MARKET COMMENT
My Worst Investment...Ever!

By Cliff D'Arcy
June 19, 2003

In an earlier article, I described how I seek to capitalise on takeover speculations and bids. This high-risk strategy proved very successful in the second half of 2002 and, as a result, I made several massive gains during this period.

Earlier this month, my wife commented that she could "see no difference between my investing style and gambling". And, in a way, she's right, because I have a huge appetite for risk and love the thrills that both offer.

What's more, as Rudyard Kipling recommends in If, I aim to "meet with Triumph and Disaster and treat both those impostors just the same." So, I can be as blasé about making a killing as I am about losing a packet, probably because I spent too long playing Blackjack at casinos!

Nevertheless, I'm somewhat disgruntled by an investment I made at the start of the year. I bought a holding in gym operator Holmes Place (LSE: HOL) on news that it was, yet again, a takeover target. Within a few days, my plan paid off and I accrued some tasty gains on paper as other speculators piled into the stock.

However, the shares steadily withered as the company's management released a series of profit warnings. Also, it emerged that the takeover was being conducted by two Holmes Place directors and, despite my misgivings about management buy-outs, I remained a HOLder.

When the bidders finally came up with a derisory recommended offer of 25p a share and no other suitors emerged, I sold my entire holding for 24p. This left me nursing one of biggest losses in my investing career: almost 75% of my initial capital (most of my holding was purchased at prices above 90p).

I've now reinvested the remaining capital elsewhere, somewhat poorer and, I hope, a little more Foolish! Here are some of the Foolish lessons I've learned:

1. I shouldn't put too much of my wealth into the shares of just one company. When the business stumbled, I ended up taking a nasty dive too. I must diversify more: even holding two or three shares is a big improvement on a single-stock bet.

2. I must ignore the tipsters and the press: by the time 'hot tips' reach me via the press, the big boys are already three steps ahead.

3. I must grasp that good news that takes too long to arrive often turns out to be very bad news indeed. The directors of Holmes Place confirmed the takeover rumours on 10 January, yet their offer did not emerge until 22 May – almost 4˝ months later. Due diligence doesn't take this long in healthy companies, especially when it's being conducted by an MBO team.

4. If I don't trust the management of a business, I shouldn't invest in it. If I have a holding in a badly managed or weakening business, I should get shot of it at the first available opportunity. 60% of every relationship is founded on trust and, once it's gone, I should follow.

5. I should be wary of companies with over-ambitious expansion plans, as these often create too much debt. One slip-up and these companies can end up being controlled by their banks.

6. I mustn't get emotionally involved in my shareholdings. I ignored all the warning signs surrounding Holmes Place because I was greedy, over-confident and swept along on a tide of euphoria. Next time I suspect my judgment to be faulty, I'll ask other investors for their opinions. (In fairness, TMFMayn and TMFGoogly both warned me off HOL, but I unwisely chose to ignore them!)

7. Almost certainly, I'll still play the takeover game, but reduce my risk by sticking to bigger companies and sensible stakes. If a company is worth a few hundred million pounds, it will have several institutional shareholders ready to kick up a fuss if a bidder tries to buy them out on the cheap.

8. As luck would have it, my passive portfolio (low-risk and blue-chip holdings) is showing some healthy gains in recent years. Perhaps I should stick all my money in an index tracker ISA and abandon stock-picking for a while?

More: Seven Deadly Stock Market Sins | Your Losses Are Your Fault | ISA Centre