Friday, 26 September 2014

Scale backs...why do you bother me so?

I recently wrote a post outlining my dilemma about investing in the most recent QBE share purchase plan.  I had already been stung once by a massive scale back and I wasn't keen to go through that experience again.

I phrased my dilemma as 'fool me once shame on you...fool me twice shame on me'.  As it turns out I was fooled twice and this time the fault is definitely my own.  However that being said it wasn't nearly as bad as last time.

I used my last experience to inform my decision this time

While it is true that you can make a lot of money from Share Purchase Plans, it is also true that you can effectively lose money if you get scaled back significantly.  I had experienced a significant scale back on the last QBE SPP and so was very aware that this could happen again.

Investing is all about learning from your previous experiences, and also from your previous mistakes and I was glad to learn from that previous mistake because it informed my decision making in the most recent share purchase plan.

I didn't apply for as many shares

In the last QBE SPP I applied for the maximum amount of shares (set at $15,000) in the hope of maximising my profits.  When I got scaled back this also resulted in me having the greatest opportunity cost loss.  I realised that this could happen to me again and so I only applied for the smallest possible parcel ($5,000).

Why did I do this?
  1. I wanted to take up my rights and gain more exposure to the company doing the raising (QBE)
  2. I could only apply for parcels of $5,000, $10,000 or $15,000 shares
  3. Even applying for $5,000 would give me a handy profit if I was allocated the full amount
  4. The potential opportunity cost is much lower if the scale back actually did occur

The scale back was large...but not as large as the last time

Although I still got significantly scaled back (because of my small shareholding) the scale back was not as large as the last time.  Shareholders received the lesser of:
  1. The parcel applied for
  2. ~17% of the number of shares held by the shareholder on the record date
In my case this meant that I should receive 6 shares.

I still suffered a loss, but it wasn't as large as the worst case scenario

Although I did still suffer a loss on the amount I could have earned on the cash in my offset account it wasn't as large as it could have been for the following reasons:
  1. They are only holding on to the cash for 1 month on this occasion (whereas I had predicted that they could have held onto it for 2)
  2. I applied for a lower amount than the maximum
  3. I made a small profit on the shares that I was allocated
The profit I made on the shares is as follows:
  • 6 shares allocated at $10.10 per share = $60.60 total investment
  • Current trading price of shares (at writing) =$11.80
  • Profit = $1.70 per share x 6 shares = $10.20
The amount I could have made by investing the total $5,000 in my offset account for a month is as follows:
  • $5,000 total investment
  • 5% p.a. interest rate
  • Opportunity cost of SPP = $5,000 x 5% x (1/12) = $20.83
The actual loss that I therefore made was $20.83 - $10.20 = $10.63

All in all not a terrible outcome but nonetheless a lot of effort for not a lot of reward.

What would I do differently next time?

That is the question I always ask myself, especially when things go to plan.  After thinking about this for a while I actually realised that I would probably make the same decision again.  

If I thought that I was going to get scaled back significantly I would probably only apply for the minimum allowable amount and only make the decision about whether to invest at the latest possible moment so that I could assess the likelihood of other investors participating in the SPP.

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