QUALIPORT
MMT, Michael Bright And Missed Opportunities

By Maynard Paton (TMFMayn)
December 17, 2001

Carburton Street, London -- Nobody ever stops learning on the stock market. Reviewing your mistakes, and taking on board the lessons learnt, always makes for a better investor.

Over the past year, the Qualiport has made its fair share of blunders. Today's article will cover the gaffes. Thursday's Qualiport, the last of 2001, will cover the portfolio's investment return.

Lessons from 2000

After reviewing the Qualiport errors of last year, I ended the article by writing:

"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!"

And needless to say, I did learn a few more lessons in portfolio management during 2001! Indeed, 2001 was never going to be a straightforward year when the final paragraph of the last Qualiport article of 2000 stated:

"Of the six portfolio constituents, I think those with the real prospect of doubling their profits over the next five years are Independent Insurance (LSE: IIG), PizzaExpress (LSE: PIZ) and MMT Computing (LSE: MMT)."

Oh dear.

MMT Computing

The Qualiport's disastrous encounter with MMT Computing, a small IT consultancy, is documented fully here. In short, rather than generating greater profits in 2001 (as I had expected), MMT promptly dived into the red.

My errors of MMT judgement included:

* Banking on an unproven managing director, especially with MMT's industry undergoing a turbulent time (the post-Y2K slowdown);

* Not properly identifying the group's competitive advantage and determining whether it was sustainable or not, and;

* Doggedly holding onto the shares, even after MMT's poor management qualities and weak competitive position became apparent.

The Qualiport's investment in MMT lost nearly 80%, or just over £4,800, in 2001. With the portfolio's value around £22,000 at the start of the year, MMT was a series of very expensive mistakes.

Independent Insurance

The Qualiport's association with Independent Insurance also consisted of one or two slip-ups. After I confidently stated twelve months ago that the company could double its profits over the next five years, Independently Insurance went bankrupt six months later. Full insights into Independent's insolvency can be found here.

The overriding lesson from Independent Insurance can be encapsulated by this warning:

"Don't rely entirely on the company's management to justify your investment decisions, especially when other aspects of the business give concern."

Back in July 2000, I summarised Independent Insurance by writing:

"A perplexing set of accounts, financial reporting changes and a distinct lack of cash hasn't made me too excited over the group's recent operating performance. Couple that with my inherent dislike of complicated and commodity-type businesses, and the lack of enthusiasm for Independent is complete."

However, rather than ditch the shares, I decided to listen to the siren voice of  Michael Bright, the perennially upbeat chief executive of Independent:

"I'm prepared to put my doubts and misgivings to one side, and place my faith with the proven and established management team and their historically superior operation"

After the company issued a somewhat disturbing statement in February, the Qualiport quickly sold its Independent shares. Although the disposal came of a good few months before the company collapsed, it was a mistake to have remained a supporter of Mr Bright while his company's accounts looked distinctly bleak.

Missed opportunities

The mistakes with MMT and Independent -- those that involved actual portfolio holdings -- are the real clangers of the year. Of a lesser consequence are those that mistakes that are hidden somewhat -- the missed opportunities.

Three shares fall into this category: Games Workshop (LSE: GAW), Imperial Tobacco (LSE: IMT) and Ultraframe (LSE: UTF).

Games Workshop was the biggest miss. Back in February, I highlighted the shares at 226p. Don't ask me why I didn't buy them, because I still don't know. The shares are now around 540p.

Then there is Imperial Tobacco, whose shares were "seriously tempting" in April at 720p. But with results out the following week, I cowardly deferred a purchase. Of course, as a prospective long-term investor, such a short-term postponement seems rather silly when considering a steady, stable business like Imperial. The shares are now 890p.

Finally, there's Ultraframe. Being overly cautious on the groups' recent foray into the US was to blame for not doing anything after this prompt, written when the shares stood at 163p. Six weeks and one very good set of results later, the shares now stand at 287p. In retrospect, at 163p, the US risks were more than priced into the shares. But that's easy to say now, of course.

Summary

In view of the above, the major lessons I'll take away from 2001 are:

* Always pay close attention to the companies in your portfolio (and watch list), and act decisively if an 'investment story' significantly changes for the worse;

* Don't rely entirely on a company's management to justify your investment decisions, especially when other aspects of the business give concern.

(And just to repeat what I wrote twelve months ago...)

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

More: Fool Admits Mistakes And Sells MMT | Insights Into Independent's Insolvency | The Qualiport's 2001 In Full

The author owns shares in Games Workshop