Note: previous blog articles of this journey can be located via the right hand side bar.
A we reached the end of 1999, the paper profits were just becoming unreal and investors were buying into the idea that this one way trip would go on and on: you even had people in well-paid jobs that had become totally seduced by the technology/.COM story and had given up employment to become full-time investors; fortunately I never really got that feeling. The Sunday Times carried a regular feature entitled The Diary of a Day Trader featuring a chap who had quit his secure job during the .COM boom to become a full-time trader working from home. The Diary of a Day Trader was a must-read feature, chronicling the ups and downs of the journey of John Urbanek. Even people who had not bought a share in their entire lives were talking about the column on a Monday morning at work. The column was beautifully honest, “warts and all” and as time went by it was obvious that the new trading life was becoming very tough. Interestingly in his final column, he wrote "I am not throwing in the towel and will continue as a day trader, although somewhat older and wiser than when I started almost two years ago. I would not necessarily recommend that readers follow my lead. It is not an easy life – nor is it an easy way to make money"; Wise words that may he headed by any investor and as I recall there were many less fortunate folk who found the glorious new .COM road would not be paved with gold forever. For my part, I was becoming increasingly nervous at the altitude that my technology stocks were reaching but felt almost powerless to climb off the roundabout, it was surreal; the intoxication just overwhelming.
As the clock struck midnight on new-year’s eve 1999, I was at work completing the tape backup for our valuable laboratory information system, wondering what I was doing there on a new years eve playing service to what I perceived as the Y2K scam. I was also wondering just for long this gold rush could continue. Thankfully the drive home in the early hours of the first of 1st January 2000 proved uneventful; the traffic lights were all still working and as yet no aeroplanes had fallen from the sky: the millennium bug had been beaten; civilisation and the planet saved!
As for the question of how long this technology gold rush could continue, the answer came along in early 2000 with to my mind a watershed of the .COM bubble in the flotation of Last Minute.com. Lastminute.com floated at a SP of 380p and rose to over 500p in the first hour of trading; the demand was massive and the average punter was allocated 35 shares; what a crazy world. The company had a phenomenal valuation: the magic roundabout built on the edge of the cliff had to grind to a halt and that’s exactly what happened in March 2000. A friend, Bob and I were talking about the madness of the dot.com thirst and the departure from reality with the lastminute.com floatation; little did we know at the time that this was the signal for the end of the technology boom. What followed is now well-documented history as the decline in share price of these briefly loved stocks was about as fast as their rapid rise. Fortunately in the most part, I got out part way through the tumble down the cliff and whilst I had in today’s terms made very healthy gains, they were nowhere near as high as they appeared to be when we were at the top of the cliff. I sold, sold and sold until again my portfolio just had a couple of stocks remaining including a few Redstone’s; how could a company that sponsored the Wales Rugby team be anything but worthy? Yes, that Redstone reasoning of myself seeing the reassurance of a company sponsoring a national side was totally misplaced.
The main part of the decline or fall off the cliff took part over something like an eight week period commencing March 2000, with many IT stocks losing around 80% of their value. In fact, Lastminute.com continued falling for some months to come until it had lost 96% of the valuation it had reached on its first day of trading. For sure, anybody who invested during the late 90’s and early 2000’s will never forget those turbulent days.
Early 2001 became a time to reflect. What would I do now? I had made good profits so far on my journey and learnt a lot. Sadly not everybody was learning as they might; I had investment friends who continued to stay loyal to their technology stocks and refused to sell, living in a world of self-denial. My good friend Bob said to me “Fibernet touched £30 not so long ago and mark my words, it will get back there soon, this fall is only a temporary setback”: to his credit Bob was a very loyal chap he went all the way to the top with his stocks and for the most part stayed loyal all the way to the bottom!
It was definitely time to sit on my hands, protect a reasonable cash pile and take some time to think; what was this diversification stuff I once thought worthwhile. After my experiences to date, I felt comfortable in that I was learning all the time and probably after the .COM bubble burst I was becoming a touch more cautious but where would I go from here I wondered. What stocks may be a touch more predictable and safe? Hang on, those ex-building societies look interesting and pay a safe dividend and then, of course, there is always the banks; you can’t get much safer than that!
The journey continues.
The investment landscape started to change rapidly in the late 90’s and whilst I had had a very good run in Blacks Leisure, JJB, MSB International, and Severfield Reeve as the prices started to fall back I took my profits and also booked slight loss on Harvey Nichols: all stocks that had been identified via Jim Slater’s methods. In those relatively early days, I would only be running around 6 to 8 stocks in my portfolio. It’s a crazy feeling because at the time I was beating myself up for having made only a 60% profit on this basket of shares. I thought to myself “if I had been smarter and sold at the top my gains would have been way over 100% for no more than 18 months of investment. Thankfully, I don’t think that way anymore and can live very comfortably with myself in the knowledge that I will probably never be able to purchase at the bottom and sell at the top. However, I did take quite some more years investing before I could leave my remorse of not selling closer to the top behind me.
I now had a fair amount of cash sitting in my PEP/ISA and only a couple of stocks including DCS which I kept holding as Jim Slater kept writing so enthusiastically about it. I then started thinking of those Fibernet shares that Gordon our electrical contractor, had been mentioning and decided that it was time to try something else and take a much closer look at IT shares. I had some good knowledge of IT companies as my own company had outsourced the provision of all IT services to a third party, our IT partner, on an amazingly expensive contract; I really could not believe the costs we were paying and all because our own in-house IT expertise was allegedly not up to the job.
