Where Woodford Went Wrong

Neil Woodford's funds are in the news. He's done so badly recently they had to close one for a bit and goodness knows when it can be re-opened.

What can investors learn from what lead to the massive falls in value of the funds?

Woodford used to be a city darling but it has all gone horribly wrong which goes to show it's so easy to mess up even if you are experienced.

I wondered what had gone wrong and I read an interview with him and I soon realised. He said he was a "conviction" trader.

Now that isn't good! This means you "believe" rather than properly look at the figures.

I was truly astonished when I looked at this holdings. Because he made all the classic mistakes.

He bought way too many illiquid high risk companies. He bought companies weighed down with debt. He bought risky disruptors. But worst of all: he never sold companies that were going down to take a loss.

For example, he had the AA. I've been short of the AA for ages and I've made about £20,000 out of the short. Yet Woodford looks like he was in at around 400p, it is now 60p! He could have dumped the AA for a loss many times. 

It has a debt of something like £2.5bln. I personally think it's a bad call to be in anything with such a massive debt. And no decent investor should be in something at 400p and STILL be in it at 60p ! It should have been sold and the loss taken and this is where Woodford has fallen short.

You MUST use stops to stop this happening. He should have been out at 300p. Or sold at any price on the way down.

I think part of it is ego, part of it confirmation bias. I have seen this time and time again meeting investors. I know one AA holder who came to a seminar and admitted he bought it because "Well it's the AA" without looking at the crazy debt.

This inability to never sell losers and only take profits or part profits on winners is a disastrous strategy meaning at best you'll only make a small percentage as the losers will kill you even if you have one or two big winners.

Some investors will grimly hold on right to the end till the company is a bust. Even if a stop loss is miles away, say 35% (to prevent a spike out) that will at least protect you from a major capital loss.

I see Woodford also held Purplebricks. Looks like he must have been in a decent profit at some point in this one but it became clear recently its strategy wasn't right and it was begging to be sold. 

Newer investors should learn a lesson from the Woodford debacle. Don't stay in stocks from "conviction" or because you are sure they will come back. Get rid or else you really really won't make much money.

After all, you can always buy back if you want. A holder of AA at 400p could have sold at 250p and could today buy back at 53p instead of sitting on massive losses.

So perhaps the one major lesson? For goodness sake, sell your losers!