This is no way to run a portfolio -- but it has worked.
The wealthiest investor I know also has by far the craziest portfolio. No investment advisor or Motley Fool writer would recommend assembling a portfolio made up entirely of shoot-the-lights out gunslingers, but it has worked for him.
I don't know exactly how wealthy he is. He isn't richer than Croesus, but he is certainly a lot richer than Greece (isn't everybody these days?). He runs his own investment website, although I can't tell you which one, because he doesn't want everybody to know he has adopted such a harebrained strategy.
Harebrained, but it works.
You bought what!
He recently walked me through his portfolio, and it was quite a jaw-dropper. He doesn't follow the normal rules of investing, such as building a solid base using low-cost trackers, adding a sprinkling of dividend-paying blue chips, and spicing it up with one or two whizzy small caps. He doesn't have a balance of stocks, cash, property and bonds, spread over different sectors and markets. He doesn't do balanced at all.
He has a sizeable holding in Aer Lingus, whose share price has plunged from €2.1 to just €0.6 over the past two years. Aer Lingus has taken a hammering, and he likes that. He likes this stock fully straightforward reason that "if it doesn't go bust then one day its shares will go through the roof."
He gave me a similar argument for investing in interdealer broker Tullett Prebon (LSE: TLPR), travel and leisure company National Express (LSE: NEX) and Punch Taverns (LSE: PUB) -- "they have all taken a smack, but as long as they don't collapse, one day they'll be back".
Enterprising chap
His portfolio is full of stocks like these. Enterprise Inns (LSE: ETI), whose share price has fallen from 500p to just 119p in the last two years, Songbird Estates (LSE: SBD), down from 550p to 183p over the same period, and waste management company Shanks Group (LSE: SKS), down by half. He also holds BT Group (LSE: BT-A), "'cos it looks pretty cheap".
He is also invested in 3i (LSE: III), Drax (LSE: DRX), John Menzies (LSE: MNZS) and a bunch of other companies, but couldn't remember why. Finally, he also holds Aviva (LSE: AV) and Legal & General (LSE: LGEN), potential takeover targets for Resolution (LSE: RSL).
Method in his madness
You can see a pattern to his portfolio. He is primarily looking for bombed-out companies that may one day rebound. It is the dash for trash all over again, plus the odd takeover target.
I said you had to be rich to be that aggressive, but he disagreed, claiming his strategy is broadly defensive (I told you he was crazy). "I don't care if one or two of those companies goes bust. Some probably will. But they won't all go bust, not unless the global economy falls off a cliff, which it won't. If some of these stocks grow three, four or five times, that will more than offset any losses."
Aggressive, according to his thinking, is the new defensive. Crazy is the new sane.
Why didn't I listen?
And he has done well out of it. At the start of last year, he recommended I invested in car dealer Pendragon. He didn't think that would go bust, and he was right. Instead, it grew about 1,000%. "I've made you rich, Harvey?" he said next time I called, but he didn't make me rich, because I didn't have the guts to invest in Pendragon (LSE: PDG) at the time. He did.
Some of his other bets are also paying off, notably Tullett Prebon, National Express and Enterprise Inns, while Aer Lingus is picking up slightly. Others haven't performed -- yet. Punch Taverns has edged down, Shanks has slipped, Songbird has flatlined, but none of them have gone bust, they are still in the game.
My crazy friend isn't trying to time the market, he says he doesn't know when the stocks in his portfolio will return to favour, if they ever do. He just buys companies that have taken a hammering, but should live to fight another day. And when they do, his portfolio will come out swinging.
You crazy Fool
My friend didn't start by investing so aggressively, but he can afford to do so now. I wish I could too. It sounds a lot more fun than more sensible strategies such as investing for long-term dividend growth (if you can take the rough and tumble).
Everybody should have an investment buddy like mine. Every time I speak to him, I feel like I've been injected with a vial of super-charged investor adrenaline. This is no way to run a portfolio, but I really, really, really wish it was mine.
More from Harvey Jones:
Harvey has an interest in Aviva and is summoning up the courage to invest more bravely.
