Last week, I wrote about the most exciting investment I’ve ever made – WPP. I met a pugnacious Martin Sorrell in his Mayfair office in 1993 at a time when he was fighting his way through a great crisis. But on the strength of that one meeting my fund invested millions in his company. And we made our money back 26 times over in the years that followed.
What did I learn from that experience? Well, probably not that much. I got very lucky with that investment. Very lucky.
The real lessons I’ve learned as an investor have come from more disappointing experiences. Like the one I’d like to tell you about today.
This is a hard story for me to tell. I literally feel queasy when I think about how much money I missed out on. So I wanted to pass on the brutal lessons I learned so that you don’t make the same mistake that I did.
My most painful lesson as an investor
People like to knock the Alternative Investment Market (Aim). Right now, the market is working off the excesses in the resources sector which had become the dominant focus of equity issuance in recent years. And so it’s proving unpopular with most investors.
But Aim is home to hundreds of emerging growth companies, some of which will make investors a lot of money. And the market has produced its fair share of great successes and investment opportunities over the years; none greater than ASOS.
Indeed, if ASOS was fully listed, it would be in the FTSE 100 given its market value of £3.8bn. ASOS also happens to be both one of my investment successes and my biggest lost opportunity.
Back in April 2004, I heard about this small internet-only fashion retailer whose name was an acronym for As Seen On Screen. Their niche was to copy the latest designer fashions worn by celebrities and sell them for a fraction of what the original would cost. In order to keep the merchandise fresh and trendy, order runs were short and outfits would be available to buy on the website almost as soon as J-Lo or Posh Spice had stepped off the red carpet. As a result,ASOS avoided some common merchandising problems suffered by their bricks-and-mortar based competitors, like being overstocked or unfashionable.
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It sounded like an interesting business and one that exploited the speed and immediacy of internet selling. So I thought I would have a punt and buy a few shares: 37,651 to be precise. I paid 24p. ASOS continued to trade well and the story carried on getting better. The shares rose and about six months later they were 70p. Almost trebling my money in such a short space of time was too tempting so I sold around half the holding. From memory I think I was also a bit concerned about the economic outlook for retailers in general.
Anyway, I reminded myself no one ever got poor by taking a profit and I still had half the holding left. Actually, that first sale wasn’t bad because the shares drifted back over the next six months and I didn’t enjoy watching them fall. So in April 2005, I had a choice: either buy back the shares I had sold or sell the remainder.
Sickeningly, I decided to do the latter, at 49p. In a parallel universe I might have been lazy and just held on to the shares. Had I done so, those 37,651 shares would today be worth £1.7m! ASOS has risen from 24p to over £46 for a gain of 19,000%. This is no fisherman’s tale of the one that got away. I had it in my keep-net, watched it grow fatter, then released it back into the investment sea for it to become a blue whale.
Six hard lessons
I certainly learned a few ugly lessons from this experience. And I’ve had plenty of time since to think them. So here goes…
• Small company investing on AIM can generate phenomenal opportunities to make serious money. So keep looking for them!
• Learning specifically from ASOS: the internet allows incredible increasing returns to scale; often without having to make big capital investments. Accordingly, successful internet businesses are often vastly superior to the bricks-and-mortar equivalent and their shares can go far higher as a result.
• Don’t worry about the economy too much – a great growth story can swim against even the strongest tide.
• If you are fortunate to find a winner, then run it. I mean really run it. This is not an original observation; but it’s amazing how easy it is to dump a great stock in the name of taking a profit.
• Be patient. There is a natural urge to be active and to trade. Sometimes you are better off sitting tight, maybe for years, and waiting for a story to unfold fully. When I find a great penny share, I think long and hard about how long I’m prepared for the story to pay off. That helps with the patience.
• Try to be dispassionate. Controlling your emotions is vital for success in investment – I was greedy in making the first sale and fearful of seeing my remaining profit disappear when I sold what was left.
Re-living my big ASOS mistake makes me wonder why I am not completely bitter and twisted! In fact, I take pride in having made the original investment. It really does serve as a great motivator in searching for new big winners and a reminder that they are out there waiting to be discovered.
By the way, you can also now put Aim stocks in your Isa as of 5 August. This is great news for penny share investors and I’ll be pointing out some of my favourite Aim stocks in forthcoming issues.
• This article is taken from David Thornton's free twice-weekly small-cap investment email, The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in The Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
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