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.
Tragic reading
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…
Passive investing
- 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
Active investing
- 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
Other articles
- 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 investing
- 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
Active investing
- 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
Like these links? Subscribe to get them every week!
- 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”.” [↩]
Always heartbreaking to read those sort of stories where people have lost out significantly. Unfortunately I find that successful people will shout about their wins far more than unsuccessful people talk about their losses. The result is an unbalanced view that a majority of active investors are making big money when I expect that’s far from the truth and is just encouraging others to take risks beyond their normal profile.
I suppose I should keep repeating “A fool and his money ….” and keep asking “Am I that fool?”
The subheading is poison: “Shares listed on the Aim market are exempt from inheritance tax”.
The story is better; it says explicitly that some AIM shares can become exempt.
Been there done that in my young age. Although I never invested more than 1-2 k this was a big part of my net worth than!
The problem is not only the market risk but the fraud factory built on top which gain people’s trust and than defraud them.
The story is heart wrenching. Sometimes I think investing in individual stocks should only be allowed to accredited investors and not innocent members of public who have no understanding of the risks involved.
Is it just my browser?
Slap bang after the excellent advice in the article appears an advert :-
Bitcoin Investment 150% +
3000% growth in 3 years
Huge growth and tangible asset
Click here
RBS shares
had a bloke on reporting Scotland
had his whole retirement portfolio in this bank,and took out loans to buyback as price went lower –destitute
From reading the MMM article, is there a UK equivalent of Betterment? I’ve been trying to get my friends to set up accounts and become passive investors, but they find it awfully complex and instead want to pay some FA £300hr for them to tell them about stuff readily digestible on this website.
It’s a tragic story and a warning to all private investors, I’ve done this in the past and learnt from my mistakes. I would like to see someone write The Antithesis of Free Capital, by Guy Thomas, “How thousands of private investors spectacularly fail to make millions from the stock market.”
Long ago, when I first got interested in money matters, one of my sources taught me that investing might keep me up with the increased standard of living of my fellow countrymen. In other words, keep me up with the earnings inflation index. To reach for more, he suggested, was to risk doing worse.
Mind you; punting everything on RBS – I suspect that plain native caution might have warned me against that.
@Grand – The main advantage of Betterment in the US is the tax loss harvesting. UK investors don’t need it if they’re using ISAs (or pensions).
The best thing for zero maintenance friends/relatives is Vanguard LifeStrategy, in my opinion.
For those who like to invest in individual stocks, the above link to ‘Dividends are Over-rated’ by ‘Expecting Value’ is well worth a look.
EV looks at the metrics for two very different companies and draws attention in particular to Cash Flow and ROCE.
One of the companies, Rotork (ROR), is of great interest to us as we have held a position in this stock for I think now over thirty years. This stock is IMHO one of the best engineering companies in the UK, often overlooked by those not familiar with the industry. Rotork is a world leader in it’s core product, the electric valve actuator, which is used in safety critical applications throughout the world. No engineer worth his salt would dare specify an alternative manufacturer.
So what are the downsides. Rotork seems to have trouble with it’s excessive positive cash flows, using them to add on diworseifications, in seemingly related but I suspect less profitable product areas, the rest then being fed back to investors, from time to time, in special dividends. One day a strong competitor will emerge. But waiting in the wings for price weakness could be an engineering conglomerate such United Technologies to launch a takeover, to then strip off the peripheral businesses.
What would be a sensible buy price for Rotork? Assuming a long term earnings growth rate of 10% then current PEG (PE to Growth) Ratio with price at 2520, PE 22.3, is 22.3/10 = 2.23 way too expensive. OK let’s try PETR (PE to Total Return) =22.3/(1.9+10) = 1.87. that doesn’t help much either. However an investor looking to buy in 2011 @ 1530, or in 2008 @ 698, would have bought a sound investment. One to watch then.
Warning : please note our opinion may be very biased by our holding of the stock.
Hope these musings are of interest.
All Best
Very relevant article since I’ve just returned today from the Money Week show in rainy London. This is the first investor show I’ve attended and the number of companies pushing charting and spread betting techniques was slightly worrying and also people scribbling down every hot stock tip suggested by the panel. There were also presentations promoting index funds so they did provide a balanced view. I was just fascinated by the people that attended, I was trying to figure what they wanted to achieve. For the majority of people attending they were probably better off buying a UK FTSE ETF and spent the Saturday with there families.
