Okay, so this isn’t actually my worst investment ever (I managed to invest in Yellow Pages provider Yell before it went bust in 2013), but it’s pretty close.
The company in question is called Xaar.
It’s a small-cap “disruptive” technology company, and that immediately puts it somewhat outside my usual hunting ground of long-established FTSE 350 dividend payers.
Since I invested in 2018, Xaar has had an existential crisis which resulted in the dividend being suspended and its shares are currently down by about 85% from where I bought them.
This is not good and several years ago I would have sold the company almost as soon as it suspended its dividend.
However, I think that’s an overly simplistic knee-jerk reaction, and that’s something I generally try to avoid.
That’s why, rather than sell immediately, I decided to spend a fair bit of time re-reviewing Xaar from the ground up. I wanted to know: 1) how much of this loss was down to bad luck, 2) how much was down to a bad investment process and 3) how much was down to a bad analyst (i.e. me).
You can read about my Xaar blunder, what I’ve done to fix the root causes and what I intend to do with the shares in a recent article I wrote for Master Investor magazine ( linked below).
In summary though, it’s a bit of all three.
1) Bad luck
I think management effectively drove Xaar off a cliff, and I don’t think it was obvious that they were going to do that beforehand.
2) Bad process
There were definitely some flaws in my process, which I have tried to plug with an updated version of my Company Review Checklist (available on the free resources page).
One problem with the old checklist was that with so many points, it was easy to loose sight of my simple, high level goals.
So the updated checklist includes a clearer focus on my fundamental goal, which is to manage a diversified portfolio of above average (dividend paying) companies purchased and held at below average prices.
3) Bad analyst
Being able to admit to mistakes is vital if you’re to improve as an investor (or anything else for that matter). In this case, I was overly optimistic and had too much of a positive mindset, looking for reasons to invest which just leads to confirmation bias.
Xaar’s track record had some specific problems (which I cover in the article below) and I wasn’t sufficiently critical of them.
To fix this, in future I will try to be the Abominable No-Man, ruthlessly saying NO to any company that does not meet and exceed my criteria.
“Warren Buffett calls Charlie ‘The Abominable No-Man’ since his answer on a given investment is so often ‘no'”25iq – Charlie Munger on mistakes
Fortunately I at least followed my rules about diversification, and only invested about 4.5% of my model portfolio in Xaar at the outset (and a similar amount in my personal portfolio).
I deliberately keep individual investments to less than 6% (typically starting positions at around 3% to 4%) because that’s the level of company specific risk I can accept without losing any sleep.
If I had 10% in Xaar and it went bust, my wife would probably throw me out of a window (hopefully on the ground floor).
My worst investment ever
(or, what to do when a company suspends its dividend)
P.S. The title for this blog post comes from a podcast called My Worst Investment Ever.
P.P.S. Long-time readers may have spotted that 2019 appears to be something of an Annus Horriblis for my model portfolio. After all, I:
- sold Centrica in March for a 36% loss over six and a half years
- sold Vodafone in July for a measly 44% gain over eight years
- sold SSE in September for a tiny 34% gain, also over eight years
- sold The Restaurant Group for a 38% loss over three and a half years
Now I’m talking about Xaar being down 85% and I’ve also written about Mitie, another of my holdings which is significantly underwater.
Obviously, these are not the kind of results that any investor wants to see, but it’s important to focus on the forest rather than the individual trees.
In my case, selling Centrica, Vodafone, SSE and The Restaurant Group has been part of a “spring cleaning” effort to remove some old investments which I’d bought a few years ago, before I started to focus on companies with above-average levels of profitability (especially once lease liabilities are taken into account).
Xaar was a mistake, plain and simple, and Mitie has become a turnaround which has yet to reach its conclusion.
Looking at the entire portfolio, I feel reasonably confident that it’s made up of a diverse group of companies that are (mostly) of above-average quality and are (mostly) trading at below-average prices.
In terms of performance, the portfolio has gained about 11% year-to-date and is just 6% below the all-time high it reached in mid-2018. It’s also on track to produce another record year of dividends.
So while there have been some disappointing investments this year, caused by a mixture of bad luck, bad process and bad analysis, I don’t think the fundamentals of my investment strategy are broken and I don’t think now is the time to throw in the towel and go passive.
On the contrary, I think bad investment outcomes and bad investment decisions (which are not necessarily the same thing) should be used as an opportunity to improve your investment process and to sharpen your knowledge and skill as an investor.
What they can’t do, unfortunately, is improve your luck, but that just underlines the central importance of broad diversification, which was never in question anyway.