The Motley Fool

Woodford funds did this. Don’t be like Woodford

Troubled UK fund manager Neil Woodford once said to Standard Life Adviser: “I sometimes find myself moving in the opposite direction to the rest of the market.”

In the past, taking a contrarian stance to invest in stock market-listed companies served him well. But it’s a dangerous strategy. I think the underperformance of his funds and recent events such as the lockdown of his flagship Equity Income Fund serve to underline just how risky the strategy can be.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

High-risk strategy

Indeed, contrarian investing, or “investing against the grain,” as a previous well-known casualty of the strategy – Anthony Bolton – once described it, is fraught with potential pitfalls. My view is that you need to be extremely experienced and skilled as an investor to pull it off, or just plain lucky in that the macroeconomic environment and other ducks have lined up in your favour.

I want to learn as much as I can from the unfolding Woodford funds debacle, and I think Paul Summers made a good observation in his article from the 8 June. He pointed out that Woodford’s contrarian style chimes with the advice once uttered by famous US investor Warren Buffett when he said: “Be greedy when others are fearful.” However, Paul went on to suggest that the Woodford investment team appeared to apply Buffett’s philosophy to stocks that Buffett would arguably never have touched.

For example, Buffett is well known for his attention to the quality of an enterprise and it’s only high-quality businesses that he is likely to buy when other investors are mostly selling their shares. Woodford, on the other hand, has spent the past few years buying up UK-facing cyclical business, many of which I would consider inherently low-quality outfits purely because of their cyclicality. On top of that, the funds compounded the quality problem by loading up with highly speculative ‘jam-tomorrow’ shares.

Mis-timing the cyclicals

It’s hard to figure out why the Woodford team went for speculative, often-profitless companies. It feels like a schoolboy investor error, and I know that many eyebrows have been raised about that in the wider investment community for a long time.

But when it comes to investing in cyclical companies at what looked like the ‘wrong’ point in their trading cycles, I can only assume Woodford chose to ignore the advice of another US one-time investing legend, Peter Lynch. Lynch wrote in his book Beating the Street: “Buying a cyclical after several years of record earnings and when the P/E ratio has hit a low point is a proven method of losing half your money.”  Sadly, the Woodford investment team seems to have proved it once more, in many cases.

Finally, I notice Woodford did a lot of averaging down. When share prices fell, instead of cutting his losses, the funds often bought more of the company’s shares.

Let’s finish up by letting Lynch have the last word about that: “There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it, when the fundamentals are deteriorating.”

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.