I had a little laugh at this this week – shares in Synairgen rocket by 550% after being sold by fund administrators. The fury of those naive investors
savvy savers who trusted Neil Woodford continues unabated. Schadenfreude aside, what does this tell us about investor psychology?
The story is that a little known drug developer shot up in value this week making the new owners very rich and the old owners (Woodford
savers investors) unhappy.
For those who don’t know, Neil Woodford CBE was a big fund manager who made a lot of people very rich from the 80s to 2010s. He was held up as having a Midas touch and being a very wise man. My old pal Giles just loved him. It was very simple: Give Neil Woodford your money and you’ll get more and more back in return – he will make you rich! And he made a lot of people rich. Neil needs a bit of a fee to keep the business side running and for his remuneration but considering he’s going to bring you near guaranteed over-performance, you’d beta invest with him to get rich (see what I did there?)
Neil Woodford worked for Invesco Perpetual from 1988 to 2014 – a long time and made a lot of people rich (or was that just failing yields, rising tides and a few good choices like avoiding dotcom in 1999 and banks in 2007?)
Anyway, in 2014 he left Invesco Perpetual to start Woodford Investment Management and lots of groupies [FIX] investors followed him there. He set up a few funds which included Woodford Patient Capital Trust. He had generally low fees and a good track record, who could be blamed for following him?
One investor that I know thought that the Patient Capital Trust was investing in medical companies since it had the word patient in it – who needs to read the label when you see Woodford on the tin (it’s got our name on it…) – he’s a dead cert to make you rich. Much like this Making Loads of Money scheme that for a limited time you can join.
Since 2014 the investor waters have been a bit choppy – not all plain sailing for Neil. His old style was investing in big companies that are easy to understand and have stable markets that they operate in. His new funds had more money invested in smaller companies in less stable or growing markets. The inherent risks that he was taking were not understood by the investors who thought that he was a safe pair of hands. Some say he moved from what he knew into uncharted territories, maybe he felt that he had the midas touch and could do no wrong – who knows?
My part in his downfall
There’s a great book by Spike Milligan – a war memoir, very funny. In a way investing is a war and we all play our part. I am in a small way responsible for poor Neil’s fall from grace. I initially invested myself. GFF is not immune from the insanity of the crowds and I put a small amount of my ETF money into Woodford’s fund including Equity Income (like a FTSE100 tracker of sorts) and the Patient Capital Trust (I’m a patient guy after all). But I sold out after a while, returns were not good enough and I objected to the fee, not the performance. And since lemons ripen faster than plums, early failures show up quickly with long term winners incubating – putting me off and I sold out for a modest profit – but not market beating. Anyway, I was not alone. Slowly the new money coming in was slowing and existing investors were selling up. Although Woodford’s funds were still be touted as “best buys” in the (this is not investment) advice from companies like Hargreaves Lansdown.
Open Ended vs. Close Ended
Since his new funds were open ended, every time an investor sold shares these shares were liquidated for cash. In stable times, money in = money out and the company holds a little float of cash to cover sales. But if money in << money out then the float gets eaten up and the fund manager needs to start selling existing assets to free up the cash for redemption. And this was where the problem lay – if you are investing in a range of companies – some big, some small – some widely traded and some thinly traded – some with narrow spreads and some with wide spreads – which companies do you sell first?
The answer is that biggest most widely traded companies with narrow spreads are sold first. So the good stuff gets sold first and the smaller companies that might not even be listed are left behind.
A trickle becomes a flood
I’ve always been fascinated with how collapses happen – from a game of Jenga [LINK] to the Big Short [LINK] – the reasons it is going to happen aren’t always the camel that breaks the camel’s back. Like Arch Duke Franz Ferdinand’s murder causing WW!, if it wasn’t that it would have been something else. But for Woodford, the general panic which is stirred up by the media is actually responsible for the downfall as much as the mistakes of the man/team itself.
With more and more people trying to escape from funds, the worse the situation is for everyone. Good stakes in growing companies need to be sold for pennies in the pound – and all the while the short sellers are betting on those same companies’ sharers dropping in value – a perfect storm for
savers investors. The fund ends up hibernating and is taken over by administrators who try to secure value by selling off the funds for a good price – not an easy task in this world.
So this story about the company called Synairgen (did they just make that name up?) that was sold off to vulture funds and then flipped for a huge profit – a veritable plum of late. Synairgen are a Southampton based drug maker – a very much in vogue investment – and the rise may be due to some PATIENT CAPITAL that TRUSTED the company to do their thing and develop drugs.
Can you really be that surprised? The
savers investors want as much money back as quick as possible – in fact the howls of protest about how long it’s taking to release whatever money is still in the company tells you what their priorities are. Yet they can be equally appalled that what they sold off for jam today is worth a lot more to the buyer than the (forced) seller?
Psychology of Loss
Our minds are our greatest enemy – conspiring against us all the time – master your mind and you can master the world*. The way I see it is that the world of finance is full of frauds, charlatans, confidence tricksters and thieves. From people selling their MLM schemes to no money down deals, “free” property investing seminars, PPI claims, timeshares, final salary pension liquidators, lifetime mortgages and shipping container investment. There’s no shortage. But Neil Woodford was none of those things – he was no Bernie Madoff. But the instinct to trust a “safe pair of hands” (as he must have been called millions of times) and then panic along with everyone else has lead to people losing their money. And for some people the loss has been huge – putting all their eggs in the Woodford basket so to speak. But I don’t have any sympathy for them. If Neil had done a good job, they wouldn’t be demanding that they give him a share of their winnings. But as it turns out, if you demand your money back, sometimes the baby gets thrown out with the bath water and for a company like Synairgen, lemons ripen faster than plums.
I suppos the lesson is if you are going to panic, panic early and panic fast and don’t shout “fire” until you’ve cleared the exit. Expect more from the Woodford saga – it sells newspapers after all and we love a good old hate figure. But when it comes to your own investment decisions:
- take responsibility for your own decisions
- remember lemons ripen faster than plums
- do your own research
- understand your own risk tolerance
- don’t come crying to me when it all goes wrong
Good luck, GFF
*Turns out that I coined that phrase, feel free to use it.