PN17 stands for Practice Note 17/2005 and is issued by Bursa Malaysia.

In general, PN17 companies normally have some financial difficulties. As such, investors get quite worried when some fo the shares they hold are for PN17 companies. They usually face a dilemma of whether to cut losses or hope for a rebound for such shares.

Here are some reasons for companies to be classified under PN17:  companies' shareholders' funds are less than 25% of their total paid up capital; receivers have been appointed to take control of the companies' assets; the winding-up of some of thier subsidiaries and associated companies; the auditors have expressed adverse opinions on the companies;default in loan interest and principal repayments; the companies have suspended or ceased their operations; and companies do not have any significant businesses or operations.

A rational investor will look for companies with good business fundamentals to invest in and we believe that most investors know which companies have good fundamentals.

Unfortunately, investors sometimes do not buy into these companies because they want to make quick money from the stock market.

As a result, they tend to listen to market rumours and buy into companies with poor fundamentals or are speculative in nature.

We may wonder why some companies turn into PN17 companies. However, if we scrutinise them carefully, we will see that these companies are usually poorly managed or do not have good track records.

There are a few reasons why investors continue to hold on to these PN17 companies. One main reason is that they seldom keep track of the companies financial performance.

Based on our observations, some investors are not aware that they are holding on to stock of companies that have been classified under PN17. In some cases, the investors do not even notice that these companies have been delisted.

We need to understand that a key difference between intelligent investors and normal investors is that intelligent investors always remember that there are chances they may make mistakes in their stock selection. Therefore, they are careful to monitor the performance of their stock.

Once they discover that the companies they have invested in are experiencing declining performance or showing early signs of financial difficulties, they will make quick decision to cut their losses.

Unfortunately, not all investors have the courage to admit their mistakes.

Even worse, some of them even believe they will never make mistakes in their stock selections and the poor performance is just a temporary situation. This type of investors usually end up getting stuck with poor performing stocks.

It is said of the stock market that "what goes up will come down, but what goes down may not go up"

The earlier investors admit their mistakes, the lower the losses they have to bear.

Unfortunately, most investors believe that the stock price will recover one day. They will only cut losses when the companies are about to be delisted.

During an economic crisis, companies with good planning manage to avoid the adverse impact from the crisis whereas some companies just cannot escape from the financial difficulties.

Lately, we notice that the owners of some companies are getting less committed to their businesses.

They give up their businesses quite easily after encountering some financial distress. If they discover that the loans amount is higher than the value of their assets and they do not foresee any prospects in their current businesses, they give up the businesses and let the companies fall into PN17 and later go bankrupt.

According to the Cockroach Theory, whenever a company announces some bad news to the public, like default in loans repayments, some accounting issues or delay in releasing their financial results, there may be more bad news that have yet to be revealed.

This is because whenever we see one cockroach in our cabinet, there tends to be many more cockroaches hiding at the back of that cabinet.

Even though some companies will try their best to regularise their businesses, unfortunately, not all their owners have the commitment to pull these companies out from PN17.

Hence, we should cut our losses and never average down our purchase prices on these companies!

We need to remember that it is always safer to buy stock at higher prices than average down on our losses.

Article from Mr Ooi