Madoff Dies, Parsley Box, Active Trading, Babcock and Covid Vaccinations

Bernie Madoff, arch fraudster, has died in prison. He ran the largest ponzi scheme in history which defrauded investors of over $60 billion. His funds showed unbelievable good performance because he invented share trades to support his fund valuations. This attracted new investors whose cash he used to pay out departing investors and to support dividends. It is unbelievable that such outrageous frauds can still take place in the modern world despite all the onerous regulations.

I mentioned a recently listed company called Parsley Box (MEAL) in a prior blog post. I have now sampled their products – prepacked dinners and have come to the conclusion that I question whether this is likely to become a great company. The meals are rather bland and you can buy cheaper equivalents from supermarkets. They do have the advantage of a long shelf life and do not require refrigeration, but so do other products such as canned goods so I am not convinced there is a big market for them. The company is spending money on national TV advertising, on channels focused on the elderly like me. You can always generate sales if you spend enough on marketing, but that does not necessarily mean that you have a profitable business.  

How actively should one trade? This is a matter of personal preference I have come to believe. Some people can hold stocks for ever in the belief that they will come good in the end whereas others panic at the first sign of trouble. It does of course depend to some extent on the type of stocks in which you invest. Dumping small cap stocks that are on wide spreads can be a very bad idea. The volatility of small cap stocks can bounce you out of a holding quite easily if you have a tight stop-loss.

But there was an amusing story in the latest edition of the Techinvest newsletter. To quote: “In that respect, we are often reminded of a well-publicised study by a large American brokerage a few years ago that aimed to identify which retail accounts generated the highest investment returns. Top of the list were: the accounts of customers who it turned out had been deceased for some time; next best was those accounts that customers had forgotten about and had not traded on for many years; the poorest of investment returns belonged to accounts that had clocked up the highest transaction costs through frequent stock rotation”. Techinvest runs a portfolio and certainly its returns have been very good over the years as they rarely sell stocks. They appear to just wait until some idiot comes along willing to pay a premium price for their holdings.

Personally I often hold stocks for years but I am also impatient when investments seem to be going wrong. I cannot sit there doing nothing. As a man of action, I pander to my impatience by selling a proportion of my holding but not all, i.e. I sell on the way down in stages. That cuts my possible losses. The only exception to this rule I make is if the news is catastrophic or I have lost all trust in the management when I dump the lot.

Babcock (BAB) is a good example of the danger of holding on regardless. It has looked fundamentally cheap for some time but the shares have actually lost 75% of their value in the last 5 years in a steady downward trend. There was more bad news on the 13th April. An announcement from the company said “The contract profitability and balance sheet review (“CPBS”) has identified impairments and charges totaling approximately £1.7 billion”. They now plan some disposals which they suggest may enable them to avoid an equity issue.

On a personal note, I had my second Covid-19 vaccination yesterday (the Pfizer version) so I am feeling slightly tired this morning, as I did after the first. The organisation was chaotic though this time. Originally planned to be done at Guys Hospital but then redirected to St. Thomas hospital and they lost my wife’s record altogether. My tiredness may partly relate to the miles I walked yesterday around and between hospitals. The person who administered the injection worked for British Airways as cabin staff. He was redeployed as there are few flights to service at present. He said a lot of people are extremely nervous about taking the vaccine. He had spent 45 minutes talking to one person before they eventually refused it.

Personally I have no qualms at all about any of the vaccines. They are much safer than the risk of catching the virus. But there are a lot of idiots in this world are there not! The latest bad news however is that the CEO of Pfizer has suggested that we may need a booster every 12 months in future. As I have been having annual flu vaccinations for 25 years that is of no great concern.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Epidemic Over? Unable to Trade and Chrysalis VCT Wind-Up

The news that the Pfizer vaccine for Covid-19 appears to work (at least 90% of the time) and has no negative side effects gave stock markets a good dose of euphoria yesterday. It suggests that we might be able to return to a normal life in future, but exactly when is far from clear. Actually producing and distributing the vaccine is going to be a mammoth task and it is very clear that it will only be given to certain people in the short term – the elderly and medically vulnerable. Some people might not accept the vaccine and transmission of the virus may still take place. It is clearly going to be many months before we can cease social distancing and wearing face masks – at least that is the situation if people follow sensible guidance which they may not. Some countries may not be able to afford to immunize everybody so how this good news translates into reality is not clear. In summary, the epidemic is not over.

