Common sense

The fortunes of Quindell made more headlines on Tuesday, for such a relatively small company it has had more than its fair share of them during the year. Part of the reason for the interest is that at the at the start of the year the shares appeared to be a favourite of the retail investor, as the year has worn on its fortunes have withered to the point now where its broker has resigned, as has its founder. Not only was Quindell the pick of many retail investors but the likes of Fidelity, Investec and M&G also believe in the investment case.

The fall from grace appeared to start with a report from Gotham City, an American research company.  Gotham City has had some success in the past at uncovering companies that  promised more than they delivered. Quindell did however win a court challenge to the report and the amount they will receive in damages is due by the end of this month, according to the papers.

Putting money into the stock market can be rewarding, but at times, particularly at the early stage is risky. Without reference to the fortunes of Quindell professional and amateur alike often confuse, investing and speculation. Oil exploration companies or junior mining companies are speculative, if they find oil the shares could go up many fold, a dry hole and the shares can be worthless. Buying shares in Procter and Gamble is an investment.

The golden rule when one is speculating is to only risk what one is prepared to lose. When considering an investment one should consider “does the management have a track record of delivering value to shareholders in the past”? Don't necessarily be fooled by the herd instinct, the fear of missing out is often the reason people use for buying a share in a company.

You are more likely to be successful if one does the research oneself rather than relying on assuming others have done it.  This can be explored by asking if the business is generating cash as its profits start to rise? Being profitable is one thing, turning those profits into cash is another. Enron was a classic example of a company generating huge profits, but no cash. many seasoned analysts overlooked this point. Also when researching, do you truly understand what the company does? If it is not working out or the reasons have changed for investing, get rid of the stock - there will be other opportunities. When looking at revenue growth, its worth understanding where the growth is coming from, is it organic or coming from acquisitions? How competitive is the market the company operates in? Does the company have a unique selling point aside from cheaper products or services than its rivals? The danger is that a company’s rivals can also play that game. Like most things in life, investing in the stock market is more about common sense than anything else. 

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Posted on November 18, 2014 .