26 Mar 2013
The source for many of my personal investment rules is mistakes that I have made in the past. The best (if that’s the word) illustration of this is my humiliating shareholding in Taylor Wimpey. I am prepared to make this public now because a) it might be a therapeutic exercise and b) the damage is not far off being repaired. (That last sentence was only just true: b) is 10x as important as a).)
Taylor Wimpey is a house builder that was the result of a merger between George Wimpey and Taylor Woodrow, agreed in March and completed in July 2007. On the day that the deal was announced, the shares of the two companies rose by 7% and 16% respectively. At the time, the Daily Telegraph wrote:
A source close to the deal said: “Both companies have strong complementary businesses and, while there is concern about the US market, if we put the two together it should add strength.”
I cannot now think of many economies of scale that would result from merging the land-banks and workforces of two house building companies. Back in the summer of 2007, I didn’t give it much thought. For no particular reason, the price of the new stock slid from a theoretical £5.00 a share to around £3.30. The stock market at this point was showing no signs of the weakness that were to come to know so well and, without looking at any balance sheet numbers, I took what was for me at the time quite a large punt: I spent nearly £13,000 on 4000 shares at 320p.
NB: it will not be my policy on this website to use my real investment amounts but in this case I will make an exception, to lace the tale with the self-administered poison that it merits.
By December 2007, very few people were talking about a financial crisis but I set about causing one of my own by sticking another five grand into Taylor Wimpey, this time at the seemingly incredible bargain price of 200p. I had averaged down but had now invested £18,000 in Taylor Wimpey. A mere 11 months later, the shares closed at 8p and my £18k was worth £520.
It is worth pausing at this point to identify my mistakes. I bought something that I knew that I didn’t understand and I didn’t do the work on it. Probably I was bored. I certainly wasn’t thinking. That is my excuse, which is no excuse at all: though it is better than the comment by the CEO of Taylor Wimpey, who told the FT that no one could have seen the housing crash coming. I know that CEOs are not famous for self-criticism but I thought that was a disgraceful evasion of responsibility.(He remains CEO to this day).
So then I started to do the work. The truth is that I would rather have been wiped out than sold my holding for £520. So I began to work out whether I could possibly average down again – in other words, to send more good money after bad.
In May 2009 the shares had recovered to 37p and the company offered a 1 for 1 rights issue at 25p, in connection with the paying down of some of its most threatening debt. For a further outlay of £1625, I doubled my shareholding to 13000 shares. My average “in” price was now a mere 151p and the survival of the company looked probable. At the end of 2009 it had net debt (including pension liabilities) of £1160m but exceptionally strong cash flow (before financing costs) of £376m. I could live with those numbers, despite the fact that the cash flow would have been largely the result of freezing new investment and closing old sales. Consequently, after the 2009 results were published, I averaged down again with another 4000 shares at 38p (another £1500, taking my total “investment” up to £21,125 but my average “in” price down to 124p).
Roll forward another year and in March 2011 the company announced the sale of its North American business for around £600m. Never mind that this price was well below what had once been paid for those assets. Following this, net debt was down to £400m and the company was going to survive. Still the price did not rise. So I bought some more. For the first time I felt on top of this. This was a viable but deeply unfashionable company. So in April 2011 I sent another £3000 in pursuit of this once lost cause and bought another 8000 shares at 37p each. I had now invested more (£24,125) than I had ever put into a single share but my average “in” price was 96.5p: which is where it remains.
Today, Taylor Wimpey is at 88p. Redemption is in sight. The idea that Britain needs more new housing is probably more popular than at any time in the last 60 years. Fashionable ideas come and go. My view is that the answer to more accessible housing is a fall in house prices and I dislike the government’s plans to subsidise deposits and guarantee mortgages. Should a bid price of 96.5p appear on my screen, I doubt if I will be running my worst ever investment any further.