Derek Pain: It's not always about chasing the quick buck – patience pays off, too
No Pain, No Gain
Saturday 24 April 2010
Patience is an often overlooked investment virtue. Yet it is a necessary asset for buy and hold investors – an increasingly ignored and derided contingent in these days when the stock market is apparently dominated by short-term vultures. The furore over the Cadbury takeover is the latest high-profile example of the quick-turn mentality. It was not only hedge funds that delivered the British confectioner into US hands; it seems many other investors, big and small, played the fast-buck game, making continued resistance impossible.
Short-termism is as old as the hills, but in these high-tech days it is a game that is much easier to play. With so many day traders now glued to their computers, they, together with hedge funds and in-and-out institutions, completely overshadow old-fashioned buy-and-hold investors.
Of course, shareholders should always remain alert. Sometimes even the most laid-back should call time on an investment. Indeed, the No Pain, No Gain portfolio has, too often, been guilty of hanging on to ailing shares. Lennox and Pubs'n'Bars represent disastrous excursions. But it can pay to persevere. Rentokil Initial and Lo-Q are at opposite extremes of the investment world. One has a £2.5bn capitalisation; the other just £21m. In recent years both have been under intense pressure. A series of trading calamities sent Rentokil shares, once constituents of my portfolio, tumbling to less than 50p from about 170p. New management has since dramatically revitalised the pest control to parcel delivery group and the shares are now approaching 140p.
Lo-Q, producing devices for cutting the time spent queuing at theme parks and elsewhere, must have even more sorely tested the patience of its long-term investors. The shares were floated in 2002 at 100p and I recall attending the launch party at a posh City restaurant; hopes were high that the shares would soar. They did touch 115p, then came a long, painful decline. The price finally settled at a miserable 3p before recovery set in. With profits of £2.4m, helped by more Americans holidaying in their own land, the shares are now at about 130p.
I have said many times that playing among small caps can be a risky activity. It is so easy to descend on losers; winners (and they can provide spectacular rewards) are more difficult to locate. I wonder how many early shareholders in Lo-Q stayed the course? Their brave endurance certainly deserves applause.
Lo-Q may be an outstanding example of patience paying off, but there are many more buy-and-hold successes at both ends of the market. A recent trawl through the top 350 companies by Investors Chronicle produced dozens of examples of returns of at least 100 per cent over 10 years. The biggest gainers were resource groups which, it could be argued, managed to strike it lucky. Randgold Resources was top, scoring a 3,500 per cent gain. But the "real" world enjoyed hits. Chemring, Domino's Pizza and Aveva were each above the 1,000 mark. And staid Robert Wiseman, operating in the unglamorous world of milk, recorded a 516 advance.
Buy-and-hold shareholders may be regarded as the dinosaurs of the investment world but their laid-back approach, which is an anathema to commission-hungry City dealers, is obviously capable of reaping rich rewards without the aggravation of hyper activity and incurring heavy dealing costs.
The portfolio is a long-term investor. Mistakes have been made, but overall it remains in profit with a £200,000 investment producing a near £100,000 gain. Dividends (and dealing costs) are ignored in my calculations.
Finally, I have completed my hunt for a new Footsie constituent and G4S, the security group, has joined the portfolio. I recruited the shares at 264p. Security, in these uncertain times, is clearly a growth business and G4S, the result of a merger between Securicor and a Danish group in 2004, has an impressive record.
Profits last year emerged at £302.8m and Tony Shepard at stockbroker Charles Stanley is looking for £393m this year. Although the shares have had a good run, they are not expensive and I feel will rest comfortably in the portfolio. I am still keen to recruit another share, probably a small cap, to lift membership to 16 – the ideal strength.
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