Market Bounces, But It’s Not on Good News

The FTSE-100 is up 2.5% today at the time of writing, and my portfolio is up 5.5%. There are several stocks in there that are up more than 20% but the bad news keeps coming so this seems to be more a case of folks picking up stocks that have fallen to very low levels and moving into defensive ones than on any really good news. The impact of the virus in the UK is still growing and business is grinding to a halt.

The bad news today was 1) From Rightmove (RMV) who said “Notably the number of property transactions failing to complete in recent days and likely changes in tenant behaviour following the announcement of the renters’ protections by the government may put further pressure on estate and lettings agents”. They are knocking 75% off their customer invoices for the next few months which will mean a hit of up to £75 million to revenue! Better to have some revenue than have agents cancel seems to be the logic. The share price is down 4%. 2) From Tracsis (TRCS) a provider of services to the rail industry who say: “Given that the situation is changing rapidly, at this point in time it is not possible to accurately quantify the impact on H2 trading and therefore full year expectation”. A lot of their revenue is recurring in nature but they will be impacted by the cancellation of events. The share price is up over 2%, presumably on some relief that it is not as bad a prognostication as many companies are issuing.

I do hold those stocks but one I do not is Next (NXT) the retailer. They have received compliments in the national media about their recent announcement which gave some very detailed forecasts of how they would cope “in extremis”. I still doubt this is a sector to get back into because wages in many sectors of the economy will be depressed which will surely hit retail sales even if they are able to venture back into the shops or shop on-line. When the economic outlook is uncertain, people stop spending money also.

For Sirius Minerals (SRX) shareholders, ShareSoc has issued a very well judged blog post on possible legal claims – see https://www.sharesoc.org/sharesoc-news/sirius-update-9-14-march-2020/ . Regrettably there have been some hotheads who wanted more action and sooner, which was not practical, and some who think ShareSoc is raising false hopes. Neither is the case. As someone who has in the past run shareholder action groups, I have learned that quick actions are neither sensible nor practical. But legal cases for redress are sometimes possible – for example in the case of the Royal Bank of Scotland rights issue in 2008 and the false prospectus. But it can take years to raise funding and reach a conclusion. Persistence is everything in such circumstances. But rushing into legal action, however willing lawyers are to run up fees on a case, is not sensible.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

 

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Sirius Meeting Result, Intu Announcement and Share Plc Results

Yesterday shareholders in Sirius Minerals (SXX) voted for the proposed scheme of arrangement. Whether the votes actually represented the considered views of shareholders as regards the Court vote is questionable as most were not on the register and hence would not have been counted as individual members. However, this was a typical example of what happens when a company runs out of money and there is the immediate threat of administration – the winner is likely to be any other company that is willing to put up the cash to mount a rescue which in this case was Anglo American. Shareholders will not lose everything in this case as is what often happens but the many private shareholders who invested after optimistic promotions of the venture will still feel disgruntled no doubt.

I did not attend the meeting as I was never a shareholder in the company, but there are good reports in the Guardian and Daily Telegraph this morning. ShareSoc who have been running a supportive campaign for Sirius investors will no doubt be publishing a report on the meeting soon.

I never invest in mining companies that are still building a mine rather than actually in production because they always tend to run out of cash and require more investment to finish the development. The folks who make money are those that step in at that point because there are often few bidders to take it forward. In the case of Sirius billions of pounds are required and the project is high risk and always has been, even if the eventual outcome could be very profitable. So you can see exactly why current investors did not have much choice and may have been wise to vote for the takeover. The only possible alternative was some support from the Government such as loan guarantees but they chose not to do so. Why should they though when the Anglo deal will protect jobs and ensure the mine is developed? At least they will be taking the risk, not the Government.

In a previous blog post I suggested that investing in property companies might prove a good defensive strategy against the coronavirus epidemic. That was on the basis that they have reasonably secure long-term leases. But property companies that are exposed to the retail sector are probably not a good bet, I should have said. This morning Intu Properties (INTU) gave an “Update on strategy to fix the balance sheet” which is a direct way of stating what needs to be done.

The share price is down 28% today at the time of writing, and that is after a long decline since 2006. It’s actually fallen by 99% since then!  The company has concluded that an equity share raise is not viable.

