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Why you should research small companies: IGas has made me a small fortune

igasenergyEarlier this year I tipped IGas Energy. I researched the shale situation in the UK, thought that IGas was ideally placed to benefit from shale gas exploration. I thought the shares were seriously undervalued. So I bought some at 68p.

That was April. They’ve rocketed to 129p each now.

How was this possible? I did some thorough research into a small company, that many other people hadn’t. I capitalised on information in the public domain. And profited.

The thing is, most attention in the stock market revolves around FTSE100 companies. Blue chip companies. There’s hundreds of analysts, researchers and looking into these firms.

So the opportunity to catch a big rise is unlikely. Most of the information is factored into the price, and is known by everyone.

But with small firms, AIM listed companies, opportunities are rife. Institutional investors don’t invest in small companies. Nor do they research them. So share prices don’t always reflect their true value.

So that’s where the opportunity for small investors like myself come in.

Do your research into small companies. Then buy if they seem undervalued. Boom. Profit all round.

 
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Posted by on January 1, 2013 in Trading Ideas

 

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I’m writing a book: Things I wish they’d told me at school

School is completely alien environment to the real world. It’s so far removed.

At school the rules are simple. Listen in class, write good notes, revise, revise, revise and pass your exams. Then you’ll then be able to stroll into a job.

But that’s a lie.

GCSEs, A-Levels and degrees are only filters that companies use. It may help you get your foot into a job interview. But that’s it, for most people.

What’s much more important is this: “it’s who you know” not “what you know”. There’s making contacts. There’s writing a CV that will actually get you a job. There’s avoiding the minefield of unpaid internships and horrific companies. There’s difficulty in finding the right thing for you.

So I’ve decided to write a short book of all these things. Things I wish they’d taught me at school. I want to help any teenager make an informed decision about whether they should go to uni or look for alternatives. I want to help them find what’s right for them. I want to help them sail into jobs. Genuinely useful career advice.

You’ll get it for free and I expect it to launch it in March 2013!

Watch this space.

 

 
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Posted by on December 29, 2012 in Trading Ideas

 

How the investment industry will fall on its own sword, and others will take over

Investments are meant to generate a return – but what happened?

Investors want consistent growth on their investments but few in the industry understand how to produce that. Those who don’t face their demise, whereas those who do, stand to take the spoils.

In many professions there is huge chasm between those are inside that profession’s bubble and those who are not. In politics, if an idea is not being circulated in the Westminster bubble it is not considered to exist. In education, if something has not been deemed worthy of putting on an exam syllabus or the mark scheme, then it is not considered worth teaching. The problem is that with such an insular attitude and so many closed minds, these professions alienate themselves from the real world. The consequences of such mean that we have politicians of all parties who are entirely mediocre, and a large number of school leavers who collect a string of A grades and yet remain unemployable.

The reason I mention this is that the finance industry suffers from a similar malaise. Although investors want to make a large consistent return on their investments, the investment industry in the UK has produced returns on investments which have been worse than monkeys, whilst charging enormous fees. The reason why this is allowed to continue is due in part to a certain level of financial illiteracy, whereby people don’t know where to find the best deal. But the main reason is that the industry is such a stale establishment, that nobody has stolen the show and made a product which blows the others to smithereens.

At the other end of the spectrum to the UK’s finance industry, we have the American technology industry. You have Google, Apple, Facebook and a zillion other bedroom start-ups all intensely competing to innovate and make something which disrupts the market. This has led to an industry which is very good a producing outcomes which benefit society. Could you imagine a world without Google? Exactly. But their dominant position could rapidly be stolen if something better came along. In which case NewOnlineCompany’s products would be better and society would have benefited from them.

The problem is that politicians don’t understand that the best solutions come from real people, educators don’t realise the best learning comes from outside the classroom and that few in the finance industry understand that investors want a net return on their investment. Investors want to make a consistent return year after year, yet few investment firms aim to do so. Most of the investment industry has forgotten that they need to make profits on investors’ money – they are merely wedded to ideas like “modern portfolio theory” (MPT) and “diversification”.

