Thomas Chua – Have a Proper Sell Thesis When Investing

BIO: Thomas Chua is the founder of SteadyCompounding.com, where he writes about business breakdowns, investment concepts, and timeless lessons from super investors.STORY: Thomas invested in a company that had a gaming and e-commerce business. The gaming business was his main attraction, but over time, it started faltering. Unfortunately, Thomas held on until the stock went too low.LEARNING: Have a proper sell thesis when it comes to investing, especially for smaller companies. Always write down why you should buy certain companies and what will cause you to sell them. When investing in small to mid-companies, ensure you’re adequately diversified. “Start writing down what would cause you to sell the company to assess the risks and also to prepare yourself for the future.”Thomas Chua Guest profileThomas Chua is the founder of SteadyCompounding.com, where he writes about business breakdowns, investment concepts, and timeless lessons from super investors.Steady Compounding provides investing insights and business breakdowns every week to thousands of readers. You can sign up here for free.Worst investment everThomas started initiating a position in a company back in 2019. The company, Sea Limited, had two business arms, gaming and E-commerce. When Thomas first bought a position in this company, its market cap was about $14 billion. The gaming business, Garena, had a revenue figure of about 1.1 billion, and its operating income was 530 million, so the operating margins were high at about 50%. The company was growing at a 100% rate. The E-commerce business, Shopee, was also growing quickly but was unprofitable.Thomas was attracted to the company’s stock due to Garena’s success. It had a decent valuation compared with what other gaming companies were trading at.When COVID-19 hit, the stock took off. Everybody on Twitter was crazy about this company. Thomas got absorbed into the whole narrative that Sea Limited had become invincible. Like anything they touched, they turned into pure gold.The thesis behind Sea Limited was that Garena would finance Shopee until it became the most dominant player in whichever market it entered. Shopee’s management got a bit hot-headed back then. They started to go everywhere, and it was doing well in revenue.The problem with this thesis was that Garena started to falter. Much of its growth came from developing countries like Indonesia and India. At some point, India banned Garena’s Free Fire game. Also, as COVID-19 started to ease, the number of users on Garena began to reduce. The stock took a tumble. When Thomas first bought the company, the stock was over $30. Then it went all the way up to over $300. Now it went down to below $30.Lessons learnedHave a proper sell thesis when it comes to investing, especially for smaller companies.Before investing, always write down why you should buy certain companies and what will cause you to sell them.When investing in small to mid-companies, ensure you’re adequately diversified.Andrew’s takeawaysBe careful about just trying to build up a portfolio of small or medium-sized companies that you believe will be the next big thing because outcomes can be highly variable.When you feel that you need to sell, sell 10% first.Actionable adviceStart writing down why you buy and conduct a premortem to help you decide...