might be deemed a failure. Yet, knowing when to pull the plug on a soured investment is actually a mark of wisdom. It requires courage to admit that things had not panned out as one intended.

More often than not, investors do not let go of losses or loss-making ventures and stocks quickly enough – and end up with more red ink than needed.

In behavioural finance, this is known as the disposition effect. The term refers to investor behaviour that tends towards selling assets that have increased in value, while keeping assets that have dropped in value.

Investors chalk up opportunity costs in doing so, however, as funds tied up in failing investments could be better invested elsewhere – and would possibly reap better rewards with compounding effect.

By the time these investors finally decide to exit the losing ventures, it might be too late.

This could explain why offerors in some recent takeovers of companies listed on the Singapore Exchange (SGX) have been successful despite their “low-ball” offers.

In some cases, the acquisition prices from some controlling shareholders were said to be both “not fair” and “not reasonable”. Yet, the offerors managed to garner over 90 per cent of shares, compulsorily acquire the remaining stakes from dissenting shareholders, and delist the companies.

For example, controlling shareholders of Sysma Holdings – which was listed on the Catalist board before its exit on Sep 13 – were successful in privatising the builder of high-end landed homes at an offer of S$0.168 apiece.

This is despite the independent financial adviser assessing the offer price as neither fair nor reasonable, and the independent directors recommending that minority shareholders reject the offer.

On its part, the authorities have accepted proposals that would make it harder for majority shareholders to squeeze out minority shareholders – which should indirectly discourage low-ball offers.

The president of the Society of Remisiers (Singapore), S Nallakaruppan, however, has a different view on this.

In a letter to The Business Times, he pointed out that the recommended proposals would mean that minority shareholders would not even have the opportunity to look at privatisation offers, which are normally at least at a premium to the prevailing market price.

Many local investors who had put money into Singapore-listed stocks only to be disappointed would, perhaps, agree with him.

Indeed, MoneyOwl’s decision also offers some valuable lessons for investors who are now assessing initial public offerings (IPOs), as well as for the companies behind them.

Recently, it was reported that a few tech companies had listed or applied to float on stock exchanges to raise funds. More are likely to do so as the IPO market begins to show signs of life, following the successful float of chipmaker Arm.

A closer scrutiny of the prospectus of one IPO hopeful, incepted eight years ago, shows it had negative working capital in the millions last year and has been racking up losses – at least in the past two years disclosed in the document.

Its going-concern status hinges on its ability to raise further capital, the company said.

Raising money from the public could buy this company some time to adjust its game plan, and perhaps give it a fighting chance. Yet, investors should be aware that profitability remains out of reach for many tech startups.

First movers sometimes have an advantage, and occasionally even manage to generate supernormal profits.

At the same time, incumbents do not cede market share without putting up a fight. And every successful entrant into a market increases the likelihood that competition will intensify – as others are attracted by the profits to join the fray.

Startups, meanwhile, should be realistic about their chances of success – or even survival.

A failed venture does not only involve opportunity costs for capital, but also the time the entrepreneur would have better invested in other endeavours.

Studies have shown that investors are slow to sell the losers in their portfolios, as such a move realises the losses. Rationality, however, must prevail. In this light, the exit of MoneyOwl is best seen as an astute business decision.