This article was originally published here in July 2003
Every serious investor should find the time to look back and review their past trades. I know that I have done well from a style of investing called value investing. However, when looking back, it is just as important to identify those investment types that always seem to loose money. From my trading spreadsheet I see there are two investment types I never seem to do well at.
When I started investing in the early 1990’s the government’s privatisation program was drawing to a close. I made some money from both AEA Technology and British Energy, buying shares in their flotations and selling soon after. I decided not to invest in RailTrack. I felt the risk of political interference was always too high. Stephen Byers eventually proved me right but I missed a good post-flotation profit. Now I think that the era of easy money from privatisations has passed. There is nothing big left for the government to sell.
I have made money through other New Issues (or Initial Public Offerings, IPOs, an American term increasingly used this side of the Atlantic). One of my very first investments was in David Lloyd Leisure. I made a nice profit when Whitbread took them over. I also did well from Intermediate Capital Group’s flotation. Most recently I gained from IG Index’s market debut. The problem is that I have lost more in flotations whose good story turned sour.
Companies that are about to issue shares publish a prospectus, detailing past trading and future prospects. From my experience companies often find post flotation conditions trickier than they expected. Two companies that I bought into at flotation went bust within a couple of years. Others issued profit warnings and their share prices collapsed.
The reason why people like to buy shares in a company’s flotation is the hope that they are getting early into a strong growth share. I have found that this can happen, but not too often. Now that my investing style is to favour value situations I do not think I will be looking at any more company prospectuses. It is only growth companies that issue shares in themselves and list on the stockmarket. Value shares are found in companies that are already listed.
I have also lost too much money investing in unit and investment trusts. My losses seem to be concentrated in newly launched trusts. The managed investment fund market is very faddy. New funds are floated to take advantage of whatever is hot in the market. Just look at the rash of technology funds launched in 1999 and 2000. A crop of fund launches in a particular sector is a good sign that the sector is overbought, overhyped, overvalued and near to a fall. By the time the fund management industry judges that the public is sufficiently interested in a sector the smart money is selling up and moving on.
You may have guessed that I am not a fan of unit and investment trusts. They often perform poorly and have high charges. Yet I do feel they have their uses. Funds can invest in areas that are out of reach of the private investor. I am interested in Eastern Europe and China. It would be impossible for me to invest directly in these areas. I have to pay a manager to do it for me. These are two long-term investments; I will not get rich quick. I am looking for strong and steady growth for the next couple of decades.
I now use a simple rule when looking at funds to invest in. Ignore any fund that has not got at least three years of trading history outperforming its peers. Of course, this eliminates all new funds. Ignore their bright advertising. If they have not got any trading history they are an unknown candidate. Let other people discover how well new funds do. I stick to investing in funds that already know how to perform.
From looking back at my past dealings I am now sure that I can ignore those riskier new issues with their glittering promises that often turn out to be illusionary. I can invest just as well as any fund manager investing in the UK. I make a good enough return from value shares. The only time I feel that it is still worth paying a fund manger to invest for me is when I want to invest abroad. I believe that some countries or regions offer excellent opportunities for investing over the longer term. In those situations I am happy to pay someone for their expertise in investing my money with their knowledge.