QUALIPORT
What Went Wrong... And Why

By Maynard Paton (TMFMayn)
October 2, 2003

The Qualiport has made its fair share of mistakes over the years. However, while nobody can avoid the odd slip-up, the trick to successful investing is to learn from your errors. Here's a review of this portfolio's biggest howlers and the key lessons learnt.

1. Marks & Spencer (LSE: MKS)

Bought May 1998 at 553.5p per share, sold May 1999 at 392p per share.

What went wrong? In short, stocking the wrong frocks. After countless years of getting the clothing right for Mr and Mrs Average, M&S management took their eye off the ball in the late 1990s and their clothing ranges were left on the rails. Fresh boardroom talent has since turned things around a bit, though current profits are still a long way from the £1b-plus 1998 peak. Increasingly cutthroat high street competition hasn't helped either.

Key lesson: Beware the company that has to chop and change its stock every year to remain popular. Indeed, fashion retailing is the archetypal industry for unpredictable customer demand and volatile profits, two characteristics not endearing to the long-term investor. Businesses that provide the same old product or service year in, year out, give fewer sleepless nights.

2. PizzaExpress (LSE: PIZ)

Initially bought October 1998 at 792.5p per share, sold November 2002 at 340p per share.

What went wrong? PizzaExpress churned out great accounts for years as rival restaurateurs struggled to match its standards. But unfortunately, the competition eventually caught on. In the face of declining sales, PizzaExpress has re-jigged its menu, increased the size of its pizzas and experimented with other dining formats. The jury remains out on the changes.

Key lesson: Seemingly great companies that operate in traditionally difficult industries will, more often than not, eventually lead to disappointment. Where barriers to entry are notoriously low, a robust competitive advantage (and preferably one that is glaringly obvious) is an absolute must to offset the numerous copycats that will emerge.

3. MMT Computing (LSE: MMT)

Initially bought April 2000 at 580p per share, sold August 2001 at 120p per share.

What went wrong? MMT Computing is another growth share gone awry. After overseeing a decade or two of rising profits, founder Mike Tilbrook took a back seat in 1999 and appointed a new managing director. Unfortunately, the move came when Euro and Y2K consultancy work started to decline and, combined with a subsequent focus on Internet-related work and problems at acquired business, led to MMT falling into the red.

Key lesson: Like many other industries, success in IT consultancy revolves around management. And when a long-time achiever leaves the boardroom, there's always a risk of trouble on the cards. Never assume the new man will automatically take the business on to greater heights. Relying on unproven management in a people-reliant business just invites portfolio trouble.

4. Dell Computer Corporation (Nasdaq: DELL) 

Bought January 1999 at $44.625 (adjusted for splits), sold January 2001 at $28.1875.

What went wrong? Operationally, not a lot. Though Dell suffered from the slowdown in the personal computer market, the company has continued to extend its market share in most markets. At the time of purchase, Dell had everything -- industry leadership, great cash flow, super returns on equity, upbeat prospects and so on -- but it was all in the buying price. Rosy projections led the Qualiport to believe a price to earnings ratio of 78 was good value.

Key lesson: Great company, bad stock. Pay too much over and above a company's intrinsic value and no matter how great the fundamentals are, the shares will under-perform. Instead, look for obvious and immediate 'value' that creates a visible margin of safety.

More: Lessons From A Falling Market | The Qualiport's Full Trade History

This article was first published in January.