How You Could Stop LOSING Money Next Year

[MaynardPaton]

Lots of popular companies have suffered a rough time this year. A few quick thoughts on how you could stop losing money through share-price disasters.

Terry Smith said in this recent podcast:

“The problem is most people don’t read the accounts”

Terry Smith: “The problem is most people don’t read the accounts”

Yes, annual reports are long and boring and so very few investors (both private and professional) read them. But lurking within a report’s small print could be signs of trouble, or at least points that do not sit quite right and require further investigation.

I looked at Avon Protection (AVON) and LoopUp (LOOP) for SharePad during January…

AVON: https://knowledge.sharescope.co.uk/2021/01/13/screening-for-my-next-long-term-winner-avon-rubber/

LOOP: https://knowledge.sharescope.co.uk/2021/01/27/small-cap-spotlight-report-loopup/

…and both companies raised questions about acquisitions. Perhaps looking at the accounts and thinking more about those acquisitions could have prompted an exit. AVON is down 64% and LOOP is down 79% YTD. (More on AVON here and LOOP here)

Asking tough questions about a business could also help minimise your losses.

Take Arcontech (ARC). This software business offered attractive accounts but the group’s services did not seem that special and underlying growth was very modest:

@MaynardPaton

I do not get the impression ARC is supplying anything revolutionary here…

Revenue from the largest client was £659k for 2020 and £585k for 2015 – a CAGR of just 2.4%.

Maybe underlying growth was modest because the group’s services were not that special. Revenue warnings this year seemed to underline those not-so-special services and have left the shares down 55% YTD.

Or Boohoo (BOO). Did you ever consider the retailer’s margins might decline, especially given the high valuation?

@MaynardPaton

The recent results showed costs starting to creep up and I wonder whether BOO will always be able to sell £5 dresses at an 8% margin. Some of the ESG issues may in time be solved through extra expenses.

BOO’s latest statement owned up to higher costs and lower margins. The shares are down 69% YTD.

Asking tough questions about shares you own may not prevent trouble occurring, but you may be able to recognise problems sooner and possibly alleviate any losses. Within my portfolio, I worry about competition at Tristel, whether Mincon has a moat and whether City of London Investment is stuck in its ways.

Looking at the accounts and questioning your holdings helps build independent thinking. Perhaps your losses can be minimised by doing your own research and becoming less dependent on other people.

Best of the Best (BOTB) is a prime example. The signs of lower profits were there…

@MaynardPaton

Alternatively, the lower customer engagement may persist for some time and Finncap eventually has to lower its projections. I do wonder whether the broker ought to have a stab at revisiting its estimates now, rather than just waiting for BOTB’s next announcement.

…and a few months later came the profit warning and Finncap downgrade:

@MaynardPaton

Broker notes just seem to react to news rather than try and proactively judge what may happen. Ordinary shareholders must therefore take matters into their own hands to determine whether the omens are signalling bad news ahead.

BOTB is down 60% YTD.

Maybe if your portfolio suffered this year, now could be a good time to go through each share you own and identify/eject the potential ‘timebombs’ that might explode during 2022 and beyond.

I am busy double-checking all my shares for a 2021 blog round up (here is the 2020 version). I find revisiting every holding at this time of year very helpful.

Thoughts on potential stock disasters for 2022 are more than welcome!

Maynard

[RogerG]

Hi Maynard,

This is quite a painful post to read for me as I have been on the wrong end of BOTB, BOO and AVON this year, quite the full house! Without that unholy trinity my high teens return for the year would be looking really quite rosy, I suspect!

I agree with the do your own research thesis, of course, and note that I have been in good company in the year’s disasters - Mark Slater had bought into BOTB around the time of one of my buys and AVON was a recommendation from a (formerly) real money portfolio service that you are all too familiar with (obviously lost its touch these days!). Plus Investors Chronicle also had it as a buy recc. at the same time. Basically you can’t (and shouldn’t) trust anyone!

I conclude that getting some buys wrong is an inevitability, although that doesn’t excuse the disciplined evaluation in order to minimise the risks. There’s a lesson in diversification for us all.

Its a bit like in football where keeping a clean sheet massively improves your chances of winning, its no good scoring goals if your defence is leaking just as many at the other end, unless you like the thrill of all that excitement of course!

I think there are a range of simple of risk factors, starting at high valuation, penchant for acquisitions, impenetrable accounts, or unclear business model that should allow us to put a risk rating on each of our holdings and then take care of position size on the higher risk positions.

On the specifics, I sold BOTB, still hold Avon (anticipate a gradual recovery of re-focussed business) and hold BOO while waiting to see if current headwinds persist. The biggest risk I see is them getting taken out opportunistically - a £2 bid might do the trick.

Thanks for all your thoughts over the last year, and all the best into 2022.

Regards
Roger

[MaynardPaton]

Hi Roger,

@RogerG

This is quite a painful post to read for me as I have been on the wrong end of BOTB, BOO and AVON this year, quite the full house! Without that unholy trinity my high teens return for the year would be looking really quite rosy, I suspect!

