The shares that got away—and what I learned from themby Andy Davis / July 20, 2011 / Leave a comment
Galliford Try, which built the Centre Court roof at Wimbledon, has proved a sound investment
Hindsight can be cruel. Most of us can endure only a partial version—we block out really unpleasant episodes, allow selective memory to do its work and rewrite history into a more palatable form. And why not? Looking back is often painful and the only lesson most investors take away is that we can’t forecast the direction of the markets.
But refusing to rake over the coals in search of insight is an opportunity lost. I’ve spent plenty of time trying to work out why I sold investments that went on to increase in value. This taught me that greed and fear must both be treated as imposters (good luck with that) and that we all have to take decisions in the knowledge that subsequent events might prove us wrong.
Similarly, I always try to do a post-mortem when an investment doesn’t work out. Did I do my homework properly? Did I stick to my own rules or bend them to make an excuse to buy? Sometimes this yields a useful lesson, sometimes just regret.
But what about things I didn’t do? Again, there’s plenty of material to reflect on. I can think of several shares I looked at carefully, concluded were attractive and yet didn’t buy. Had I done so, they would now be showing large profits. What stopped me?
The first was a company called Diploma, about which I knew nothing when I came across it. Diploma turned up as one of a small number of shares that fitted the criteria I had set for a screen of the British stock market in late 2009. It had a robust balance sheet, a history of steadily increasing earnings per share and dividends and what looked like a very undemanding valuation. I liked it even more once I read its annual reports and saw that a key performance indicator for management was total shareholder return (capital appreciation plus dividend payments). At the time, the shares were trading at about 170p. I made a mental note—and did nothing. Recently, the shares have been above 350p as Diploma has reported robust profits growth. Ouch.
Another one that got away was Galliford Try, a construction and house-building company which built the roof for Wimbledon’s Centre Court. I first looked at it in July last year as part of a wider trawl of construction companies, which at that point were very cheap. I liked its low valuation and improving financial condition, and at about 310p the downside in its shares appeared limited. I bought two other, larger construction stocks and forgot about it. I noticed it again last November when its price sank to a one-year low of about 270p. I did nothing. It’s been above 500p recently.
So what insights can I draw from this?
I can make a few pleas in mitigation. In the case of Diploma, it seemed an odd, disparate collection of businesses—its three divisions supply products ranging from diagnostic equipment to public health customers in Canada and Australia, hydraulic seals and gaskets for heavy machinery, and “specialised fasteners and wiring” for industry. Although I could see the numbers were good, I didn’t feel I understood any one of these businesses—much less all three—well enough to buy with confidence. It now seems a classic case of the conglomerate structure that is too time-consuming for busy or lazy investors to understand. It’s a stock that has yielded much recently to those who either took more on trust than me, or who dug a lot deeper.
Instead of buying shares in Diploma, I bought other businesses that the screening turned up and that were more straightforward to understand. They have all done well, though not as well as Diploma, sadly.
When it came to Galliford Try, I feel a little less dejected. I did buy other companies from the group I’d been looking at, but missed out on a stellar performer. The ones I bought produced gains of around 50 per cent by the time I sold. But Galliford Try left them for dead, partly I think because it had exposure to house building as well as construction, and house builders’ shares had a traditionally strong first quarter.
What do I conclude from all this? Investing is about choices and I made mine: I didn’t buy these shares but I bought others, many of which did very well. For most of us, deciding to buy often involves selling something else to release the cash—and that’s where inertia can set in. You can’t buy everything, and just because it might be the right time to buy this share doesn’t make it the right time to sell that one.
Would I have felt better if I’d spread my money thinner and bought these stocks as well as the others? Maybe—but there’s a good chance I’d feel frustrated that I didn’t put more money into the best performers.
So the ultimate lessons I take away are, first, that knowledge plus inertia represents a decision just as much as does knowledge plus action. Second, you can’t buy without cash. And third, that looking back, while useful, can be distracting too. The market produces a succession of opportunities to buy at attractive prices. The secret is to stay open to the opportunities as they arise, rather than letting yesterday’s decisions dominate today’s thinking.