The epitome of this approach is that stock market funds are forced to invest 100% of their fund, 100% of the time. So even if you know the economic forecasts are dire, the stock market is overvalued, it’s crashed 10% today and is probably going to fall another 40% – as a fund manager you still have to hold all your investments in a falling asset class. It would make sense to sell out now, and just hold cash, but you are forced to keep all your money in shares. It’s ludicrous!

So this leads us to the question – how do you generate a positive return, year after year? Nobody can ignore the fact that every asset market is cyclical. Whether your money is in property, bonds or the stock market – these have been all been known to fluctuate greatly. But the important point is you need to be proactive in buying and selling investment funds at the right time. In which case you can earn all the upside during a bull market, and be out during the bear markets.

Investment providers, mangers and independent fund advisers who take this approach and focus on generating an absolute return, despite market conditions, are the future. Those who don’t adapt to this model will fail. This is where St James Place, Aviva and many others are going to be consigned to the dustbin of history.

 
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Posted by on July 11, 2012 in Trading Ideas

 

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The ESM will be the vortex which swallows Europe (if ratified)

Today it emerged that the ESM (European Stability Mechanism) could later be paying for the €100 billion bailout of Spain’s banking system. This ‘stability’ mechanism, however, has only been ratified by France, Holland and Slovenia – and may never materialise.

The video below is targeted at a German audience, but is still relevant to any European.

That ESM which everybody may think is a cuddly solution to the problem, is in fact a huge Orwellian nightmare. Nobody will be able to sue it or any of its officials, whilst they will have carte blanche to act above the law. Unelected overlord Eurosprouts will be able to impose their will over Europe and have the right to ask for any money from governments, whenever they like, within 7 days. Given such stringent conditions, it is difficult to see why any sovereign nation would want to participate and ratify the proposals. Please correct me if I am wrong (and I suspect I am) but it seems only 3 countries have ratified it so far, and I think it is likely that the pledges for the ESM will never really come to light.

Moreover, any bailout in Europe is also subject to the risks of contagious circular logic. The Eurozone’s members have to stump up the cash to pay into the ESM. But if anyone needs a proper bailout,  Italy stumps up 17.9%, Spain 11.9%, and France 20.4%, of the ESM’s funding. But I have some questions.

A) How is Spain going to be able to afford to fund a bailout to itself, when it inevitably needs one?
B) By paying up for Spain, surely Italy will be pushed over the edge and will need a bailout. How will Spain be able to afford to fund that, given that it has just been bailed out?
C) Then doesn’t this put ‘safer countries’ like France and Germany at risk? If this jiggery-pokery continues with the ESM, they may very well need a bailout themselves – although I don’t see the Euro lasting that long.

To conclude, sovereign bailouts are throwing money down the drain. The ESM is only going strengthen contagion fears because it spreads out the risk amongst already fragile public finances. Therefore if the ESM does get signed into national statute books, it will make Europe far from stable and will be the sinkhole that swallows it up.

 
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Posted by on June 11, 2012 in Trading Ideas

 

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The Spanish bailout that will only make the EU more fragile

No lasting joy forecast for Rajoy

The markets are likely to hurrah this morning as news of the Spanish bailout is celebrated. Spain’s banks have been given a €100 billion bailout from the EU and the headline could easily be interpreted as good news. The reality, however, is that this bailout is incomplete, unratified and unpopular.

Furthermore Spain’s bank bailout has been largely free of conditions – unlike the bailouts of Greece, Portugal and Ireland, they will not have to suffer enforced austerity. This strengthens the hand of parties like Syriza in Greece who want to get rid of austerity – let’s not forget they are Greek elections on Sunday. Therefore, this bailout makes the EU and the Euro project even more fragile as the risk of sovereign default and eurozone exits becomes more real.

Firstly the EU is yet to specify which bailout fund will pay for Spain’s banks. Will it be the EFSF (European Financial Stability Fund) or the ESM (European Stability Fund) which is not yet signed into law? If it is the EFSF – there are legal issues surrounding it. Money was paid into the fund by Eurozone members on the premise that it would only be used for sovereign bailouts, not bank recapitalisations. There is pressure from Holland and Finland, not to mention other states, who want to vote against the bailout before it is agreed.

