Tuesday, 9 July 2013

Looking for Ten-Baggers is a Losing Strategy: You are not Peter Lynch

7 reasons why these 8 10-bagger picks have lost 42% in 3 years

"One of the most damaging concepts in investing has come out of one of the best books"
This is how I began my first ever investment article. I got a freelance spot on the Motley Fool UK in 2006 and, being a big-head, used it to attack one of the most popular ideas among small investors. I have listened with my head in my hands as friends have told me about their latest share buy, a 95% chance of failure punt wrapped in a great story.
Peter Lynch's idea, buying into a long-term growth company at an early stage, is a great one. There are 24,000 hits on Google for the phrase. How can such a good and popular idea be so damaging?
  1. You are not Peter Lynch
  2. Promoters of shares make them sound way better than they are
  3. Journalists prefer exciting stories over solid but dull firms
  4. Most journalists are writers, not investors
  5. Survivorship bias and prominence bias conspire to make you think exceptional growth companies are commonplace
  6. Misplaced faith in efficient markets - you are probably paying more than a fair price for the supposed next Coca-Cola
  7. You may be diluted many times over in fundraisings - it's like a negative dividend

Eight potential ten-baggers from three years ago

I came back to this hobby horse because of a glitch on Investors Chronicle's website. They re-published an article from three years ago but gave it last Friday's date. Tomorrow's 10-baggers chooses eight shares that could ten-bag. The article is gone from the site but here's Google's cache of it. 
"The next blockbuster is just around the corner, you just have to look out for the signs – a niche but valuable product, a genuine growth market, or a recovery about to kick-start. Tomorrow's 10-baggers have already started their journey, you just have to hitch the right ride."
That sounds so straightforward. How have these potential portfolio-makers done?


Name
Ticker
Buy price
price now
change
Note
Firestone Diamonds
FDI
39.5
2.62
-93%

MDM Engineering
MDM
175
129.5
-26%

Falkland Oil & Gas
FOGL
177
26.62
-85%

Faroe Petroleum
FPM
107
110.25
3%

Monitise
MONI
20.25
35.38
75%

Ocean Power Technologies
OPT
432.5
#N/A
-69%
(only NASDAQ now)
SeaEnergy
SEA
38.25
22.25
-42%

Asterand
ATD
16.5
0
-100%

Average    



-42%

FTSE Smallcap

2752.93
3907.39
42%

 
Not a single share has even two-bagged in three years. The best one, Monitise, is a very good company, in a great sector. Its turnover is up 1250% in three years. But it's losing more money than ever and fundraisings have nearly trebled the number of shares in issue
"Not a single share has even two-bagged in three years."
£1000 put into a portfolio of these shares would now be worth £520. £1000 in the closest index, the FTSE Smallcap, would be worth £1420 or 145% more.

[Edit] A comment here on this article points out that eight shares over three years does not prove anything. This is quite right. You'd need something like 100 over ten years to start getting a statistically significant result. It's a massive problem with learning to invest compared to say tennis, where the feedback is significant and immediate.

3 comments:

  1. Lynch also strenuously warns against adhering to the advice of the "experts".. It's ironic because your list of warnings were all expressed by Mr. Lynch in his book.

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