Lead us not into temptation

Rushing in where angels fear to tread can leave you with hard lessons to learn. But, when it comes to shares, ignoring smaller and newer companies can be short-sighted
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The Independent Online

As the Lord finalised the wording for His Prayer and put in that bit about "lead us not into temptation", I have a feeling he had me in mind.

As the Lord finalised the wording for His Prayer and put in that bit about "lead us not into temptation", I have a feeling he had me in mind.

Ever since, as a cyclist, I moved from three wheels to two and immediately fell off because I would not let my dad hold the saddle, I have suffered the consequences of rushing in where more cautious angels fear to tread. It was the same with jobs and horses, I always picked wrong 'uns to start with because I never had the patience to check them out carefully first.

My initial foray into share buying was doomed from the start. Armed with a copy of a penny shares tipsheet, I staked my £10,000 nest-egg on five rank outsiders. It was three days before Black Monday in October 1987, when the bottom fell out of the stockmarket. Within a fortnight my ten grand was down to under two grand and, unlike the rest of the market, it never recovered.

If I had bothered to do my research I would have discovered why my five disasters, like the vast majority of penny shares, were priced at next to nothing. It was simply because that was all they were worth, and it took no time at all for them to become totally worthless.

My saving grace is that I learn from my mistakes. I went to Spain for two years, sat in the sun and read all I could about the stockmarket. Now I am a learned fellow when it comes to jobs, horses and shares.

Despite these hard lessons I admit to still being tempted by the untried. Hopefully I have managed to quell the foolhardy streak - although there is a relatively recent venture into options which I still cannot talk about - but I firmly believe a wide spread of investments is the safest way to protect the value of your portfolio. It's my opinion, too, that to ignore the newer and smaller companies is short-sighted.

With this in mind I have turned my attention to OFEX, the trading market for the private investor rather than the institutions. Although its acti-vities are governed by the Securities and Futures Authority, it is a privately run operation and a law unto itself because it imposes its own code of best practice on the companies it lists, and suspends them if they transgress the rules.

In the five years since its formation OFEX has become the incubator for small companies, and there must surely be some nuggets hidden in the 200 quoted businesses listing their shares on this dealing facility. OFEX differs from its bigger brothers, the London Stock Exchange and the Alternative Investment Market (AIM). They are regulated trading exchanges and their requirements for entry are more onerous. It's also much more expensive to get your shares quoted on the conventional exchanges. Inevitably then, OFEX attracts the minnows and I list them all here to give you a flavour of the range.

Betachance.com is an internet betting site raising £312,500 for working capital. Cardington Plc generates revenue for public sector business and is seeking a further £250,000 capital. Fishworks Plc is a Bath-based restaurant and cookery school looking for £850,000 to spin out its formulae around the country.

Halcyon Internet Plc is a recruitment software company wanting £1.7m for expansion. Latin American Copper Plc is a Chile-based copper mining company looking for £360,000 to fund its operations. Strand Technology is a networks integration business seeking £1.6m to help increase its exposure in the marketplace.

Symphony Plastic Technologies has developed a polythene that will wholly degrade as a plastic material, leaving only water and carbon dioxide. The aim is to attract £3.2m for product development and marketing. Virtual College Group Plc is a technology-based training operation aiming to raise £2.8m to further develop specific training material.

I should emphasise these are not all start-up companies wanting capital to get going. Many of them are established companies with a good financial foundation. In most cases they require the amounts for specific expansion purposes, hence the relatively small amounts of capital required.

Although there are big companies like the giant Weetabix and Arsenal Football Club that - for a variety of reasons - list their shares on OFEX, the vast majority are comparative tiddlers and in these uncertain times they must come with a strong risk warning. But the carrot is they might perform like Knowledge Management Systems, which has shown a 20 times increase since it made its debut earlier this year.

There's another barrier to look out for. The number of shares available for private investors to buy might be very limited, because in several instances the founders or directors of the company concerned own the majority of the stock.

So how does OFEX work? It is owned by a company called J P Jenkins, which undertakes to offer a buying price and a selling price in a certain number of shares in most of the companies on OFEX. Note the words "certain number" and "most". In some of the smaller listed companies with less liquid shares J P Jenkins merely offers a "matching" facility, trying to match buyers with sellers. And if a company is suspended (usually because it has broken one of the Jenkins rules) you can't buy or sell the shares through OFEX.

How do you buy shares in OFEX companies? Probably through your stockbroker. Most of them offer an OFEX service now and dealing charges should be similar to those you pay for main market trades.

I conclude that OFEX is rather like the biotechnology business. There are plenty of weaklings in there and no matter how you nurture them theyare destined to wither and die. But there are also sturdy youngsters in the pack too, and they will strive and thrive and achieve unimaginable feats. The trick is to identify the winners and you will only do that by very close and careful examination.

* One of the logical moves for an OFEX company that's expanding is to transfer from OFEX to AIM (incidentally, there's a rumour that the two are talking of amalgamation). I've learned that one company considering the idea is Supreme Plastics, which makes plastic bags that can be resealed and used for food, clothes, medicines, stationery and - would you believe? - dead bodies.

The company has had its shares listed on OFEX for two-and-a-half years and has a steady if unspectacular track record. Profits are slightly up despite a price increase in the raw material, polymer. From its own resources, Supreme has funded the £2.5m expansion of its factory in Lincolnshire, and whisper has it there are plans for growth through acquisition. There's a wide product range, much of it protected by patent.

These facts, combined with an experienced and go-ahead management and a price-to-earnings ratio of less than eight, have encouraged me to have a dabble.

Declaring my interest, last week I bought a modest amount of Supreme Plastics shares at 62p.

* terry.bond@hemscott.net

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