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Three lessons every investor needs to learn from the rise and fall of Neil Woodford

We all knew star fund manager Neil Woodford was in trouble. But it still came as a surprise when he was unceremoniously booted off his own eponymous fund yesterday.

Sacked!

Many expected him to be dumped from his investment trust vehicle Patient Capital Trust. Instead, he lost the big one. His once mighty flagship LF Woodford Equity Income is now renamed LF Equity Income Fund.

This was the craft on which Woodford launched his dreams of becoming a fund management group in his own right, after leaving his cosy berth at Invesco-Perpetual. At the time of his sacking, the fund was worth £3.1bn, down from around £11bn at its peak. It would have been a lot smaller, except loyal customers (including me) have been locked in since June.

The fund will now be wound up “as soon as practicable,” according to Link Fund Solutions, which is running (down) the fund. Investors won’t get anything back until at least mid-January. Link warns this may be less than they originally invested. You bet it will. So what can we all learn for next time?

1. No star shines forever

Woodford was the UK’s number one fund manager, renowned for turning £10,000 into £114,000 over 20 years. He was lauded for making two bold calls – shunning the ill-fated technology boom, and bailing out of banking stocks before the financial crisis.

The problem is, no investor can bank on getting this kind of call right time after time. As Warren Buffett put it: “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good.”

Woodford’s losing bet was that solid UK companies had been overly punished by Brexit, and would recover when that was solved. Except Brexit wasn’t solved. Some may find irony in the fact the UK may finally get a deal in the week he was sacked, but that still doesn’t vindicate Woodford. If his star can fade, so can other managers.

2. Every investor is fallible – including you

Woodford made a string of lousy stock picks. Allied Minds. Kier Group. AA. Doorstep lender Provident Financial, for crying out loud! There were times when I looked at some of his holdings and found myself thinking – are you still holding onto that? This can’t end well. PurpleBricks jumps to mind.

If Woodford can mess up, so can you. This doesn’t mean you should avoid individual stocks. What you must do is avoid arrogance and spread your risk, because it’s inevitable some will sink rather than swim. Consider underpinning your direct equity portfolio with a broad-based fund, for example a FTSE 100 tracker, to limit your exposure to individual flops.

3. Understand what you buy

The ultimate example of Woodford’s hubris was moving into unquoted stocks, buying a string of clunkers. I suspect he’d been itching to unleash his genius on biotechs and other start-ups for years, only for Invesco-Perpetual to rein him in.

I’m reminded here of that other superstar manager – Fidelity’s Anthony Bolton. He also struggled after launching investment trust Fidelity China Special Situations in 2010, despite having no experience of investing there. However, Bolton faced none of Woodford’s liquidity issues and turned things round, leaving the trust in 2014 with its net asset value up 18.6% and share price up 6.3% over his tenure.

Again, Buffett understands. He recently said investors should stick to areas they know when they buy companies, in what he calls your “circle of competence.” Woodford strayed well beyond his, with grisly consequences. Make sure you don’t.

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Harvey Jones has no position in any of the shares 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.