Secondly, Spain technically has to backstop the loans to it’s banks. Many economists believe that the tipping point where a nation can no longer pay back its debts is when the debt/GDP ratio is over 90%. Now with this bailout equivalent to 10% of Spain’s GDP, Spain is pushed over that level and onto the path to insolvency. Moreover, this Spanish federal debt does not include that of its regions – which adds another 13% onto it’s debt/GDP ratio.

One last bugbear that the markets seem to be forgetting is that Spain’s bailout is without many conditions. Unlike the bailouts of it’s other European members, there is no harsh austerity requirements attached. As Greeks go to the polls once again on Sunday – I would not be surprised if they give a mandate to Syriza to rule because of their unjust treatment. With Syriza in charge, the austerity package would be in ripped apart, Greece would be truly insolvent and would not be repaying the EU’s bailout. Long term, this means exiting the Euro, short-term they are likely to be subsidised by Germany. But how long would the Germans be prepared to put up with that? Then what about when Spain needs a bigger bailout? Or Italy needs one? They are too big to fail and too big to bail. Although we are now veering into the realm of the hypothetical – I would imagine this could set the precedent for Spain and Italy to leave the Euro.

Even if that doesn’t materialise soon, it is impossible to see how this bailout solves the Eurozone crisis. I am shorting the FTSE now in out of hours trading at 5560 with a stop loss at 5660. Once the bailout mania disappears, I think we will see the markets realise the dismal fate of the Eurozone once again and they will fall.

 
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Posted by on June 11, 2012 in Trading Ideas

 

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The truth about bank accounting: the Royal ‘Berg of Scotland

Shareholder group PIRC discovers £40 billion of unrealised losses in UK banks – yet bonuses keep flowing on the back of fake profits

Last summer I attended an open day by RBS for A-Level students. It was an “insight day” to look at what it was like to work at their investment banking division. They paid the travel expenses and my naive self thought that investment banking was something I later wanted to work in – so I went to London for the day.

After arriving, I got chatting with a chap who had come down from Bradford. “They paid me train fare – 250 quid, put me int ‘otel overnight, and paid me for’ taxi.” That’s a lot of money, I thought, for just one person, for just a single day. At that point I pondered – if RBS were willing to spend that much on today, surely they must value it, think it is important, and make it really useful. But how wrong I was.

For the first half hour we had a “communications guru” who spent the best part of an hour telling us that smiling makes you come across as a nicer person. You don’t need to be Benedict Cumberbatch to work that out.

Then we had another woman who was awfully nice, and smiled a lot, but didn’t really tell us anything useful. She told us about RBS’ Moneysense program that would teach us how to make a budget at university. Surely if you did not know how to budget at university, you should not be later working with other people’s money in an investment bank. But no, not at RBS!

This was followed by tasks of minimal educational value – putting velcro-backed company logos onto a board with Retail Bank, Investment Bank, Hedge Fund and Building Society on it. A trip to the trading floor for literally 30 seconds (for informational security reasons) – before we were told about their wonderful “insight week” (more of the same), internships and other opportunities. At which point many of us just rolled our eyes.

The reason I mention this day is because it illustrates a culture in which money is thrown around left, right and centre for spurious purposes – regardless of the fact it is owned by the UK taxpayer. This approach may have been acceptable before the crisis – but they should not be so reckless with money now, given that without the UK government they would no longer exist.

In the context of the recent report by PIRC, a shareholder group who revealed that RBS have undeclared losses of £18 billion, it would seem RBS have been equally liberal with their accounting.

The problem with bank accounting is that – from an outsider’s perspective – it’s very easy to fudge the numbers. You can report your losses during one quarter, or announce them later. You can mark-to-market (record your assets at their real market prices) or not. What this means is the top brass at a bank can record large profits and consequently pay themselves huge bonuses, despite the reality of creating a big loss.

