There's nothing worse than holding shares and suddenly finding them 'suspended'.
What's worse is seeing the words 'into administration' in a statement issued the next day.
You realise the shares you'd bought are probably worth nothing.
Yes - you've lost every penny you put in.
It happened to me when I first started trading in 1995 when I was a shareholder for Waterglade, which suddenly went bust.
I vowed that was it was NEVER going to happen to me again.
You only have yourself to blame if you're in a share that goes bust.
Because, believe me, shares don't just go bust without any warning at all.
There are always plenty of signs. It usually starts with a profits warning, then another one, then the company starts talking about 'breaching banking covenants'.
So why do investors end up holding onto companies that go bust or even, in many cases, actually buying the companies' shares just a few days before the end, or even on the day itself?
Look, sorry to have to be basic here but it's because... they're greedy idiots!
There, I've said it now and if I get nasty e-mails, well, so be it. I'm a big boy (or so my wife reckons) and I can cope.
Anyway, look I was a greedy idiot myself back in 1995.
The best example I can give which is very recent is Courts, the furniture retailer.
I'm sure you all know the story that they were put into administration the other week.
Yet despite news stories everywhere warning that Courts was in breach of banking covenants, people were STILL buying shares on the very morning the shares were suspended.
And lots of people too! And some to big amounts.
Why were they buying the shares? Because they were betting that the banks wouldn't pull the plug.
But it was far too big a gamble to take and they paid for it by probably losing all their money. As I say, greedy idiots!
The problem is people often think they're getting a bargain and buying a share at a 'basement price'. Half the time they don't even bother looking at the news behind the shares. They just see a share tumbling so buy in the hope of a quick bounce.
They might win sometimes, but I doubt they will over time. It's all gambling and not investing. Investing takes time and effort.
So, to sum up, how do you avoid buying a company that might go bust on you? It's simple:
Do not buy shares that are in trouble with their banks!
Don't be tempted into shares when:
- The words banking covenants are mentioned anywhere in any statement.
- There is talk about bank facilities being renegotiated
- There is mention of re-capitalisation or a dilution of shareholder assets.
So go out there if you want and gamble on these types of companies. But if you buy into them, prepare, as Anne Robinson points out, "to leave with nothing!"
Back in the world of proper shares with real profits it's been a fabulous year for me (yes, I know self praise is no praise but I need some, dammit) with my portfolio continuing to fly every higher.
My most recent successes are Carrs Milling, Dart Group, Premier Foods and Isotron. All are still undervalued, I reckon, but there are more profits to come.
Next time I'll be chatting about my successes and failures of 2004 and a look forward to next year.