Under the Radar Report’s Portfolio Manager The Idle Speculator recounts a very personal story, highlighting how longevity, a watchful eye and patience were the keys to transforming a losing trade into a big winner.
What's in a name?
The Idle Speculator has followed literally thousands of publicly listed smaller companies in his time as Senior Investment Analyst in the UK with the largest privately owned fund management group and subsequently in Australia. Over his 39 year active investment career, he has invested in many hundreds of companies, some large but in the most part those which would qualify for inclusion in our Small Caps universe, i.e. under $600m market cap.
One portfolio he’s managed for 25 years has been for his now ancient mother invests mainly in stocks listed in London
Over time there have been such dramatic changes in the provision of investment information that he has better access now as a private investor than he did as a professional investor all those years ago. Further, as his mother has aged, the investments have been lower in risk and higher in liquidity. This is as it should be, and all investors need to consider their ability to liquidate their investments at somewhere close to the market price if faced with exigent circumstances which require a liquidity event. That might be medical expenses, moving expenses, the cost of a house renovation or any number of unexpected or unanticipated life events that scatter all our plans to the wind at what often seems like the worst time.
This is not to say, however, that this should prevent an older investor from taking higher risks with less liquid speculations, as long as the amount committed can afford to be lost. Further to this, the failure to attempt to find growth stocks condemn an investor in the current environment to a low and unreliable yield. Older investors necessarily need investments that either produce actual income, or offer returns by way of growth that can be readily realised.
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This lengthy introduction gives background to a recent trade
For some years, TIS has been berating himself for one particular small company investment made when London was an easier place to invest (pre Brexit, since you ask), but which had declined 98% by the end of the first COVID wave. That is the worst performance of any stock in that portfolio, and probably the worst performance that he has experienced since investing in an engineering contractor in the early 1990s which managed to go out the back door before he had even received the contract note for his final trade. Now that was a disaster! One of the reasons we are very cautious about engineering contractors with debt.
In the current instance, this UK investment had fallen so far that it was barely worth selling. The price of the stock had fallen to around 0.2 pence.
As a result of the irritation that the loss caused him, he kept a watching brief over the stock for some years. The company had technology with global potential, but the valuation correctly reflected a business that made no money and little prospect of making any. The company had to revert to its principal shareholders for support in the form of a convertible loan, which is often a sign of extreme distress.
Finally some action
TIS first invested in 2014, realising some (very) small profits at a price of 16.5 pence, but failed to recognise just how vulnerable the valuation could be to a loss of confidence. He remained idle. The time never seemed right or urgent to make any further investment, and in the meantime the beneficiary of the portfolio was only getting older and therefore any further speculation would be extremely hard to justify. Nevertheless he kept looking. Idly speculating what might be done to make good on some of the losses. And he waited, and he waited. More than 5 years after the original investment which had gone so badly wrong he thought he saw a twitch in the share price. TIS did nothing, the share price came back, nothing to see here. And then in early July, the stock twitched again. This time, having made a few quid out of some relatively short-term trades as we recommended subscribers do in Australia, he felt empowered to make a risky bet, with a very small amount, around 1% of the portfolio, but enough to buy ten times the number of shares already held. For a few days the price settled back again, but only a few days.
Suddenly, some action! Over the course of the next two weeks the stock doubled. That was no big deal at all. It was still down 96% plus on the price which TIS paid for the original stock, and the overall position would still be down something like 80%. The company was issued with a speeding ticket, but no news was released. And then came the news that the company had signed a contract with a global technology company. The stock tripled again on the day, before settling back. TIS sold the original holding (at an 80% loss), the stock settled back for a few more days before accelerating again, which the company put down to increased press and market comment regarding its new contract, while noting that it was a renewal. It also noted that the company has not yet reported audited results for the year to December 2019, for which it has been granted an extension. Since then, TIS has been frantically selling the majority of his mother’s holding, realising a 16 bagger on 20%, and realising a 10-bagger + for the rest of the position, including the 30% of which is still held. This huge gain came within 5-6 weeks. Failure to take advantage of a serendipitous act of good luck in the stock market is often a mistake… (Jesse Livermore). The company itself is taking advantage, launching a placement and share sale designed to beef up the balance sheet. Priced at a discount of 24%, the stock is likely to languish now for a while, at best.
The moral of the story
Sometimes a speculator has to wait a very long time before an original thesis comes good. Vmoto (VMT) is an example of a company covered in Under the Radar Report, which ultimately delivered on its promise, but the patience required to realise the gains tested all of us. Also, this is a highly speculative and frothy market. This UK stock will fall by half or more at some point from here or from 3 times the current price, we have no way of knowing. However once the “buy anything if it moves” mentality is lost, our experience suggests that it will be gone for a long time. We think that anybody who thinks that this is not a speculative market is simply not paying attention. That does not mean that there is not money to be made, but extreme caution is recommended when jumping on stocks simply for the fact that they are moving fast. No one will ring a bell at the top. You have to ring your own bell. Remember this: when you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes. (again, Jesse Livermore).