But the good news did propel big changes in some stocks such as airlines, aerospace industry companies and the hospitality sector which have been severely damaged by the epidemic. Rolls-Royce (RR.) share price was up 44% yesterday for example, although I wouldn’t be buying it until it can show it can make a profit which it has not done for years. In the opposite direction went all the highly rated Covid-19 diagnostic stocks such as Novacyt (NCYT) which I hold. There have probably been way too extreme movements both up and down in the affected stocks as sentiment was only one way.

The big problem faced by many investors though was that platforms such as Hargreaves Lansdown and AJ Bell Youinvest actually ceased to function. It is reported that their customers were unable to log in and trade. But this is not a new problem. See this report in December 2019 when there was a previous bout of euphoria that affected the same two brokers: https://roliscon.blog/2019/12/16/euphoria-all-around-but-platforms-not-keeping-up/ .

They clearly did not learn their lesson and should have done better “load testing”. Perhaps the moral is don’t put all your eggs in one basket by relying on one broker (I use 5 different ones and spread my holdings over them).

For those with an interest in Venture Capital Trusts (VCTs) it has been pointed out to me that Chrysalis VCT (CYS) is putting proposals to wind up the company to its shareholders. I used to hold the company, but sold out in 2018 at prices ranging from 62p to 66p – the current share price is 35p. I had big concerns then about the shrinking size of the company (NAV now only £14.9 million) as cash was returned to investors. The other major concern was the holdings in the company, particularly that in media company Coolabi and the valuation thereof (last filed accounts were to March 2019 and showed a loss of over £7 million).

VCTs that shrink too much, even if they are good at returning cash to shareholders, can get themselves into an unviable position as costs of running the VCTs sooner or later get out of proportion. As the announcement by the company makes clear, in such a situation a VCT has the following options: a) merge with another VCT; b) change the manager and raise new funds; c) sell the company or its portfolio; or d) wind it up.

But raising new funds under the tougher VCT rules that now apply might not be easy, while mergers with another company might be difficult. Who would want to acquire a portfolio where 29% of the current valuation is that of Coolabi – even if you believe that valuation!

The directors give numerous reasons why a wind-up is the best option after they got themselves into this difficult situation. They correctly point out that some investors will be prejudiced by this move as some original investors will have claimed capital gains roll-over relief. They will get their tax liability rolled back in after the wind-up and the ultimate cash cost might be more than what they obtain from the wind-up. Ouch is the word for that. But the directors are going to ignore those investors on the basis that a wind-up “best serves shareholders as a whole”.

The other problem is that a wind-up of a company with holdings of private equity stakes takes a long time and there is no certainty that the value they are held at in the accounts can actually be obtained. Investors in Woodford funds will have become well aware of that issue! Who would actually want to buy Coolabi for example, or some of the other holdings?

Another VCT I held in the past that got into the situation of returning cash to shareholders while finding no good new investments and not raising funds was Rensburg AIM VCT. They managed to escape from it after a lot of pushing from me by merging with Unicorn AIM VCT. But I fear Chrysalis VCT have left it too late and hence the choice of the worst option.

But if I still held the shares, I might vote against the wind-up and encourage the directors to take another path. It is possible to run VCTs on a shoestring if a big focus on costs in taken. In addition, the directors say that they did have some discussions about fund raising, possible mergers or the acquisition of the company but have rejected those for various reasons. But I think they need to look again, after a more realistic view of the values of the existing portfolio holdings has been obtained.

One change that should certainly be made if the company chooses not to wind-up is a change in the directors and fund managers who allowed the company to get itself into this unenviable situation. Regrettably there often appears to be a tendency for directors and fund managers to want to keep their jobs and their salaries long past when tough decisions should have been made.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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