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The Beginners’ Portfolio: Shock Fall For Blinkx Plc!

This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.

The Beginners’ Portfolio is a virtual portfolio, which is run as if based on real money with all costs, spreads and dividends accounted for.

blinkxWhat a shocker!

I checked on the Beginners’ Portfolio share prices when sorting out our next purchase, and what’s happened?

Blinkx (LSE: BLNX) shares have plummeted by 40%, that’s what! Yes, the price dropped a massive 65p to 111p on Thursday. But why?

It seems there’s an associate professor at Harvard Business School by the name of Benjamin Edelman, who considers himself something of a critic of online advertising — and he’s just published a damning rubbishing of Blinkx in his blog.

I won’t repeat the professor’s allegations, but he starts his blog report saying “Video and advertising conglomerate Blinkx tells investors its “strong performance” results from “strategic initiatives” and “expanding demand, content, and audiences.” Indeed, Blinkx recently climbed past a $1.2 billion valuation. At first glance, it sounds like a great business. But looking more carefully, I see reason for grave doubts“.

He seriously questions the company’s approach to presenting advertising material, even going as far as to imply fraud.

Denial

Blinkx, for its part, issued a denial on Thursday afternoon, saying it “strongly refutes the assertions made and conclusions drawn in the blog post“, adding that there is “no material change to the operational and financial performance or outlook for the business“.

Blinkx also highlighted a disclosure in the blog, which says that “I prepared a portion of this article at the request of a client that prefers not to be listed by name“.

A report in the Financial Times points out that a lot of institutional investors have been shorting Blinkx quite heavily — apparently nearly 17% of its free float is currently short.

So who’s got it in for Blinkx? Is the professor on the level? Are any of the allegations true? Is our investment in Blinkx a dead duck?

All these questions will be answered in a future episode of The Beginners’ Portfolio (hopefully).

The lessons

Meanwhile, what are the lessons for us as investors?

First of all, I’d caution people to be wary of putting credence on unsubstantiated allegations, especially those published at the behest of “a client that prefers not to be listed by name” — we should let the dust settle and see what emerges in the coming days and weeks.

Secondly, these events show that investing in a small high-growth share really can be risky, and you must be aware of the possibility of a volatile ride and of an occasional substantial fall.

And that brings me to diversification. In my view, if you want to punt for high-risk investments, only use a small portion of your capital and be prepared for the possibility of losing it — especially if you’re a beginner and haven’t yet developed the sanguine nature that comes with age and experience. We staked only 10% of our starting cash on Blinkx.

And last of all, as far as Blinkx is concerned, after the crash we’re only 200% up on our investment!

What’s next?

Oh, and before I go, I should tell you the next Beginners’ Portfolio purchase has been done, but with the excitement of Blinkx upstaging it, we’ll have to wait until next week to take a look.

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> Alan does not own any shares in Blinkx.