At this time, I was also attending meeting after meeting with our IT outsource company as they preached their version of the Y2K commercial opportunity, apologies, I mean the millennium bug. We were all doomed to perish when the clock struck midnight on 31st December 1999 unless our consultant IT partners determined each piece of IT kit was safe. I started to get the feeling that IT service companies were very lucrative investment opportunities.
Yes, the technology world was rapidly impacting on the stock markets: respectability and excitement could easily be demonstrated by a company if it had the magical .com after it’s name or business plan. Within no time at all Technology and internet stocks had become the new Klondike Gold Rush
Once it became clear to investors and speculators that the internet had created a wholly new and untapped international market, IPOs of internet companies started to follow each other in rapid succession. It seemed to me that the business plan of some of these companies was based on little more than just an idea on the back of a fag packet with a flashy vision and obligatory mission statement. The excitement over the commercial possibilities of the internet was so big that every idea which sounded viable could fairly easily receive millions of pounds worth of funding. The basic principles of investment theory with regard to understanding when a business would turn a profit if ever, were ignored in many cases, as investors were afraid to miss out on the next big hit. They were willing to invest large sums in these companies many of which had more of an idea rather than a feasible plan. The survival of most of these companies depended on the rapid expansion of its customer base, which in most cases meant huge initial losses. Try as I did at the time, I just could not get a “must have” feeling about pure internet play stocks and never invested in one as such.
However, I became very much in tune with any form of technology business that seemed, at least to me, to have a tangible product to offer: IT consultancy, outsourcing of IT services, procurement, software developers etc. I became totally hooked; you could say I was an IT junkie. During the late 90’s conventional wisdom went out of the window; who wants to invest in a company that actually makes something; paying dividends is boring. Good old reliable Mickey Clark on the BBC’s Wake Up to Money used bemoan the markets “who wants to but smoke-stack companies, you know the ones who make something and pay a dividend”?
“Let’s not miss”
Paul Kavanagh’s very readable column in the Sunday Times started to heavily feature plausible technology stocks: Sunday mornings had become very interesting. Many such investment articles in almost all publications caught the IT mood of the time as the technology bubble formed. As I said, I was far from immune to this technology fever and my portfolio had just about abandoned the previous Zulu style principles and climbed aboard for the tech ride. My portfolio now became fully invested in a whole range of technology stocks: Anite, Comino, Dataflex, Diagonal, Financial Objectives, Kewill, Logica, London Bridge Software, MMT Computing, Merant, NSB Retail Systems, Plasmon, Royal Blue, Redstone, Staffware & Triad. What was that dinosaur term of diversification all about? I had become a complete technology junkie, not a very relaxed junkie but nevertheless a junkie.
The world had become just unreal; a couple of months could go by and a stock could be up 50% or 100% and in some cases rise almost in a logarithmic fashion. The rate of price rise of these technology stocks was phenomenal: I bought Kewill for just over £3 in June 1999 and eight months later it had risen to over £28 “wow, my stocks were going through the roof”.
Footnote: there is just so much to say about this .COM/IT boom that the blog has been divided into parts a) & b) to offer a comfortable length of text: Part 3b to follow.
It was my intention to write up my usual open and honest blog covering the purchase of Telit Communications and indeed I was in the process of doing that yesterday evening albeit belatedly for a purchase made only 9 trading days ago. The declared figures for Telit, results and those top level numbers available on various financial sites, did attract me along with a couple of encouraging RNSs on 23/5/16. The income for the business has been rising very nicely over recent years as have the apparent profits even taken into account the occupational hazard of a minor profits warning back in October 2015. The stock did not pass my routine screens which are weighted to free cash-flow but nevertheless, I was swayed by the increasing profits year on year and decided to make an initial purchase.
Last night, 2nd June, I started to dig around a little further and did not like what I saw on the cash flow statement which suggests that costs that should possibly have been taken into account against income when calculating profits were actually capitalised. Looking further at the figures over recent years and I see that the capital expenditure is starting to open a big gap over the quoted depreciation & amortisation; starting to not feel comfortable now! Of course, it’s not illegal to do that but it does greatly detract from my original reasoning to make the purchase just a few days earlier. It may well be that things will turn out well and the apparent need to follow this practice will diminish. As I see it the profits year on year are shown far more favourably than they may have been and I am left with the feeling that real profits as I would see them, are actually considerably less than the top line figures suggest. We already have a business on a current PE within the 20’s and whilst this falls to something like a PE of 11 in the future, these PE figures are generated on profits calculated following capitalisation of a lot of costs; had this not been the case then just how high would the PE be? Ok, I am not the greatest fan of the PE and much prefer free cash-flow measures but taking the quoted figures we have a P/FCF of over 75.
Please Note: I am not saying that Telit are cheating in any way, I am not saying that they are a bad business; what I am saying is that based on the criteria I apply that Telit carries a far greater risk than I allow my portfolio to live with: I simply don’t like large amount of costs being capitalised in this way. Accordingly I sold the shares today and booked a fortuitous 11% profit; this was purely down to Lady Luck and not skill as the price ticked up over the last few days. On the same theme, I would not wish to slate Telit and say they are an unworthy business; they simply don’t on reflection tick all of the boxes for me.
As ever with this blog, the above is just a walk through my thought process and should not be seen in any way as investment advice or condemnation of Telit; it’s simply what fits or does not fit with me comfort.
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