Money: Smaller companies can deliver huge rewards if you get the timing right

Click to follow
It is said that the worst kind of investor is one with 20-20 hindsight. You know - the person who jobs backwards. A member of the "if only" brigade. Looking backwards is a useful way of learning from your mistakes but too many "if onlys" and you may find it difficult to take any investment decisions.

One of the more acceptable "if onlys" occurred to me this week. If only two weeks ago I had decided to write about smaller companies, it might have made me look a whole lot smarter. I am not jobbing backwards. I was on television talking about smaller companies, so it would have been quite legitimate to turn thoughts for the broadcast medium into the written word. I had already written a piece about mutual insurance companies - they were in the news - and I was busy. So it goes.

For those of you who missed the excitement, in the portfolio competition in which I, sometimes reluctantly, take part on Sky Business, I bought some Proudfoot shares. What are they, I hear you ask? They are a rather bombed-out management consultancy. Into the portfolio they went at 12p. Now just two weeks later they are 27p.

Of course, I could not know Proudfoot was going to perform so well for me. But it all shows what can happen if you catch a smaller company at the right time.

Many years ago I bought into a transport company called Dawson Group. A small coterie of brokers bought shares at 27p. Before you could blink they had fallen to 11p.

One of us doubled up his holding. If they were cheap at 27p, they had to be cheaper at 11p, was his view. The rest of us bit our nails and hung on. At 40p two of our gang of four bailed out. I did not touch my holding until they reached 90p, when I sold a quarter. Another quarter went pounds 1 higher, a further quarter pounds 1 above that. And the last of the holding was sold at a little over pounds 4. That was when my friend who had doubled up started to unload his holding. He made serious money.

Of course, I can report disasters too, but part of the fun of buying smaller company shares is they can deliver huge rewards if you get it right. You have to be able to live with the risk, though. Volatility is higher, but by and large smaller companies perform better than their larger counterparts. I say by and large, because there have been periods when they underperform significantly. The post-1987 crash was just such a time.

Stockbrokers can be a useful source of information on smaller companies. The idea for Proudfoot came from our own head of smaller company research.

And here is where the wealth warning comes in. Corrections can be just as swift and severe on the down side as on the up. Many smaller companies have share registers dominated by directors or family holdings. This can make marketability difficult, so it is as well to remember that you may not be able to get out of your holding easily.

Smaller companies are for the seasoned investor. I shall stick to smaller companies rather than trust my luck to a handful of multi-coloured Lottery ping-pong balls. And, no, I did not buy any Proudfoot shares. Well, you would not want me accused of front-running, would you?

Brian Tora is chairman of the investment strategy committee at Greig Middleton (0171 392 4000)

Looking for credit card or current account deals? Search here