A few years back I wrote an article considering how an investor may mitigate risk when investing on the planet AIM. As a few years have passed and after various shenanigans by some AIM companies, I thought it would be timely to revisit the stocks originally mentioned and see how they have performed. Remember each of these stocks was invested in at the time based upon criteria that I consider to be attractive and also give a degree of confidence in that you are buying into a quality business. Selection criteria included improving revenue/profits, good returns on capital employed, hopefully, a high gross margin and attractive EBIT margin plus cash generation. Then being savvy and investing when momentum is with you. I am never fussed about being the first one to arrive at the party; simply happy to arrive after a few others have got things going and hitch a ride on the coat-tails of momentum.
Our own planet Earth has some treacherously dangerous environments such as the wild oceans, jungles and deserts, snake-infested swamps and I certainly would not contemplate settling in such areas. AIM certainly has such hostile environments in abundance but the savvy explorer landing on AIM will head for the richer fertile plains to settle upon and hopefully thrive. Hence, the selection criteria I use that fits my personality. Now I really should say there are other very successful ways to thrive on AIM, for example, you may have the steady unflappable patient personality of a value investor who spots an undervalued maybe unresearched stock, buys and sits it out; a good approach yet one that does not readily fit my personality.
So, how have the 10 AIM stocks I held when I wrote about AIM a few years back performed:
Note: the appreciation in value is based on the quantity of stock originally purchased. Do remember that as you make further purchases of a stock as it appreciates in value, the important thing, the bottom line, improves but the sometimes misleading percentage gain of the new pot will not look so impressive.
In summary, I have been very fortunate that the stocks I previously reviewed on AIM over the years have either performed well or have been jettisoned from Voyager without damage. The key for me is to keep looking at the numbers declared from the company as given in each relevant RNS release which include Interim results, Final results and for many companies trading updates. If in doubt, get out and protect one’s capital.
There are of course the usual considerations that are often magnified with AIM stocks and these include:
At this point, I should say that I have penned this article In response to some enquiries regarding what AIM stocks I currently hold and my approach to managing them. In truth, my approach to AIM is strikingly similar to that of the main market and it is quite simple:
1. Seek quality stocks to invest in: good returns on capital employed, increasing revenue/profits, attractive margins, acceptable debt position, acceptable valuation & remember sometimes you just have to pay for quality.
2. Look for any “smoke & mirrors accounting” or sloppy process such as at UTW, TCM, AIR: I have commented on all three of these companies in the Voyager Log at various times. Simply looking for things that don't stack up; those mislaid invoices, whoops we have not paid the full amount of tax, overly ambitious revenue recognition, manipulating of operational costs etc to boost foggy profits.
3. Avoid wafer-thin margins
4. Ensure you are comfortable with the newsflow/annual report; challenge some of the figures with your own calculations.
5. Maybe avoid the bulletin board highly followed shares: don’t be seduced by the next big thing. If the next big thing really does work, then hitch a ride on its coat-tails.
6. Don’t take a position when a stock is on a downtrend. Remember, "the trend is your friend"; yes, I know its an old saying but nevertheless very reliable.
7. When comfy, take an initial position with a tight indicative stop loss and add to the position as it hopefully appreciates. Say you are planning to invest maybe £xk in a stock, start with a position of £xk/3, then add as appropriate (by appropriate I DON’T mean averaging down). What I mean is building a position in a winner.
8. Protect your downside with an indicative stop loss (SL) that you raise in steps based on multiples of your actual stop. Maybe when the stock is really motoring I may change to an indicative trailing stop loss. Note, I say an indicative stop loss not an automated one. Simply a bell that may ring to say “hey you dozy so & so, do you need to take any action”. It does not mean that you have to trigger that SL but rather evaluate the situation. For example, the day after the referendum would not really be a sensible day to press the sell button as guided by the SL but merely a time to evaluate things.
9. Leave your ego in a small box outside of your office; ego has no place in investing. Sadly so many investors don't sell a losing position as their pride will not allow them to do so at least until break even is reached. I simply admit I am wrong when a stock goes against me, shrug my shoulders, learn what I can and move on.
10. When things work well with a stock, don’t be afraid to let it run: maybe adding more or taking a comfort reward, give yourself a treat, on top-slicing.
Apologies if the list is not exhaustive as it was penned on a train ride back from a footy game.
So, whilst the Voyager log has been running, there have been a further 16 AIM stocks purchased in addition to the 10 traded that are listed in the table above. Of these other 16, the following five remain in the Voyager: ARC, D4t4, KWS, PMP and SDI. The stocks D4t4, KWS, PMP and SDI are giving very good returns whilst a relatively recent position, ARC has yet to move appreciably.
From the 26 AIM stocks covered either in this article or recorded in the Voyager Log, we have:
Eight very appreciable winners and one apprentice (ARC) that remain in the Voyager: ABDP, ARC, D4t4, DTG, IGR, KWS, PMP, SDI & SOM. = 9 AIM stocks currently held within Voyager. Whoops, almost forgot I have a “wild card” or rule breaker on AIM with a small holding in HUR: as I have said before, I am useless with holes in the ground and even worse with holes in the sea so, let’s see if my treading from the path of safety ends in a loss. Also just after their recent interim results, I took a small initial starter position in TRCS.
Note also regarding some sold AIM holdings: eight stocks that delivered very good returns up to the point that profits were taken following my feeling less comfortable with an RNS, went on to have fairly significant falls in price; indeed CAKE went bust but I made 20%; see notes about CAKE in the Voyager Log from earlier months. Ok, I was very fortunate regarding CAKE, however, had I simply stayed inactive invested in the other sold winning positions and not followed the RNS newsflow, then eight winning positions would have turned into losing positions. I can’t stress enough the importance of the RNS newsflow to my investment approach.
Of the remaining stocks sold a few have remained in a trading range and a small number have appreciated a touch more.
Of the three stocks making a slight loss, this was risk controlled to an average of -7%.
In summary 16 of the 26 stocks have added significantly to the value of the Voyager and downside has been strictly managed with risk control. That’s roughly 6 or 7 winners from every 10 investments which I think is fairly routine for my work or maybe even a touch flattering. Of that win ratio, I usually find its just a small number of stocks that do the really heavy lifting within a portfolio. That’s fine and dandy but the crucial thing is to ensure that the ones that don’t turn into winners do not have an opportunity to damage your bottom line. So, a couple of key points to my approach to managing a position once I have bought into a stock:
Key Point 1: The key point I am trying to get over here within my approach is the vastly important aspect of reading and interpreting the RNS newsflow issued by each business. This does two things. Firstly on encouraging news, it leads you to either add more shares or simply continue to hold. Secondly as a once encouraging story begins to show signs of change e.g. “H2 weighting” it gives me an early opportunity to sell, hopefully, take profits and move on. Hence the Voyager RNS Log that I keep and publish.
Key Point 2: A second key point is that even with the most diligent research, I completely accept that I will not be right all of the time. When this appears to be the case and it can be quite often, I simply sell without emotion or regret and simply move on.
This article is not designed to say “how clever I am” because I am not. It simply demonstrates my approach to investing and in particular AIM stock investing that attempts to manage risk. I honestly feel that selecting good quality stocks that turn into winners is only half the story of success: the other half is managing your downside; absolutely crucial in my opinion.
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