When we make an investment, we expect to profit. I mean, why else bother? But even the best laid plans can go awry. And as an investor, it’s when things go wrong that you really have to show your mettle.
I’m always reminded of the advice of the golf pro: “It’s not the shot that goes wrong that costs the round. It’s the shot that comes after it that really counts.”
That’s as true in investing as it is in golf – or anything else, for that matter! What do you do when things start going wrong?
Dealing with awkward questions
Last week, I wrote an article about vigilantism in the markets; about how vigilantes can help keep markets in check by telling bad news – the news companies have no incentive to tell themselves.
We looked at the case of Quindell, a business that was subjected to a negative research note by a mysterious outfit called Gotham City Research. Was Gotham a vigilante fighting for the truth, or perhaps a nasty con artist, deliberately peddling falsehoods in order to profit from a short position?
I suggested that, in fairness, Gotham was asking some valid questions – questions that any self-respecting investor should rightly ask themselves. “Only time will tell” was how I left it.
But I have to say, I was surprised that so many readers read what I wrote as an attack on Quindell. Responses talked of bringing “MoneyWeek into disrepute” – about “withdrawing subscriptions” and “uninformed rubbish”… you know the sort of thing.
I suppose some shareholders were particularly peeved, but still – is this a useful response, when they’ve just been offered the other side of an argument?
When a tricky situation unfolds, shareholders need to make the right call. Putting our hands over our ears and shouting “la, la, la… ” in the face of an adversarial argument cannot be the best reaction. I’m sure we all do it to one degree or another, but it’s not helpful at all.
The truth is, it’s difficult to face awkward questions, especially when it comes to our investments. But pretending these questions don’t exist will just cause more headaches down the line.
The Quindell argument is far from over
Now, let’s get one thing straight. I did not endorse Gotham’s research note.
And indeed, since writing the article, Quindell’s management has come up with a full rebuttal of Gotham’s research note. That was as expected.
But despite what some Quindell shareholders may think, this doesn’t put matters to bed. Of course the company comes out with a defence in such a situation! But that doesn’t mean that the argument is over.
Indeed, as the shares opened for trading on Monday following the response, they fell back a full 20% again. Shares recovered slightly yesterday, but investors are clearly not at ease.
As I said at the time, only time will tell. But in the meantime, shareholders have a very tricky decision to make. Has a wicked short-seller offered an opportunity to pick up more shares on the cheap? Or does the vigilante have a point?
Do you chip out of the rough and safely onto the fairway – or play the risky shot and try to hit the green?
Take your time and make the right call
Well, every shot is different. And every case of a short-seller’s attack is too.
The key is to be absolutely sure of the facts. To know the argument, and the counter-argument. I have gone toe-to-toe with short-sellers and come out on top. I have also played the “la, la, la” game, and lost!
Long-time Right Side readers may remember a vicious short-selling attack on SuperGroup that drove the share price below three quid. In response to the attack, I said “Buy” – and watched in delight as the shares gradually recovered to over £15.
Other times, I’ve come unstuck as I’ve believed management rebuttals and lies (I won’t mention names for obvious reasons!).
The key is to listen to both sides of the argument. Do your homework – and work out whether or not you can put 100% faith in the company’s management.
Beware the kings of spin
And last of all, always be aware that company directors and management are the absolute kings of spin. Read every statement very carefully and compare it carefully with the counter-argument. Even if there aren’t downright lies (which, in fairness, there seldom are), carefully crafted statements can mislead.
If you feel confident that you are right, and you can hit the tricky shot, then buy more stock. However, if uncertainty remains, then it’s probably best to sit tight (or even lighten up on holdings). Given the share price action, it’s clear that many holders have lightened up. It’s not always the worst thing to do.
There are lessons here for us all, whether it’s learning from Gotham’s inquisitive approach or learning how to deal with opposition and a short-selling adversary. Maybe we can even learn a bit of humility.
Now, before we leave the subject, let me just put one thing on record: I sincerely hope Gotham’s research note is flawed. I hope Quindell returns to form. And I hope shareholders make a packet.
The only thing is, hope isn’t always the best way to invest. It’s certainly not the best way to play golf. At least, that’s what the pro says!
I’ll be watching this one with interest.
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