One-way ticket38
to return to his old job in IT. That paid €2,300 per month, so the
aloof and brooding Frenchman will need to keep working until he
is 177,569 years old to pay back his losses. If he takes no holidays,
that is.
s
Buys and sells
Outside the sky darkened. The mysterious Mr Conrad had fallen
silent but Anisa was still full of questions. ‘What does it mean
when investments don’t plot on the expected line of risk and
return?’
‘Look at the graph now. I’ve got Investment A and Investment
B. Neither of them can be plotted on the line of correlation.
How are they different and what is the message they send to
investors?’
Return
Low Medium
Risk
A
B
High
Attractive investments are found above the line
Anisa correctly rated Investment A as a strong buy. ‘I’d ll
my boots with it!’ she announced, to Conrad’s amusement.
39The leap of faith
‘Investment A is above the line. For a given level of risk, it’s giving
investors more return than they’d expect. You’ve got to buy it!’
I nodded at her to carry on.
‘If you buy Investment A before other investors do and they
follow you, their purchase orders will push the price of the
investment up until risk and return are aligned again. You
capture that price rise if you do good analysis, act early and
convince the market to follow you. If everything works, there’s
your capital gain.’
Anisa’s explanation was perfect, so I drew the two dotted lines in
her notebook.
Return
17%
8%
Low Medium
Risk
A
High
Above the line
‘You can see that most low/medium risk investments will give
you about 7 per cent return per year. But Investment A, which
has the same low/medium level of risk, is giving you 17 per cent.
Any investment which plots above the line is giving us more
return than the risk deserves. And that makes Investment A such
a clear buy.’
Investments below the line are to be avoided
‘Now, take a look at Investment B. Anisa, what do you reckon?’
‘It’s higher risk, but investors aren’t getting the return they deserve.’
One-way ticket40
‘Correct.’ I drew the two dotted lines on the ipchart.
Return
15%
6%
Low Medium
Risk
High
Below the line
B
‘Investment B is medium/high risk, so investors look for a return
about 15 per cent per annum. But the return is a paltry 6 per
cent. They should sell any investment below the line.
‘Bear in mind that investors can make money out of selling
investments as well as buying them. If they sell Investment B
before other people, and then other people follow them, then
the price will fall. What smart investors do now is buy back
the investment and return it to their portfolio. They have the
same investment but they’ve bought it at a lower price. So,
they’ve made money – or at least saved money – by the fall
in price.
‘A word of warning before you rush to set up your own private
trading oors. Both these approaches will only work when two
conditions are met. First, your analysis must be correct and,
second, enough people must follow you. The investment world
is littered with people who’ve done analysis which has been too
obscure, too complicated or too unpopular to be accepted by the
rest of the market. Or just wrong.’
Anisa asked a smart question. ‘What examples can you give of
Investment A and Investment B? I’m looking to make some fast
bucks when I get back to London!’
41The leap of faith
‘The sad fact is that investments don’t stay as A and B for long.
So, by necessity, my examples come from history.’
Many privatisations were above the line
‘Most government sell-offs are above the line.’ (We’ll look
at similar deals in more detail when I tell you about Jerry
Witts.) ‘The companies are normally well-established, with many
existing clients and very little competition. They are in steady,
dependable industries: electricity production, for example, or
water and gas. And governments are often very eager to raise
money quickly, so the shares tend to be below their true values
when the company is privatised. These sell-offs are usually low
risk and high return, so investors rush in.’
But football clubs are often Bs
‘Many football club shares are below the line. A football club
is always a very risky proposition because its fortunes largely
depend on how the team performs on the pitch. A company
may invest in loads of players and a new ground and then lose
every game. If it drops a division, the company’s income from
sponsorship deals, ticket sales and television rights will be vastly
reduced. And most clubs don’t make a prot, because player
salaries and transfer fees are often bigger than the company’s
turnover. The combination of high risk and low return puts most
football shares below the line.’
The sad case of Millwall Holdings
It’s one of my beliefs that we learn more from our mistakes than
our successes. Most investors take immense pleasure bragging
about their big wins. Delegates are often surprised when I openly
talk about my worst-ever investment.
case study
s
One-way ticket42
Millwall Football Club was based in an area of south-east London
best described as unfashionable. The most common words used
to describe the area were grim, dangerous and life-threatening.
Descriptions of Millwall supporters were even less flattering.
So imagine the excitement when the club opened a new stadium
closer to the centre of London and announced plans for a new
issue of equity capital. The club was pushing for promotion to
the lucrative Premier League and bought lots of good players,
including two Russian internationals.
I bought a line of shares at 2p each, which quickly rose to 4p.
I’d doubled my money in a matter of days. I reckoned that even
if Biblical plagues befell the club I would be in the money. How
wrong I was to be proved.
My share purchase coincided with a long string of defeats. One of
the Russian players was dismissed for alcoholism, after gleefully
admitting that he was on ‘a honeymoon which lasted for six
months’. The club dropped from promotion hopefuls to relegation
certainties. No games were shown on TV and ticket prices fell.
Sponsors and advertisers cut back dramatically, but the club was
contractually obliged to keep paying big salaries to its players.
Millwall entered administration.
The shares plummeted to 0.0181p. I didn’t sell them, though,
because the cost of a stamp and an envelope for the share
certificate was more than the worth of my total holding.
s
Day 1, 8.00pm – Nancy, France
Outside, oodlights suddenly shone through the sleet. Nancy
station was crawling with police.
‘I told you so,’ said Conrad. He’d predicted that we’d be held
up and was smugly happy to be proved right. It didn’t seem to
bother him that he’d be as late as the other passengers on the
train. ‘Where’s your rich friend got to?’
I shrugged. And that’s when I heard the scream.
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