The business reports some positive news but in essence the company has too high debts with a debt to asset ratio of 68% after the latest property revaluations downwards. It has £190 million of borrowings due for repayment in the next year and other liabilities of £93 million also due. The company is to “broaden its conversations with stakeholders” but it looks to be a grim outlook for ordinary shareholders. A debt for equity swap is one possibility which often dilutes previous shareholders out of sight.

Share Plc (SHRE) who run The Share Centre announced their preliminary results this morning. You can see why the company recently agreed a takeover bid. Revenue was up 7% but losses rose to £133,000. Not that this is a great amount but it shows how competitive the stockbroking sector is currently with new entrants now offering free share trading. Consolidation is clearly the name of the game so as to increase scale and therefore it’s not surprising that an offer was accepted.

Stockbrokers now have high fixed costs due to the costs of developing and maintaining their IT systems and increased regulations and compliance have also added more costs. With few barriers to entry and not much market differentiation the future for smaller players does not look good.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

 

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Brexit – Over and Out – and Why Shareholder Votes Matter

Last night Brexit got done. We exited the EU after 47 years. Our last words to the EU bureaucrats were surely “over and out”. But we will need to resume the conversation to secure a trade deal. That still leaves room for many more arguments within the UK and with the EU.

Some people seem to think that there is a hope we might rejoin the EU some time in the future. But while the EU is dominated by bureaucrats and real democracy is so lacking in the EU institutions that seems exceedingly unlikely to me. Hope of any reform to the EU is surely forlorn.

It might be preferable to have some alignment on product and financial regulations but in the latter area the EU either follows well behind the UK anyway, or creates regulations like MIFID II that are over complex or simply incomprehensible.

One area that the EU could have been a leader in was to improve financial regulation such as on shareholder rights. They have produced a Shareholder Rights Directive but it is so badly written that it can and is being effectively ignored in the UK. Just take the area of shareholder voting and the problem of nominee accounts.

The Investors Chronicle (IC) have published an article by Mary McDougall this week entitled “Why Shareholder Votes Matter”. It shows how the nominee account system has disenfranchised most individual shareholders as they either cannot vote their shares, or it is made so difficult to do that they don’t bother.

I contributed to the IC article because I have a lot of knowledge of this area having pioneered the ShareSoc campaign on the issue and having experience of using multiple platforms over many years (see https://www.sharesoc.org/campaigns/shareholder-rights-campaign/ ).

The article mentions Sirius Minerals (SXX) which is currently subject to a takeover bid via a scheme of arrangement. A very large proportion of the shares are held by individual investors in nominee accounts but because of the voting rules on Court hearings all of them will only get one vote by the nominee operator who might not even vote at all. That’s because nominee accounts are generally “pooled” with only one name on the share register as a “Member” of the company – and that name is that of the nominee operator (i.e. the platform).

Another example that shows where votes are important is that of the forthcoming AGM scheduled for the 12th February at RWS Holdings (RWS), an AIM company. You might think that this will be a routine matter with just the standard resolutions. But not so. There is actually a resolution to waive the need for a Concert Party that might acquire more than 30% of the shares to make an offer for the company under the City Takeover Code. The Concert Party comprises Chairman Andrew Brode, Diane Brode and a Trust they control. They already hold 32.8% of the shares but as there is also a share buyback resolution that might increase their holdings, and hence trigger the need for an offer, a waiver is required. I voted against both resolutions – I always vote against share buy-backs unless there are very good reasons, and I don’t like public companies to have shareholders with more than 30%.

You can see that just a few private shareholders in nominee accounts might affect the outcome as the Concert Party cannot vote on the waiver. But will they?

Regardless I encourage shareholders in RWS to vote their shares – if you hold shares in an ISA your platform operator has a legal obligation to cast your votes.

The IC article mentions that the Law Commission is currently looking at the problems and legal uncertainties created by nominee accounts, but it also discloses that they only expect a “scoping study” on intermediated securities to be published in Autumn 2020. No great urgency there then!

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Winning The Loser’s Game – It’s Like Tennis

Tennis Player

It’s that time of year when we review our investment performance over the last year and some of us realise that it would have been lot better if it was not for the few disasters in our share holdings. For example, this is what well known investor David Stredder tweeted before Xmas: “End of 2018 and most of this year has been pretty awful investing wise for me…ACSO, CRAW, BUR, SOM, OPM & JLH were all top 15 holdings and lost 50% or more. CRAW actually went bust. First signs of recovery in two of those and thankfully my top three holdings GAW, JDG & INL have all doubled and covered most my losses but shows investing cannot be fab returns every year. Often a roller coaster ride and must prepare yourself…Sell half on first bad news, slice profits, make friends, share bad and good times as happen to all of us. Enjoy the festive break”.

