Should you go 'all in' on an investment?
When people talk about "betting the farm" on an investment, I take this to be a very sizeable investment, as opposed to betting absolutely everything you can lay your hands on. Whether or not this is an advisable strategy or not will depend on a whole host of factors which are unique to each individual and a bit too boring to go into here (you know, stuff like stage of life, risk profile, job security, blah, blah...).
But what is interesting to consider for investors is whether such a strategy has merit. When should you consider a farm bet, why would you do so, and what are the risks of so doing?
Personally, I've only come close to what could be termed "farm bets" a couple of times. These were back in the heady days of the latter-stage tech meltdown in 2002-03 when various former tech-stars fell to ludicrously low valuations as the market overshot in the other direction, as it is wont to do, valuing perfectly viable companies at less than their cash holdings; much less in some cases.
Fortunately, these investments were successful as the companies were gobbled up by bigger fish in fairly short order, who got the assets and cash on the cheap -- but still a lot higher than I and many other Fools had been able to buy at.
Asset-based farm bets
It's worth looking at these situations to see whether they merited a bet the farm approach, though. The value was fairly obvious -- the cash. And there are other situations where companies are valued far below their net tangible assets (including cash which is nearly always the best asset, though property which hasn't been re-valued for a long time can also represent conspicuous value).
These can still go very wrong though. Losses can spiral; management can blow the cash on big salaries, emoluments, unwise acquisitions and the like. And the smaller the company is, the more likely you are to experience a nasty surprise in general. This doesn't mean that the big guns are safe by any means. Many Fools remember Marconi's experience of unwise "reshaping" of the business etc all too clearly.
Perhaps the safer farm bet approach is the one expounded by Stephen Bland; the "PYAD" one of identifying companies with a price-to-earnings ratio, yield, assets and debts, all well out of kilter with their contemporaries -- in a good way of course. But even Stephen is a little more cautious these days, recently saying: "...I very much doubt that I would raise all-in on just one share any more, probably an age related, more risk averse kind of thing".
Never say never
"Hear, hear" I would say. On the whole, a bet the farm approach is a risky one. There are simply too many unforeseens and we don't all have the insight of a George Soros.
For most of us, making a decent profit -- or even a living -- out of investing necessitates two steps forward, one step back. In other words, we all get a few wrong. But you only need to be right most of the time in percentage terms to make a decent return. One ten bagger, for example, as many Fools have experienced with UNIQ (LSE: UNIQ) this year, accounts for nine total wipe-outs; the latter being a highly unlikely scenario.
That isn't to say you shouldn't follow up initial capital losses by averaging down. Many investors shy away from buying more shares at a lower price, preferring the opposite of a stop-loss approach. Each has merit, but if you're digging down for value a share price fall could present more of an opportunity than a threat. I'd still shy away from betting the farm though.
Learning from mistakes
I think it's very important to learn from your own mistakes and those of others -- but to learn the right messages. This is tougher than it may appear. Buying shares which subsequently go down due to completely unforeseen circumstances isn't a "wrong" decision; it just didn't turn out the way you expected it to. For most of us, though, it shows that diversification of investments is generally the wiser course.
But if I was 21, with a good career ahead of me, no debts and a few quid in the bank -- maybe I'd bet my smallholding if the right one came along!
More from David Holding:
