Ian Cowie: six lessons from one of my worst investments

They say we learn more from our mistakes than we do from success, but no investor can afford to make a habit of it.

Later today (27 February), shareholders will likely have voted to wind-down one my worst stock market stinkers after a decade of decline. The board of this investment trust says that a wind-down is in the best interest of shareholders. This would result in capital being returned to shareholders over time.

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Ahead of that being confirmed, here are six lessons I’ve learned from the investment trust that used to be called Woodford Patient Capital before it became Schroders Capital Global Innovation Trust Ord (LSE:INOV).

1) Beware of ‘star fund managers’

First, beware so-called star fund managers. It’s hard to believe now just how highly regarded Neil Woodford used to be a decade ago, when his eponymous new fund raised a record £800 million from credulous chumps like me. INOV currently has total assets of £163 million and a stock market value of less than half that, having destroyed 90% of my original investment.

All I can plead in mitigation is that I had avoided Woodford for more than a decade, because - it seemed to me - his great “insight” boiled down to not much more than there was still money to be made out of tobacco. By contrast, I prefer to shun businesses that make profits from killing their customers.

Even so, the hype about Woodford’s new fund in April, 2015, suggested it would be different this time. It was, in some way, but, in others, it wasn’t.

2) IPOs

Second, be wary of initial public offerings (IPOs). With hundreds of investment trusts and thousands of other shares trading on the market, some of them with more than a century of publicly available history, why succumb to the spurious lure of novelty?

By definition, any IPO involves the vendors knowing more about the asset being marketed than the buyers can possibly access. That “asymmetry of knowledge” can prove a big handicap for small shareholders and an unnecessary disadvantage from which we might never recover.

3) Be diversified

Third, do diminish risk by diversification. This is probably the most valuable lesson I have learned from painful experience over several decades of stock market investment.

Spreading our money over dozens of different companies, countries and currencies reduces our exposure to unexpected setbacks at any one of them. In plain English, don’t put all your eggs in one basket.

The only thing I got right about the Woodford disaster is that I restricted my investment in this dud to 1% of my life savings. I watched others “doubling down” and buying more shares as the price fell but did not follow them.

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4) Beware ‘experts’ following the crowd

Fourth, beware “experts”. You wouldn’t know it now but there was scarcely anyone with a bad word to say about Woodford Patient Capital a decade ago. Buyers outnumbered sellers at first, pushing the share price to an initial premium.

Later, when the wheels began to fall off, I remember one well-known independent financial adviser, whose judgement I respect, confiding: “Good old Woody won’t let us down”. Well, he did disappoint terribly, but I will spare the adviser’s blushes because investors must ultimately accept responsibility for what we buy or sell.

5) ‘Skin in the game’

Fifth, always look for independent directors with skin in the game. Only two out of five INOV directors have more invested in this trust's shares than it pays them in annual fees. That’s rarely a good sign or much of a vote of confidence.

If the directors had more of their own money at stake - or “skin in the game” - they might have deterred Woodford from getting out of his depth with start-up businesses in scientific sectors where he had little, if any, expertise.

6) Home bias

Sixth, beware how patriotism can hurt your pension - or any other investment. This is most topical as the government hints it might force more of us to buy British shares, either by scrapping cash ISAs or forcing company pension funds to invest more domestically.

However, the parliamentary pension fund for MPs has less than 2% of its money invested in the United Kingdom, which is even less than British shares’ 3% weighting in the MSCI global equities index. If they really believe patriotic ISAs or pensions are a good idea, they should invest their own life savings accordingly.

It’s only fair to admit that the main reason I put some of my own money into what became the Woodford wreck is that I liked the idea of monetising British university scientific spin-offs and other UK start-ups. Sad to say, even after waiting a decade for some signs of improvement, INOV became one of the worst Cowie’s Clangers - or shares whose price fell by more than 10% after I invested.

Let’s hope I learned something from the experience because, if the board’s recommended wind-up proceeds, it will be months if not years before I get back as much as 10p in the pound. Ouch!

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Schroders Capital Global Innovation (INOV) as part of a globally diversified portfolio of investment trusts and other shares.