Good reads from around the Web.
There’s a certain kind of private investor who is drawn to ‘story stocks’ such as:
- Hyper-growth loss-making companies.
- Tiny mining outfits.
- Revolutionary app developers.
- Aggressively accounted roll-ups.
- Radical hemorrhoid cream suppository manufacturers.
That kind of thing.
Very occasionally one of these makes its early investors a mint. Much more often, they become the latest cautionary tale against jam tomorrow gambling.
Except they don’t, exactly. The general idea that it’s a risky game is reinforced, but the specific firm that failed is soon forgotten.
Who remembers the microcap companies that went bust in 2003? Not me.
I think this is one reason why it’s so hard to make story stock fans understand the risks they’re taking. Like budding authors who see bookstores full of best-sellers, they see only the ARM Holdings and the Vodafones of the world – the once tiny companies who made it huge.
The myriad failures are lost in the memory even of those who watched them fall.
The Internet can help to change that. Reading old bulletin boards that chart the demise of doomed companies is a sobering experience that I highly recommend for preventative medicine purposes.
For example, White Coat Investor featured a sad summary this week of posts from investors in GT Advanced. The firm made a material called sapphire crystal, which is used in high-end devices like the iPhone. It went bankrupt in apparently controversial circumstances.
GT Advanced is as much a tale of danger of getting so wrapped up in a story that you invest far too much in it; the company’s value peaked at over $1 billion, so this is not a classic small cap bear trap.
Here’s one post that White Coat Investor highlights as the sort of terrible thing that can happen when you bet all on red and lose:
I am totally numb. Just got home after working.
I saved this money for over 25 years and it is gone in a day.
I haven’t sold my shares because I just don’t know if the shares will be worthless soon or any chance that they may come back.
I bought at $18 and $18.25 and have about 4,700 shares. This is everything. My retirement and my savings for my son and me. This is so hard for me to take in because my son has special needs and this was for him and his future, especially when I’m not here any longer. He is getting of the bus soon so I need to dry my tears and put on a smile.
He is the best son a mother could ever wish for. I just feel and know that I have failed him and trying to figure out what to do.
Should I sell now and at least have a couple thousand for us to at least have a few weeks to figure out what to do. I feel for everyone on here who lost.
I was advised by someone who I trusted dearly not to sell. My instincts told me otherwise but I put my trust in this individual because I just felt so inept at trading and believed he knew much more than me. I will more than likely have to sell our home and struggle with this only because change is so difficult for my son.
I apologize for venting but I am too ashamed to share this with my family or friends. I shared this with the person who advised me to hold and my messages go unanswered.
This sort of thing makes for heartbreaking reading. No ifs or buts.
Position size is everything
I have seen countless story stocks dwindle to nothing or go bust over the years. Many were the subject of frenzied interest from private investors. Very often any warnings about the wisdom of investing or criticism of a company’s performance or practices were shouted down.
Indeed, a bulletin board full of evangelical supporters is pretty much a contrarian ‘avoid’ signal for me these days.
Now, you know what I’m going to say next – the best way for most people to avoid this sort of thing is to invest in passive funds, which will never have more than a tiny smidgeon devoted to companies like these.
And that’s true. But I’m an active investor for my sins, and I do steer my little ship through some of these choppy waters.
Totally avoiding dubious story stocks would be a good rule of thumb, but my idea of a dubious story stock is someone else’s idea of a great growth opportunity.
So my best blanket advice for investors drawn to microcap, loss-making, or one-shot wonder type shares is to limit your exposure, no matter how much you like the company or the price.
I’m talking initial 0.5-2% positions here, not the 10-30% you’ll see touted as ‘safe’ in some dark corners of the Internet.
Also, I think you should rarely add to risky loss-making story stock winners, at least not until they’re years out of the incubator stage.
Just let the winners run. Just in case your wrong.
- If a story stock defies the odds and eventually lives up to its hype, you won’t need much to make a big return.
- If – as is far, far more likely – it goes tits up, you’ll be glad you didn’t own much in the first place.
Let’s be careful out there.
From the blogs
Making good use of the things that we find…
- Should you own precious metals? – A Wealth of Common Sense
- Why I put my last $100K in Betterment [US service but interesting] – MMM
- Fighting through risk tolerance questionnaires – Rick Ferri
- 30-second guide to asset allocation – The Reformed Broker
- Cashflow as an indication of sustainable dividends – DIY Investor UK
- Terrible forecasts, and what you can learn from them – The Value Perspective
- Value investing myths – Oddball Stocks
- Dividends are overrated – Expecting Value
- A simple momentum strategy – Stock Market Almanac
- Investing in Marmite-y companies – iii blog
- Concentrate your value portfolio – Millennial Invest
- How the market tempts us – A Wealth of Common Sense
- Work is but a stage of life – Simple Living in Suffolk
- The top 10 anthems of financial independence – The Escape Artist
Product of the week: People are drawn to Coventry’s Poppy Bonds, reports ThisIsMoney. The building society’s new Centenary Bond pays 2.4%, fixed with no access to your money until December 2017. Coventry will donate 0.15% of the total balance come December to the Royal British Legion. If you can find a higher or more flexible rate elsewhere, you could always save with that instead and make your own donation.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
- Passive funds are winning the war for your money – MarketWatch
- Complexity is failing investors – Chief Investment Officer
- 5 things you don’t know about Vanguard – MarketWatch
- Jim Slater: Escape inheritance tax with AIM shares – Telegraph
- Are risks starting to matter to stock pickers? – Yahoo
- Time to buy Japan (again…) – ThisIsMoney
- Barrick exec: Even Einstein couldn’t predict gold prices – Bloomberg
- Liberty’s John Malone is the king of avoiding taxes – Bloomberg
Other stuff worth reading
- Merryn SW: Making money in the age of machines [Search Result] – FT
- Regular investing options from £10 to £500 a month – Guardian
- Martin Lewis: The benefits of overpaying your mortgage – Telegraph
- House prices ex-London at 2004 levels – ThisIsMoney [Will grow faster]
- How losing your job effects investment risk tolerance – WSJ [Featuring Mike]
- The art of doing nothing at work – The Atlantic
- The dangers of working night shifts – BBC
- How Uber is changing nightlife in Los Angeles – NY Times
Book of the week: Want to get rich by inventing the future? Let’s be honest, it’s going to take a lot of effort. Why not procrastinate by reading the thoughts of someone who did it earlier? Enter PayPal co-founder Peter Thiel’s new Zero to One. It’s as much about the philosophy of innovation as the practical matters of starting up a business.
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- Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” [↩]