No Pain No Gain: Buy and hold should court Lady Luck
Friday 30 November 2012
When recruiting Essenden, the latest addition to the no pain, no gain portfolio, I was pleasantly surprised to rediscover that in an earlier incarnation the ten-pin bowling group, had been quite a successful investment. I had forgotten that, as Georgica, it had made a considerable contribution to our funds.
My decision to sell was a lucky break. The shares subsequently fell into the disaster zone and I would probably have been forced to sell them at a significant loss. Just to underline my good fortune I dumped Georgica for, in a sense, the wrong reason. Lady Luck was certainly smiling on me then. But during the portfolio's near 14-years existence there have been many occasions when she failed to offer even the remotest comfort.
Although the portfolio remains comfortably in the black, there have been a number of decisions which, in retrospect, were manifestly wrong. Hindsight is a great leveller that haunts many an investor and should not be ignored.
In a past column I berated myself for selling Anglo Pacific, a mining investor, at 16p suffering a modest loss. In recent years the shares topped 350p. But other misdemeanours came to light as I examined Georgica's performance.
One is Avon Rubber. The shares were early recruits. I was impressed with the group's gas mask technology and the response to its endeavours being displayed by United States authorities. But after waiting patiently for the still elusive US breakthrough and with a few problems on the horizon I sold, suffering a 20.5p a share loss. Since then Avon, once famous for its tyres but now concentrating on defence and protection equipment and the dairy industry, has made the sort of progress I had earlier envisaged. If I had stuck around the portfolio would be sitting on handsome profits with the shares, as I write, residing at 350p, against my 194p purchase. With pre-tax profits coming out at £11m the group has rolled out an inflation-busting 20 per cent dividend increase. There is clearly more to come.
Others I have waved my goodbyes to far too quickly include S&U, the loan firm. I unloaded in 2005 at 525p, for almost £9,000 from a £5,000 investment. The profits achievement is dimmed somewhat when I now look at the shares as they ride at 835p. Mears, acquired at 23p and sold at 84p, is yet another miscalculation. The shares went on to hit 385p.
There are other blunders; too many to mention. Still there have also been quite a few successes, some of them in the mouthwatering category, such as current constituent, the Booker cash and carry chain. Its shares were picked up at 24.5p, have hit 105p, and are now around the 100p mark. I think the portfolio's experience underlines that Lady Luck enjoys an important role in the performance of many investors, particularly us small players. I realise that it is possible to do the sums, explore an industry, study the outpourings of various analysts and even visit companies and chat to the management but in the end, good fortune plays an important role. Not necessarily in every investment, but certainly in some.
At what stage profits should be taken and losses assimilated is a never-ending debate. Many old sayings are heard in the stock market. Such as "there's never any harm in taking a profit" or "leave something for the market". On the other side of the fence there is the cry "cut and run". And many investors, particularly short-term traders, favour stop-loss limits. Indeed there is something to be said for the stop-loss attitude. Even so it can create situations, such as Avon, when it would have failed to shelter the long-term, buy-and-hold investor.
I suppose the message from my investment experiences is that buy-and-hold shareholders, providing there is no significant change to the overall picture of an investment, should prosper. Many studies have concluded that patience is a virtue, not to be ignored. Over the years the stock market has moved ahead and there is the additional attraction of dividend income. But it is sometimes impossible to avoid selling during sharp reverses, like in 2007/8, which could reduce, even wipe out, long-accumulated profits.
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