Learning from Investment Mistakes: Accrol

Someone wise once advised me that ‘experience is the sternest teacher’.
Few areas of life bear this out more often than the stock market.

Although the loss only amounts to 0.3% of my overall portfolio, my sale this morning of the increasingly distressed tissue paper manufacturer Accrol for about a third of what I paid in 2016 offers an important opportunity to learn from a failed investment.

Despite the unforeseen contingency of a potential health and safety fine being one of the catalysts for the company’s current crisis and share price collapse, as the estimable Paul Scott points out in the Small Cap Value Report , the warnings were there at the time of flotation for those who studied the prospectus with sufficient care.

Concerns about the potential risks of rising raw material prices were also flagged in a company trading statement in September 2017 shortly before the suspension.

Having slept on it overnight on the day after Accrol returned to the stock market I decided to sell first thing at 43p, some 72p below the average price I paid.

So what are the general investment lessons?

1. Investing in initial public offerings is even riskier than general share purchases.

Ask yourself when a company floats on the stock market: why are the owners selling now? What do they know that we don’t?

The flotation documents present the company in the most favourable possible light, but read with sufficient scepticism the potential vulnerabilities can discerned and weighed appropriately. No investment is risk free, but risk awareness must be heightened when a company comes to the stock market.

2. Don’t be swayed by commentators and fund managers.

In summer 2016 I was still too easily influenced by commentators (such as the Investor’s Chronicle which mentioned the shares favourably) and the factsheets of respected fund managers (in this case Gervais Williams who had a position in Accrol in his UK Multicap Income fund).

As I hope to show in a future post, some of my best investments so far have been those I’ve researched independently. There is no substitute for diligent research conducted by oneself – it makes for the right combination of caution and conviction stemming from self-generated and self-owned investment decisions.

3. Debt can be the great destroyer.

Despite raising tens of millions of pounds in the flotation, Accrol still carried nearly £20m of debt. This made it even more vulnerable to the adverse raw material, currency and health and safety costs behind its current difficulties.

So, be ultra-cautious of companies still burdened with debts to repay despite having just raised capital in a flotation or placing.

4. How sustainably profitable is the company’s distinctive offering?

This question should be asked of any investment, but is particularly apt for smaller, newer companies.

Subjecting Accrol to even a rudimentary analysis along the lines of Michael Porter’s famous 'five forces' shaping the destiny of companies, it was easy to see in retrospect how vulnerable Accrol was.

It was a small supplier of an easily substitutable commodity – tissue and toilet paper - to a handful of large, aggressively managed discount supermarkets. Hardly a position of strength from which to dictate terms, not so much a corporate castle behind a deep moat, as a small vessel facing stormy seas.

5. How have I adjusted my approach to investing?

In summer 2017 another flotation, for the kettle component manufacturer Strix promised the same attractive combination of growth and a high yield as Accrol. As with Accrol a number of well-known fund managers opted in at the outset.

However, I looked at the prospectus with a sharper eye this time and noted the ‘risk factors’ laid out in the document (e.g. the largest customer accounted for a fifth of the company’s revenues; it was not clear how much debt the company would be carrying after flotation) and decided not to invest. Time will tell if this was a wide decision.

6. Continue to invest, but with renewed caution

The experience with Accrol has not put me off investing in dividend-paying smaller companies altogether, rather it is a salutary reminder of the risks involved, and the ever-present possibility of loss.

More pleasingly, on the same day as the Accrol sale a couple of smaller company investments in which I have larger percentage stakes - XL Media and Caledonia Mining - have risen by sufficient in today’s trading alone to make up for the Accrol loss. Tellingly, both at the time of purchase and today each of these companies had sizeable cash positions on their balance sheets.

Indeed the whole set of smaller company shares I’ve purchased since late 2015, including Polar Capital, Numis, River and Mercantile, Premier Asset Management, is substantially ahead overall, even with the Accrol loss.

Thus the ‘experiment’ of seeing if individual stock-picking could trump the low interest rate in a Santander 123 account has still been successful overall, so far…