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3 lessons every investor can learn from Neil Woodford’s fund suspension

Private investors can learn a lot from the humbling of star fund manager Neil Woodford. Like, reputation counts for nothing. Don’t believe fund manager marketing hype. Illiquid and non-quoted equities can be risky. Investors live or die by the stocks they pick. Falling knives can cut your reputation to ribbons.

I could probably go on all day, but I’ve decided to focus on the following three.

1. Only buy what you understand

Woodford was a raging success when he focused on FTSE 100 blue-chip dividend-paying stocks, because that’s what he understands.

By setting up his own fund management company he liberated himself to dabble in areas he didn’t really get (even if he thought he did). It must have been intoxicating, for a while, being free to deploy his stock-picking genius on all those exciting unquoted companies and biotech minnows.

Then he came unstuck, making basic errors such as loading up a unit trust with the regulatory maximum 10% unquoted stocks, leaving him vulnerable to a rash of redemptions. Woodford Equity Income might be worth holding after it reopens, if he returns to what he knows.

Make sure you understand what you are buying as well. Woodford Equity Income wasn’t the blue-chip fund many investors thought it was.

2. You can beat active managers

The big advantage you and I have over fund managers is that we don’t have to answer to anybody but ourselves. No customers, no regulators, no journalists. If you buy an out-of-favour stock, you can give it as long as you like to recover.

Woodford thought he was an exception. Investors had given him time before, they would do it again. That was true, but only up to a point. With his fund down 18% over three years against a rise of 24% on the UK All Companies (truly lousy), they finally lost faith.

Then he was in trouble, because of all those unquoted/illiquid stocks he had to offload in a hurry. You wouldn’t have to do that. Although hopefully, you wouldn’t have bought them in the first place.

3. Don’t think you know better

Ultimately, any fund manager is only as good as the stocks he picks. Woodford invested in disaster after disaster. And then when his bet backfired he doubled down, notably with stricken Capita and Provident Financial.

Other high-profile bombs include Kier Group and Purplebricks, and that’s without mentioning the AA, Allied MindsEve SleepNorthwest Biotherapeutics, Prothena, Theravance Biopharma, 4D Pharma, Redde, RM2 and Utilitywise. Even Imperial Brands, down 50% over two years.

I’m only surprised he didn’t own most of Carillion too.

Everybody makes mistakes but why so many? It partly goes with the territory. Woodford is a value investor, looking for companies that others shun. That takes self-confidence bordering on arrogance and at some point, Woodford overstepped the mark.

It is well known that private investors overrate their ability to beat the market. This must have been multiplied in Woodford, who had beaten all comers for three decades.

Humility is an underrated virtue when it comes to investing. If Woodford shows some now, he may still bounce back.

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Harvey Jones holds units in Woodford Equity Income but has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.