The problem with investing is that when your results are good, it’s sometimes difficult to distinguish between genius and being the luckiest idiot in the world …
In April, I had reported that I help shares in CHAR (Chariot Oil & Gas) (http://is.gd/BMVanD). I knew that it was a share I could end up looking foolish for owning. Here’s what I said at the time:
Bought this one earlier in the year because it’s a net-net. It’s not done anything yet, but we’ll see. It qualifies for 3 Stockopedia screens, all of them bargain screens. That shouldn’t be too surprising considering how cheap it is. Actually, Stockopedia’s Negative Enterprise Value Screen has shown a pretty dismal performance, being down 30.8% over 2 years, underperforming the Footsie by about 40%. Maybe it’s a strategy that works best after a market crash, when there are plenty of bargains available.
I bought in Feb 2015, having noted that it was a net-net and had a significant directors purchase in Oct 2014 by a director at 10.5p. Come May, the shares were up over 25%, so I decided to sell at 11.06p. I figured that this was a good gain for 3 months, the shares were overbought anyway, and, well, the company never made a profit.
If I were to play with net-nets again, I would probably stick to companies that had at least demonstrated some ability to generate a profit, and that I thought were not scams (I’m not saying that I thought CHAR was a scam) or Chinese companies. That is a nigh-on impossible trick to pull off in this market. I know, because I checked recently. Net-nets will almost certainly be AIM companies in any event. I wouldn’t rule them out just because of that, though. Net-nets are unlikely to be the mainstay of an investing portfolio, simply due to the lack of candidates.
I set a share price alert of 8.5p on CHAR to see if it would be triggered. The shares were trading at this level for much of mid-December 2014, and I was curious to see if they would go down to those levels. Clearly, they did.
I haven’t bought any more, though. I really don’t like the fact that CHAR has never been profitable. I have set a new price alert of 5.95p, at which I may consider buying again.
Why 5.95p? Because it’s a 30% reduction of the current “impossible” price of 8.5p. I had read that a famous investor said that when you see a share trading at an impossily cheap valuation, try to buy it for 30% less. Perhaps a knowledgeable reader will be able to place the name. You may be surprised.
One such surprise happened a couple of days ago: LMI (Lonmin). I am an unhappy holder of these shares, and noted later, after further falls, that the shares were “impossibly cheap”. I set an alert for them when it was 30% below this figure, to 80p. On the 13th, the shares hit 74p, setting off the trigger. I had decided not to buy – I wasn’t prepared to risk it – which in hindsight was a pity, because the shares have bounced back sharply, standing at 81.5p now.
According to Stockopedia, the company has a PBV of 0.23. Although the company has many problems (what would you expect at current valuations?), we have to remember that it’s a “real” company, not some AIM nonsense. I heard that Barron’s reported that LMI was a top pick at the London Value Investing Conference. I think it was picked by Schroders. If anyone can confirm or deny that, I would be grateful.
So there we have it: when trying to buy value shares, set a target 30% below the impossibly cheap valuation level.
Now all I have to do is practise what I preach.
May you all be well.
Edit 15-Jul-2015: Fixed errors. “I’m saying that I thought CHAR was a scam” now reads “I’m not saying that I thought CHAR was a scam”. One word can make all the difference!