QUALIPORT
Mistakes du Jour

By Maynard Paton (TMFMayn)
December 21, 2000

Rochester, Kent – Investors never stop learning. Reviewing your successes and mistakes, and then taking on board the lessons learnt, always makes for a better investor. The Qualiport has made its fair share of mistakes this year, and although you may not think it, the portfolio has had some success (we've been learning our lessons from years gone by!). In overall performance terms, a 17% decline over the year compared against a 10% fall in the FTSE 100 isn't anything to shout about. However, given the investment turmoil suffered by other Fools of late, it could have been a lot worse. Needless to say though, there were missed opportunities that could have drastically improved the portfolio's value. Essentially, the Qualiport's underperformance during 2000 can be simply attributed to the combination of two factors, neither of which I feel is likely to be repeated:

* The lack of attention given to most of the portfolio's holdings in the first half of the year, and;

* The "Huge Tech Bubble of 2000" that led to some great, but missed, buying and selling investment opportunities.

Getting up to speed

After Bruce took a portfolio management back seat earlier in the year, my biggest mistake of 2000 was not getting up to speed quickly enough with the portfolio's then constituents.

In fact, during the first three months of the year, minimal attention was given to the operating performances and valuations of most of our existing holdings. I even ventured in February that "the 'maintenance' aspect of owning shares in a company, reviewing the financial figures, does not have to be an urgent task". Oh dear.

Take Misys (LSE: MSY). It took until June before I realised that the expected (and very highly-rated) e-revenues from the group's US healthcare operation wouldn't be all that significant in terms of the company's overall turnover. It then took until August before I highlighted the group's rather unimpressive return on equity achievements. And after a little dawdling on my behalf (idly musing whether Misys was "grossly overvalued" or not, which was another mistake), I then sold our Misys shares in September at 629p each.

In retrospect, my earlier laissez-faire attitude towards our existing holdings cost us dear. The concerns over Misys I eventually expressed had all existed before, even in February when the company's shares topped 1200p. Had I been on the ball with those concerns at the time, I'm sure I would have paid more attention to the company's ever-optimistic share price. Instead, with my attention elsewhere, the only opinion to the valuation of Misys I offered in the first quarter of 2000 was given in this article. It's not very inspiring...

"Misys look to be on a stretched valuation, with a forward price-to-earnings ratio (P/E) of 61..."

Had my trading instincts been perfect with Misys, the Qualiport would now be showing a profit over the year.

A similar inattention-to-a-toppy-valuation mistake was made with Emap (LSE: EMA), albeit to a much lesser extent. And in reverse, not paying much attention to Independent Insurance Group (LSE: IIG) during March, when the insurer's shares plunged below 200p, now looks rather embarrassing. But overall, it's my experience with Misys, the company that exhibited the highest rating and the worst business record in the portfolio, that is the most regrettable.

LTB&H

Another part of the "Misys problem" was that we had only topped up our holding in October last year. Surely this is a long-term buy and hold portfolio? We couldn't sell after a couple of months, could we?

Over the year, I've increasingly felt that "value" should be our guide to buying and selling, instead of sticking rigidly to some predefined time span. A quotation from this article sums up my feelings:

"Conventional wisdom suggests that investors shouldn't dive in and out of great stocks. That's true. But then, conventional wisdom wasn't written in a time when substantial companies went from clearly undervalued to clearly overvalued in a matter of months. If a very optimistic long-term share price suddenly arrives in a short space of time, then perhaps a sell decision should be considered."

Take it from me. If the circumstances ever arise again, a sell decision will be actively considered.

Qualiport candidates

So, if I wasn't paying attention to the Qualiport's existing holdings during the first-half of the year, what was I doing? I'll tell you – looking for even more Qualiport companies!

In the first six months of the year, I carried out some preliminary research on twelve different companies and then performed detailed reviews on six, namely: Southnews (LSE: SNW) ("a definite maybe"), Diageo (LSE: DGE) ("a second-class Unilever"), Waste Recycling Group (LSE: WRC) ("stay away"), Great Universal Stores (LSE: GUS) ("I'm interested"), MMT Computing (LSE: MMT) ("far better than average") and Games Workshop (LSE: GAW) ("a sound investment proposition").

True to Qualiport form, of those companies proposed over six months ago that I either dimissed or were vaguely interested in (Southnews, Diageo, Water Recycling and GUS), all have put on subsequent share price spurts. The one the Qualiport eventually bought, MMT, has been largely flat all year. And Games Workshop...? Ah yes, Games Workshop...

Toy soldiers

To put it mildly, I was quite bullish about the investment prospects of Games Workshop. The wargaming company had suffered operational problems in previous years, yet I was satisfied of "the smooth and sustainable appetite for [the group's main product,] Warhammer".

All that was needed was "proper financial discipline" at the company I thought, adding "after laying all the groundwork for the future, I feel getting somebody to look after the purse strings properly should be a relatively minor task." I even drew a parallel with Buffett's purchase of the then near-bankrupt GEICO.

The fine line between investment success and failure was shown just a few days later after making those upbeat remarks when Games Workshop issued a profit warning. The shares have since lost around 60% of their value.

I've learnt two things from Games Workshop and of investing in possible "management turnaround" companies in general. Firstly, ensure there is a sizeable margin of safety in any share purchase, as more trouble could be on the cards. And secondly, don't get involved until at least a new Chief Executive, the man who has ultimate control, is installed.

Buffett did both with GEICO. I didn't do either with Games Workshop.

Departures

As well as selling Misys in 2000, the Qualiport also waved goodbye to Rentokil (LSE: RTO) and said farewell to Unilever (LSE: ULVR). In short, with both companies offering limited long-term profit growth potential, alternative investments were sought.

And although our Unilever shares have gone from strength to strength ever since we let them go (TMFDragon, a Unilever shareholder, has regularly kept the Qualiport managers informed of the upward progress),  I still feel we ultimately made the right decision on both companies.

Top-ups

And finally, it has to be said that the Qualiport's successes this year have been muted. Our success has been paying more attention to company valuation when dipping into the market. We have been learning from past experiences!

The portfolio made five separate purchases during the year and all are showing minimal losses at present. That may not sound too brilliant, but how many other investors can say that their worst performing share bought in this turbulent year has fallen only by 10%? The Qualiport can -- hurrah! Indeed, if it wasn't for a sudden share price spike at the time we made our initial purchase of MMT, our worst performing purchase of 2000 we would have only suffered a 5% decline at most. Yes, I know it's still early days with our two purchases of PizzaExpress (LSE: PIZ) and our three of MMT, but it gives hope for the future.

So, there it is. Apart from the Games Workshop experience, the three main lessons learnt this year, for me at least, are:

* always pay close attention to the companies in the portfolio;
* actively consider selling on grounds of overvaluation, and;
* continue to make share purchases with prudent valuations in mind.

Needless to say, by this time next year, I'm sure I'll have learnt quite a few more lessons in portfolio management!

Portfolio Update

Following our announcement on Monday, Tuesday morning saw the Qualiport purchase:

* 460 PizzaExpress shares at 645.5p each, with associated costs of £37.12, totalling £3006.42, and;
* 450 MMT shares at 550p each, with associated costs of £26.88, totalling £2501.88.

Where Next?

The Qualiport Year in Full – Visit the 2000 Archives