Sorry about that… although a high-teens return even with that trio is a super performance. The obvious questions then are i) what were the winners that offset the disappointments, and; ii) should we be holding these winners for 2022?

@RogerG

Its a bit like in football where keeping a clean sheet massively improves your chances of winning, its no good scoring goals if your defence is leaking just as many at the other end, unless you like the thrill of all that excitement of course!

Agreed! One of the most influential essays on my investing is The Loser’s Game:

Have you beaten Peter Lynch’s 6 out of 10?

Referring back to the Investors Anthology book reminded me about this great investing essay titled The Loser’s Game. the_losers_game.pdf (52.0 KB) Investing is not all about picking winners, but avoiding losers as well. The essay includes a super correlation between amateur tennis and investing. In amateur tennis you can win matches simply by allowing your over-ambitious opponent to make too many mistakes: “The strategy for winning in a loser’s game is to lose less. Avoid trying too hard. By k…

@RogerG

On the specifics, I sold BOTB, still hold Avon (anticipate a gradual recovery of re-focussed business) and hold BOO while waiting to see if current headwinds persist. The biggest risk I see is them getting taken out opportunistically - a £2 bid might do the trick.

I see the main BOO risk to be BOO itself buying/merging with a similar operator. Such a deal might be an admission the sector’s growth/profit prospects have diminished. I can’t really see BOO being acquired, as I am not sure who would think they could run BOO better than the present board. If the biggest risk is indeed a £2 bid, then should we all be filling our boots at 125p?

Maynard

[RogerG]

Hi Maynard

Thanks for the comments and in particular an excellent bit of “Twixtmas” reading !

@MaynardPaton

Sorry about that… although a high-teens return even with that trio is a super performance. The obvious questions then are i) what were the winners that offset the disappointments, and; ii) should we be holding these winners for 2022?

You prompted a quick review of the years significant ups (over 20% gains) and this included some US stocks: GOOGL, FLGT, BNTX and SHOP, a bit of a Covid boost for Biontech and Fulgent, so good question as to whether that still has legs (lets hope not!).

UK-wise JDG, LOK, SDI, ACSO, BLV, OCI, RCH, REDD, CLIN and RCP all were stars.

CLIN is subject to a bid, and so will likely take care of itself. Judges is a long term hold that I wouldn’t consider selling unless the CEO retires. SDI is a mini-Judges and hopefully has a long runway ahead.

Lok n Store has new locations in the pipeline and so some growth, against which high sector values suggest more modest future growth. I’m happy to be patient but wouldn’t increase the position.

Accesso has had a post Covid bounce, and whilst there’s more to go, I think the best of the bounce is behind it in the short term. Longer term, it is well run.

Belvoir is going great with its franchise model and I don’t see a reason to sell even with a few clouds gathering over housing in the face of interest rates rising

Oakley is my sole Private Equity holding and its a sector I’d like more exposure to. (GROW and HVPE on the watch list.) Much of OCI’s progress was a closing of its previously huge discount to NAV, a trick it will not repeat but as its in bagger territory I’m happy to be patient.

Reach divides opinion, with its pensions hole and the transition from print to online. Again a bagger that I’m happy to cut a lot of slack to.

Redde Northgate is solidly placed, but I suspect likely to be more pedestrian in future, I may bank profits on this one.

RIT capital partners (Rothschild) is the surprise as its in the wealth preserver category (with PNL, and CGT), so has no right to such a storming year. Low risk and high return is a match made in heaven, so that’s a keeper.

This rather unscientific straw poll suggests 14 good outcomes to the three mini disasters. Peter Lynch would approve, I think. There’s a lot of ballast in my portfolio in the middle, although I suspect Mark Slater, Terry Smith and Stephen Yiu wouldn’t like to be thought of as ballast, they have all contributed handsomely during the year.

@MaynardPaton

I see the main BOO risk to be BOO itself buying/merging with a similar operator. Such a deal might be an admission the sector’s growth/profit prospects have diminished. I can’t really see BOO being acquired, as I am not sure who would think they could run BOO better than the present board. If the biggest risk is indeed a £2 bid, then should we all be filling our boots at 125p?

I note that ASOS’ largest investor T. Rowe Price took a 10% stake in BooHoo in August, not the best of timing! But I wonder if an ASOS -BooHoo merger or Shein buying BOO is possible.

I see more upside than down in BOO at 125p Unless the growth wheels really have come off; a business that broadly doubles sales every two years can grow itself out of a lot of messes and it is not priced at anything like that growth rate. I’m more likely to add than sell, though my position is lumpy even after the declines.

@Have you beaten Peter Lynch’s 6 out of 10?

Referring back to the Investors Anthology book reminded me about this great investing essay titled The Loser’s Game. the_losers_game.pdf (52.0 KB) Investing is not all about picking winners, but avoiding losers as well.

This was an excellent bit of reading on a slow markets day - thank you for sharing. You may have unwittingly improved my tennis as well. There’s a 2022 resolution, lose less!

All the best for the year ahead.

Roger