Lessons from the fall of China Gaoxian and similar S-Chips!

I was so disgusted and angry with China Gaoxian after reading an article in Straits Times Money today and decide to share some thoughts on this once favorite counter... Company founder sold 60 million shares at IPO price at the point of listing. Insiders have been selling their shares to innocent investors between 2005 and 2008. A major shareholder sold off a large percentage of his holdings after the lock up period. I think this incident, together with similar counters like Hongwei Technologies & China Hongxing Sports, should be a stern warning to investors putting their hard earned money into them. Lesson must be learned to avoid mistakes and being conned by these companies!

Let's talk about China Gaoxian, one of the Singapore largest IPO in 2009. After making a spectacular move between Oct and Dec 2010 and its dual listing in Korea Exchange, majority of the investors are so confident that price will continue to push higher. In fact, some in the forums are shouting sky prices for this counter, and rallying others interest to satisfy their deeply rooted belief China Gaoxian will be a multi-bagger in 2011. When price falls unexpectedly on 25th Jan, this should already be a sign of problem (loss of confidence) but vested people dismissed it as a normal correction and a great opportunity for bargain buying. On 25th Feb, price gives its last warning to those straddled on this ship, before a trading halt and a request for suspension on 25th Mar. Those unfortunate investors may never get back their hard earned money... haiz! :(

Key lessons to learn even though many have been iterated times and times again by many professionals before! Just consolidate some that comes to my mind...

1. Never receive tips. The forum is a place where tips and rumors are being circulated. No one can verify if they are true! Even if it is true, by the time it reaches your ear, someone higher in food chain may has already capitalized on it. Be accountable for your investment; don't rely on tipsters.
2. Never trust what professionals and analysts say. Most are paid employees and must generated news to secure their rice bowls. Some may even have hidden vested interest. Trust only your own judgment and analysis.
3. Never trust accounting figures and ratios only. This does not mean I reject fundamental investing. But figures can be manipulated! A cash rich company on paper may be an empty shell, especially if majority of its operations are based overseas. Beside reading annual financial reports, an investors needs to ask questions. Is the products/services well received by customers? Are the stores doing well? Are the management sincere and people with integrity?
4. Learn to read technical chart. Yes I mean it even for those fundamental players! Before making any stock purchase, I will encourage everyone to open the chart and take a look at the technical picture. It can be as simple as checking if price is above/below its long term Moving average (see examples below how a simple long term 150MA can help trim your losses). Chart will be a critical tool to get out of a sinking titanic if the stock is not behaving well. Don't lock your money in laggards; there are always be better ones hiding at the corner.
5. Always have a stop loss ready in place after each purchase. No matter how attractive or rosy a stock is, have a stop loss in place. No one can tell how low a stock can go after it is hit by news or aggressive sellers. Low can go lower! Capital preservation must always come before capital growth. Just remember there is NO growth without capital.