For those like me that cannot remember all the TIDMs of the several thousand listed companies, the failings were in Accesso, Crawshaw, Burford Capital, Somero, 1PM and John Lewis of Hungerford. The positives were Games Workshop, Judges Scientific and Inland Homes. As an aside I do wish investors would put the company name not just the TIDM (EPIC) code when referencing companies in tweets. A lot of the time I have no idea what they are talking about.

As in most years, I have also had failures. Patisserie was a wipe-out. It went bust after a massive fraud. Thankfully not one of my bigger holdings but I ignored two of the rules I gave in my book “Business Perspective Investing” – namely avoid Executive Chairmen, and directors who have too many roles. I lost money on a number of other newish holdings but not much because I did not hold on to the duds for long.

One of the keys to successful long-term investing is to simply minimise the number of failures while letting the rest of your investments prosper. It is important to realise that investment is a “loser’s game”. It is not the number of sound investments one makes that is important, but the number of mistakes that one avoids that affects the overall performance of your portfolio.

A good book on this subject which I first read some years ago is “Investment Policy – How to Win the Loser’s Game by Charles D. Ellis”. It covers investment strategy in essence but it also contains some simple lessons that are worth learning. He points out that investing is a loser’s game so far as even professional investors are concerned, let alone private investors. Most active fund managers underperform their benchmarks. A lot of the activity of investors in churning their portfolios actually reduces their performance. The more they change horses with the objective of picking a winning steed, the worse their performance gets as their new bets tend to be riskier than the previous holdings, i.e. newer holdings are just more speculative, not intrinsically better. That is why value investing as followed by many experienced investors can outperform.

But Charles Ellis supplied a very good analogy obtained from Dr. Simon Ramo who studied tennis players. He found that professional tennis players seemed to play a different game to amateurs. Professionals seldom make mistakes. Their games have long rallies until one player forces an error by placing a ball just out of reach. But amateurs tend to lose games by hitting the ball into the net or out of play, i.e. they make a lot of unforced errors. The amateur seldom beats his opponent, but more often beats himself. Professional tennis is a winner’s game while amateur tennis is a loser’s game.

In a recent review of my book by Roy Colbran in the UKSA newsletter he says “the book takes a somewhat unusual line in telling you more about things to avoid than things to look for”. Perhaps that is because I have learned from experience that avoiding failures is more important to achieve good overall returns. That means not just avoiding investing in duds to begin with, but cutting losses quickly when the share price goes the wrong way, and getting out at the first significant profit warning.

However, the contrary to many negative qualities in companies are positive qualities. If they are unexceptional in many regards, they can continue to churn out profits without a hiccup if the basic financial structure and business model are good ones. Compounding of returns does the rest. If they avoid risky new business ventures, unwise acquisitions or foreign adventures, that can be to the good.

The companies most to avoid are those where there might be massive returns but where the risks are high. Such companies as oil/gas exploration businesses or mine developers are often of that nature. Or new technology companies with good “stories” about the golden future.

There were a couple of good articles on this year’s investment failures in the Lex column of the FT on Christmas Eve. This is what Lex said about Aston Martin (AML): “Decrying ambitious ventures is relatively safe. Many flop. We gave Aston Martin the benefit of the doubt, instead”. But Lex concedes that the mistake was to be insufficiently cynical.

Lex also commented on Sirius Minerals (SXX) a favourite of many private investors but where Lex says equity holders are likely to be wiped out. Well at least I avoided those two and also avoided investing in any of the Woodford vehicles last year.

To return to the loser’s game theme, many private investors might do better to invest in an index tracker which will give consistent if not brilliant returns than in speculative stocks. At least they will avoid big losses that way. Otherwise the key is to minimise the risks by research and by having a diverse portfolio with holdings sized to match the riskiness of the company. As a result I only lost 0.7% of my portfolio value on Patisserie which has been well offset by the positive movements on my other holdings last year. It of course does emphasise the fact that if you are going to dabble in AIM stocks then you need to hold more than just a few while trying to avoid “diworsification”.

Not churning your portfolio is another way to avoid playing the loser’s game. And as Warren Buffett said “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” – in other words, he emphasised the importance of not losing rather than simply making wonderful investment decisions.

Those are enough good New Year resolutions for now.

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

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.