A little while later, losses have to be reported, the bank’s capital buffer is wiped out, and guess who will have to pay again? You guessed it – the taxpayer!

Many would argue that RBS should have been allowed to fail in the 2007/8 crisis – but it was propped up. Billions of pounds have been dispersed in bonuses whilst they have milked moral hazard mentality (tails we win, heads you lose) – leaving the bank to be little more than a decrepit shell.

In my humble opinion – RBS is taking took much risk and is willing to let the taxpayer take the hit when defaults on their loan books ultimately occur. In the meantime, they are paying out most of their (short term) “profits” out in bonuses. Therefore, I would recommend a short-selling of it with a stop-loss at 250p a share.

Granted, the shares have fallen 50% over the past year – they are not at their cheapest and a bit of volatility could make us hit the stop loss. However, with the saga of Europe rumbling on – I would argue they are already technically insolvent.

One last thing, if you’re not convinced that it is a basket-case already… just read what The Slog said about it.

 
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Posted by on June 6, 2012 in Trading Ideas

 

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Gold – due a reversal soon?

Still as attractive as ever

I must admit that I am a gold bug. I think that in the face of an economic crisis and/or high debt levels in an economy – governments solve their problems by printing more money, and encouraging inflation. As we’ve seen already, central banks have followed a zero-interest rate policy, embarked on two rounds of shameless money printing Quantitative Easing, and have had little interest in targeting inflation (CPI inflation hasn’t been under the 2% target since 2009). This policy is understandable, many people would prefer monetary policy to try and encourage growth rather than keep a lid on inflation. However what this means in the long-term, is that the purchasing power of all fiat (paper) currencies is gradually being destroyed, and if you look over the course of history, this has happened before and the one asset which has held its value is gold.

Ready to bounce?

I am not a big fan of technical analysis, but I think this weekly chart shows us a lot. Gold hit an all time high last summer of $1921 before it began to retreat again – as gold mania emerged. However since that point, it has dipped to the $1520-1530 mark twice before finding strong support. Now, I think by the end of the week we will have touched those levels, and it should rebound strongly off them.

Usually in times of crisis, such as these in Europe, you would expect the price of gold to be a lot higher than it is. Gold is traditionally seen as an Armageddon hedge – if the stock market collapses, the printers are on full blast in central banks, and commercial banks are in trouble – then surely you would keep your money in something that is an exceptional store of value. Interestingly the IMF is buying more gold, as Zerohedge wrote on Monday

When wonkish blogs suggest gold ownership as a hedge for the political idiocy of the world, it is mockingly shrugged off. When the BRICs add gold, it is eschewed in a ‘well, its diversification’ argument. But when the bankers’ bankers’ bank – The IMF – starts adding Gold to its reserves to cover higher expected credit risk losses (read major devaluations of fiat currency exposure), perhaps – just perhaps – the ‘rationality put‘ we noted earlier is becoming a little more expensive in the minds of Lagarde and her colleagues. As Bloomberg News reports, “The Fund is facing increased credit risk in light of a surge in program lending in the context of the global crisis,” the IMF staff wrote in a report released today, adding “there is a need to increase the Fund’s reserves in order to help mitigate the elevated credit risks,” and as CommodityOnline added: “The International Monetary Fund (IMF) is planning to purchase more than $2 billion worth of gold on account of rising global risks. The IMF currently holds around 2800 tonnes of gold at various depositories”.

If the Euro does fracture, as I have argued before, then everyone will suddenly become scared about the banks and the entire financial system. That is when gold will really show its true shining colours – and I think we could easily see $2000-$3000 an ounce, potentially even more. Therefore, when gold makes a dip over the next few days – I see it at as a perfect buying opportunity with a stop-loss at $1510, just in case it does fall further.

I know I have advocated buying gold before at higher levels, and that plan had gone awry, but I maintain my view and I believe there are a lot of gold bugs sitting on the sidelines, just waiting to crawl into the market again. Once this happens, gold will not look back.

 
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Posted by on May 15, 2012 in Trading Ideas

 

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