Sell Dignity & Fu Shou Yuan

A new view on the funeral sector

Early this year I was really trying to find new long term investments, that I could hold for years and years. I thought I had come up with a very defensive and good investment idea. From my perspective it also seemed somewhat overlooked by the market. Great long term tailwinds with a increasing old population that will eventually pass away. The old generation is also wealthier than before meaning they would leave all that money and assets behind. All boding very well for a nice structural position for listed funeral companies in my view. Great invesment case, stocks were a bit expensive, but given these fundamentals that mattered less in the long run. So i invested, in one UK listed and one Hong Kong listed funeral company. What I didn’t forsee was that governments would come in and have a view on how expensive funerals should be. I have come to realize that society sees this as a service in line with schools etc. For these types of services it is not accepted to make large profits in the same way as for things not everyone needs. After seeing comments like these about Chinese funerals and what has happened lately in UK I started to look at this in a different way. Looking at it from this light, this will perhaps not be a great long term investment, even though demographics guarantee that demand will be there.

Dignity a disaster investment

With the above thesis of great tailwinds I bought into Dignity early this year at 18.8 GBP per share, only a few days later the stock plummeted with 50%. This was on the back of tougher price competition and that Dignity decided to change their pricing strategy. At the time I thought this was a big over-reaction by the market and a great buying opportunity, so i doubled up: Double Pain & Doubling down in Dignity At 8.7 GBP per share I bought as many shares as I bought at 18.8. The strategy seemed to do fairly well at first, the stock recovered and set a high around 13 GBP per share, on my average I was not really even down that much. Then came the next hit, the UK CMA decided to look into the British funeral market and the pricing of funerals, the stock took another dive. Today a clarification around this came out: “Nov 29 (Reuters) – Britain’s funerals industry could face formal investigation after the UK competition watchdog found that high prices were taking advantage of grieving families.” Link to article: Reuters article. The stock is currently down -17% on the day and back trading around the same price I picked up more shares. All in all a disaster investment for me.

Giving up on my Funeral theme

This all has made me realize I have misunderstood this segment. Given that the kind of thinking from UK CMA is probably even more true how the Chinese think, I decided to divest in both my funeral stocks (Dignity and Fu Shou Yuan) as of close today. I still see the structural tailwinds and defensive characteristics of these stocks as attractive. But these markets UK and China, will most likely not allow this companies to be highly profitable for the long term.

Fu Shou Yuan has not been an equally terrible investment, but also a loss. I bought it for 6.49 HKD per share on the same day as Dignity on Jan 15th and I sold today at 5.9 HKD. Which is not terrible given that Hang Seng is down -15% for the same period. But given that Fu Shou Yuan was trading above 9 HKD in June, it again feels like pretty poor timing on my side. This stock has been strangely volatile and I didn’t really understand why it went up (or down afterwards). The Hong Kong market has been extremely peculiar this year though..

So I am a bit bruised by these investment mistakes. You always learn something from your mistakes and here was another angle to consider. A similar story has taken place for my gaming stock NetEase, which was on real roll, until the Chinese government froze all new game launches in China. This has hurt NetEase a lot and it’s greatest rival Tencent. These kind of out-of-the-box disturbances from politicians and governments is not just disrupting in terms of Trade War, but most obviously also be considered from a more narrow sector perspective. As always the market is good at keeping me humble.

Now on and upwards to new investment ideas. Stay tuned for a Part 2 of my dental series!

9 thoughts to “Sell Dignity & Fu Shou Yuan”

  1. Hi, I don’t understand why you sell finally, or you didn’t explain much..
    If you did your analysis well, you should not sell only because stock goes down, market news and comments.
    Please take very much caution on market news (especially Reuters) as they seem to contain game changing information, but actually are not.

    I had backward looking on some investments I made and sold at the midst of “game changing” information and realized that all in all I would have been much wealthier should I have hold on everything than sold and try to equalize losing and winning investments.

    To be honest, I think that stock picking is unfeasable for us because of our expectations, time frames and emotions.

    Or, commit one of your finger for every investment you make: if you sell it before 5 years, you have to cut it !

    Best regards

    1. Hi Bon, thanks for your comment. I did not sell because the stock went down. I sold because I realized that funeral services is something that politicians and society does not accept as an area where large profits are made. I did not expand on it as much for Fu Shou Yuan, but I have read similar comments around that company. Also the communist party in China has quite strong ideas around this, which is not in line with what Fu Shou Yuan business strategy is..

      Stock picking is hard, and we need to keep our emotions in check, its not easy, but I still believe it’s doable. So far I have outperformed the MSCI World index, although I kept a big underweight to USA, which is 50% of the World Index. And USA has performed much stronger than other markets, so my actual outperformance adjusted for this is even larger. Let’s see if I can keep this up in the future as well, I will do my best. Hope you can contribute with your thoughts and help me out!

  2. After your posts about Dignity (not this one) I also looked into the company a bit. I’m in doubt if the UK CMA intervention is really bad for the company. If they really have outrageous prices this might be a problem but it also depends on the service which is delivered. Very cheap alternatives don’t have a great service. Dignity also mentioned theirselves they want regulation. I think this whole thing might be overblown. The market cap has been cut more than half already, it’s more about patience now probably. Why I’m saying this is that I have experience with selling at lows in the midst of a company crisis. You have to really think carefully about selling because it’s not always the right option. I’m not saying you didn’t but sometimes emotions can take the best of you; you have new ideas in your head and want to get rid of the pain, but losing money is hard to recover from. 50% loss mean you have to recover 100% with your new investment to overcome it. I’m not judging in any way, I’m learning each day, from this blog from others and from my own investment decisions; just wanted to share my experience in this context.

    1. Agree with you, never an easy decision. It might definitely be that this is overblown in a year or so and the company recovers. But with the facts I have right now, I have to decide if these funeral stocks, or other companies have the best long term prospects. In the case of Dignity I did not mention one detail (which I have brought up before) and that is its debt. If they would actually become significantly less profitable over the coming years, the debt burden will really hurt them.

    2. And regarding having to recover 100% to cover the loss, yes that its true. But that will be equally true if I keep Dignity, it will also need to increase 100%. So that is not really an argument to sell or not, the point is, does Dignity have a better chance to return 100% or some other company? Right now I rather bet on another company. I might change my view again in the future. One important point in the superforecaster book is not get stuck in your decision and not take in new information.

      1. Yes recovering is the same for Dignity although it’s common in this kind of company crises that there is mispricing in the stock; even more so in illiquid stocks/thinly traded stocks.

        Yes nice book!

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