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I’m sorry I haven’t posted a Newsletter for a few days – I was completing the manuscript of a book (on Warren Buffett), but I’m back to my investments now.
I’ll start with some upsetting news. A large percentage loss has been made on my Havelock Europa (LSE:HVE) shares, having sold at 9.15p. These were bought in May 2015 for 14.61p. Thus 37% has been lost.
I’d like to take the attitude (and, rationally, I should) of “you can’t win them all” – but breaking RULE NUMBER ONE still stings, so a short post-mortem might be in order to see what can be learnt from the mistakes.
(Rule number one: don’t lose money. Rule number two: don’t forget rule number one).
Havelock is a subcontractor for the internal fit-out of banks, schools, shops, etc. It has worked for some big names such as Lloyds Bank completing one bank branch after another.
Why did I buy in the first place?
You can look back at what I wrote about Havelock Europa both at the time of buying and subsequently for a fuller picture (Newsletters dated 20th – 27nd May 2015, 11th and 19th Sept 2015, 27th – 29th April 2016), but a short summary is presented here:
Havelock Europa seemed to fit the criteria for the return reversal portfolio. Its shares had fallen from 160p in 2007 to 58p in 2010, and to 14.6p in 2015. Research evidence demonstrates that a portfolio of shares with very large percentage falls in share prices over five years goes on to outperform a portfolio of shares which had experienced very high positive returns in the prior five years (see earlier Newsletters for a summary of the evidence – search under return reversal).
This phenomenon is thought to be related to a systematic and persistent human trait of overreaction caused by people employing the representative heuristic. Put simply: they reject the “loser” shares too much because they think that they “have always underperformed and are likely to continue that way.” The past pattern becomes representative of the future.
Amid all this rejection, prices get pushed too low as people fail to allow sufficiently for the “base data”, meaning the evidence that operating performances and share price performances have a greater tendency to revert to the mean than people assume.
Net tangible asset value
While Havelock’s market capitalisation was only £5.4m its net tangible asset value was greater at £6.2m. Thus it fulfilled my second quantitative criterion for a return reversal share.
Piotroski factors
The final set of quantitative investigations was to gauge its vulnerability to financial distress by examining the changes in nine variables in the prior year.
This Piotroski factor analysis gave a result of six or seven positive elements for things like a cash flow, and reduced financial leverage, over the year. A score of six or seven out of nine means that it is unlikely to run into financial distress.
The qualitative factors
This is where I really went wrong. I was looking for………….To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
