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3 lessons to learn from Neil Woodford’s troubles

Neil Woodford’s fall from grace has been dramatic, after he had to suspend trading in his Equity Income Fund following a period of fund withdrawals. But what can we learn from what we know so far?

No more heroes

For me, the number one lesson is not to put blind faith in heroes. And I say that as someone who almost worships Warren Buffett. The key word here is “blind”, and a lot of investors will have piled into Woodford’s new investing offerings purely on the back of his lengthy success at Invesco Perpetual.

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But what investors needed to do was examine Woodford’s strategy for his new Equity Income Fund. What would you expect from a fund with the word “income” in the name?

I’d expect to see investments mainly in global high-dividend companies, not speculative non-profit growth hopes. Not Purplebricks, for example, which I think faces an increasing chance of actually going bust.

And not unquoted companies that are nowhere near making profits yet. Was Woodford’s speculative Equity Income Fund a good place for Kent County Council to invest £263m of pension funds? I don’t think so.

Understand what you’re buying, even if someone else is buying it for you.

Do it yourself

That’s just one symptom of what I see as a bigger mistake — handing over your cash for someone else to manage. No matter how good an investment manager, if you give them your hard-earned savings to manage for you, they face an inevitable conflict of interest. Even with the finest of morals (and I think Woodford is up there with the best), an investment manager’s key priority is to maximise their own profits.

Sure, I’d buy shares in a company managed by a great investor, like Buffett’s Berkshire Hathaway, or like any number of the investment trusts I think are very good value these days. But they work differently in that you’re a co-owner and the company makes its money exactly the same way as you do, by growing its profits.

Buy shares in the company, sure, but don’t hand over money to the company to invest for you. I’ve never done the latter and I never will.

Don’t overpay

I’m going to go off at a bit of a tangent here and take a brief look at the Lindsell Train Investment Trust as an example of what I think… people investing in names rather than in underlying stocks.

Co-manager Nick Train is very much a darling among investment managers these days, and I do rate him as probably one of the best of our times. Train’s approach echoes that of Buffett in many ways, in that he looks for companies at the top of their game and which have strong defensive characteristics. He also isn’t too bothered by short-term valuation, which is another plus in my book.

But with its shares at 1,960p, the Lindsell Train Investment Trust trades on a premium to net asset value of 97%, based on its monthly update for May. That means investors are paying almost twice as much as the trust’s underlying investments are worth, and I see no sense in that.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Berkshire Hathaway (B shares). 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.