If you go to www.hmrc.gov.uk/cgt/negligible_list.html , you will find a rather morbid list. Namely “Shares of Negligible Value”, the graveyard of quoted shares!
Once on this list, even the Inland Revenue accepts that they are worthless, and if you have the misfortune to hold one of them, your only consolation is that you can offset your 100% loss against your gains in your annual capital gains tax calculation.
Incidentally, if you hold shares which you suspect are worthless but do not appear on this list, you can still make a negligible value claim to your tax office and see whether it is accepted.
One of the earliest names on these corporate headstones is Cyril Lord, the carpet manufacturer (remember them?), which went bust in 1969. Since then over 400 names have been added to the list, a sobering reminder that plenty of stock market investments turn sour, and can take your entire investment down with them.
I am sure that you would recognise several names on the list. Cammell Laird, the shipbuilder; Brent Walker, the leisure conglomerate headed by former boxer George Walker; toy makers Mettoy and Airfix; Marconi, Ferranti, Sock Shop, and the infamous Polly Peck International.
Already two things become apparent. Size and a famous name are no guarantee against financial extinction. Secondly while shareholders can lose their entire investment if a company goes bust, the business itself and the trading name can continue after a refinancing.
We can learn lessons from this list, and here are five.
1) Adapt or die!
The British Chrome Tanning Company. Dimplex. Stone-Platt Industries. These all hark back to the days when the UK economy was founded on manufacturing. The Fairfield Shipbuilding & Engineering Company and Lyle Shipping recall the time when we had a proud merchant fleet. The Padang Langkat Rubber Estate conjures up visions of the Empire. Lesney thrived when boys played with Matchbox cars, not video games. John Foster & Son made mohair clothes and worsted suits.
Time has overtaken these companies. Perhaps they could have found a way of adapting, but they did not.
Lesson 1: Sometimes changing circumstances work against companies and it can be very hard to adapt. I see little point in investing in companies which are clearly battling against adverse trends. I like to invest in companies whose glory days lie in the future, not in the past.
2) Beware vaulting ambition
Some of the companies on the list were very much associated with personalities. Polly Peck was the creation of dashing Cypriot Asil Nadir, Albert Fisher of Tony Millar, and Coloroll of John Ashcroft. For a while these individuals could do no wrong in the eyes of the City. They made a rapid series of acquisitions, all enthusiastically greeted. But they ran up large debts in the process, and in the end the acquired businesses were not sufficiently strong enough to survive.
Lesson 2: There are two lessons here. One is not to be sucked in – just because somebody has a high profile in the media, does not automatically mean that they have good business acumen. The second is to be aware of companies that expand too quickly through acquisition, unless the deals have consistent logic, and have delivered good financial returns.
3) Money, money, money
Cash is King! Many of the companies on the list had great ideas. Intersolar Group offered solar electric systems. Sock Shop was a copy of Tie Rack, and had shops which sold nothing but socks. Bioglan Pharma’s hopes rested with a skin cancer prevention gel called Solaraze. Navan Mining ploughed shareholders’ cash into a Bulgarian gold project. But none of these companies ever converted their big ideas into sustainable businesses.
Lesson 3: The journey from having a good idea to turning it into a successful business is a very long and tricky one. Until a company is profitable it is inherently risky, and it pays to be cynical.
4) Don’t Invest In What You Don’t Understand
That is a lesson that the directors of Barings Bank never learned. They loved Nick Leeson and the profits that his options trades appeared to deliver. But they clearly did not understand how it was done – or why it was about to bring down the bank. Similarly, the technology boom had investors throwing money at things that they never understood – and in the cases of Marconi, Irevolution Group or Voice Recognition Systems, they lost the lot.
Lesson 4: If you don’t feel that you really understand how a company makes its money, then pass it by. Sooner or later you will come across a great business that you really do understand, and one of the keys to successful investment is to have the patience to wait for just such an opportunity.
5) Make the world a better place
One of the companies on the list is Versailles Group, a trade finance group run by Carl Cushnie, who was convicted of fraud. But one that has recently gone into administration is Homebuy. Homebuy found a way of selling a television that cost £270 for £1,585. It did so by marking the price up to £587, then adding a £30 arrangement fee, £281 of “maintenance vouchers”, finance charges of £589 that were based on an annual interest rate of 39.9%, and VAT of £98! As you can guess the business was very profitable indeed. But the banks eventually refused to fund its growth, probably because they did not want to be associated with a business that fleeced the financially illiterate to such an extent.
Homebuy’s business was not illegal, but it was hardly something of which to be proud. The same comment applies to Interactive World, (see RHPS, August and September 2006) which downloads porn to mobile handsets.
Lesson 5: If you choose to invest in companies that conduct their affairs on the edge of morality or legality, then beware the backlash. Companies that are doing good and useful things are far more likely to gain financial support than those that don’t.
The final lesson is that what goes down does not necessarily come up again. If a share is not working out, don’t hang on in hope. Sell and move on – or you might lose everything.