All I can say is “Butt Ugly Martians”… What was I thinking?
“Just let the winners run. Just in case your wrong.”
I read this article on Saturday and I managed to resist saying anything at the time but it’s been bugging me for some reason…
Maybe it is just me but I’d almost say losing out on some hot stock/sector is a rite of passage, it’s nearly impossible to talk people out of it once they think it is the right thing to be doing. That said you want this lesson to be at the beginning when you’re merely dipping your toe in to the piranha filled waters. It sure scared me in to a more sane path.
Magneto,
Thanks very much for the comment on Rotork. Love to read other opinions on stocks I know.
Completely agree with one of the main drivers going forward being the deployment of the capital they’re generating. Management are very credible, but returns on recently invested capital – in acquisitions – are significantly below that in the core business. I suspect they would argue that this is upfront outlay to get a toehold in markets that they can then grow organically; organic growth, of course, comes without the goodwill requirement and would hopefully pull return back up.
This is really the crux of the argument. If Rotork have opened up a slew of new markets which they’ll be able to dominate in the same way they dominate actuators, I have no qualms paying 20+x earnings. Companies which are able to make 30% returns on capital – provided they have places to deploy that capital – compound growth in such a powerful way. The presumption has to be on the suspicious side, though, which is why I haven’t bought in my current unknowledgeable state.
I’m curious about your comment on their actuators, being someone a touch ignorant of the physical world: “No engineer worth his salt would dare specify an alternative manufacturer.”. Do you have first hand experience of the product? This is a case of me knowing there’s a moat from the figures and not the other way round, and it sounds as if their moat is that in critical applications engineers won’t hesitate to cost their employers a few bob more to ensure that they get the creme de la creme of the actuator world.
Cheers,
EV
@Jon > For the majority of people attending they were probably better off buying a UK FTSE ETF and spent the Saturday with their families.
I’ve never understood investor shows or been tempted to go to one. Something makes me deeply suspicious about a bunch of guys wanting to charge me money to make me rich. Colour me cynical, but why aren’t they doing this on their own dime 😉
But humans are a social species at heart I guess. Somehow with investing if you’re running with the crowd it’s not always good news, at best it’s thinning out your potential upside!
@ Lewis (EV)
Thanks for the further helpful points and in regard to your question :-
“I’m curious about your comment on their actuators, being someone a touch ignorant of the physical world: “No engineer worth his salt would dare specify an alternative manufacturer.”. Do you have first hand experience of the product? This is a case of me knowing there’s a moat from the figures and not the other way round, and it sounds as if their moat is that in critical applications engineers won’t hesitate to cost their employers a few bob more to ensure that they get the creme de la creme of the actuator world.”
At certain points in my career (now retired), worked in measurement and control, to which Motor Operated Valves (MOVs) were delegated, since the valve specialists did not have the necessary info on the control side. Rotork were very much the default selection as the product was well known both with end users and contractors (plant builders), with whom Rotork kept in close contact to get feedback and refine product development. The main competitor is US company Limitorque (think now called Flowserve Limitorque), which might aid your research. If there is a problem with Rotork, it is the tasty margins on Electric Valve Actuators. This could tempt say a Chinese company into production (have no knowledge here). Counter to that is that Electric Valve Actuators are a niche product, needing in depth design expertise, also safety certification by world-wide bodies, not a mass production product, so could still be under the radar to potential new entrants. The actuators are designed to work reliably in difficult environments, sometimes corrosive, sometimes with explosive potential laden vapours, so reputation counts for a lot.
Returning to the financials, the low price points noted in earlier post, in 2008 Rotork was trading at 698 which back calculates to a PE of ~15.3, yield ~3.1% (but then most stocks were cheap). In 2011 Rotork was trading at 1530, which back calculates to a PE of ~19.0, yield ~2.1%. As long as the competitive position remains secure, and there is not a process plant disaster attributable to Rotork’s product, then this stock is unlikely to come cheap. As of close Friday Rotork had a PE of 22.3, yield 1.91%, but as we are getting towards the year end (31 Dec), some anticipated increased earnings and dividends could be factored in by a buyer looking on the optimistic side, which would get us close to 2011 figures! It is noticeable that Rotork has underperformed the FTSE 250 over the last twelve months by about 13%!
All Best
Magneto,
Much obliged. Always great to hear from someone with far more than my paltry knowledge on any particular company.
EV