How I made £497000 profit Part 2

17th Nov '16 by Ken Lowes

5 comments 5795 reads

I ended the first chapter of this story by stating that the VCT loss of £40,000 needed to be covered by profits from elsewhere and that a journey over 16 years had netted £497000 from investing in different types of financial instruments. One sector has stood head and shoulders above the rest returning £350,000 of profit with no losses from a turnover of £1.2million, turnover being -- invest a £1000, sell and reinvest the same £1000, turnover is £2000. Profit / Loss is net of costs.
Throughout the 1990’s insurance companies made lots of money out of derivative products that gave a return based upon the market index achieving no more than being at the same point or better at maturity than it was at commencement. A typical example of this would be 10% income or growth for each year held providing the FTSE was at or above the starting index, if the index was below the starting level at maturity the capital would remain intact. As usual some in the industry got greedy and changed the safeguards until eventually the precipice bond was born. Which meant slightly greater income but complete devastation of capital if the index was below say 80% of the starting level. Many of these highly suspect investments failed during the bear market that followed 1999, the bad publicity tarnished all such investments good and bad. My job at that time, amongst many others, was to make sure our clients were not exposed to unnecessary risk so we chose the low risk reasonable return variety and of the millions of pounds invested in FTSE contracts not a penny was lost, even though the index fell by 50%.
The investment industry is continually evolving and the issues which caused the precipice bond were addressed. Structured Products emerged from the ashes and have been one of my most successful investments. The risk is primarily incurred if the FTSE 100 is more than 50% down at maturity, usually after six years or the counterparty, usually a bank, goes bust. In the first instance the investor loses 1% of capital for every 1% below the starting index and in the second it could be a…

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Ramridge

17th Nov '16

Hi Ken - interesting musings. You have reminded me of the time Frederick Forsyth, the well know writer and critic, lost over £2m in an investment fraud committed by the con man Roger Levitt.
I remember thinking at that time (I believe around 2009) that if a smart chap such as Forsyth can be conned out of £2m then no one should think to be clever enough to avoid such fate.

potter12

Dear Ken
I was one of the investors in a couple of your company’s structured “precipice bonds” and was pleased with the results. Nothing startling, but a good return over five or so years. No complaints!
Unfortunately as a result my wife and I also invested, through one of your competitors, in a similar NDF “bond” offering modest returns, which we were told was backed by a highly rated bank (under the regulations at the time, the literature did not have to inform us which bank it was). It turned out to be Lehmans! So despite the FTSE performing within the limits set, the bonds became worthless.
I’m pleased to say that Grant Thornton, the administrators, have beavered away since 2008 and by instalments we have received from the wreck of Lehmans, just over 50% of our original investment back. I’m sure GT have made a good income too, but we are grateful for some return.
After reading the Stockopedia team’s excellent report on profit warnings, I’d mention one lesson for fellow investors. We had very diversified investments at the time of the Lehman crash. Our equity investments dropped substantially because the period 2008/9 was like a mass profit warning for virtually all stocks. But we held on and the overall portfolio is now worth roughly double its 2006 valuation.
Learning from the past, whilst I thoroughly enjoy the fun of holding companies such as Boohoo, AB Dynamics, Trakm8 etc, I’m pleased we have a mix of long held, large company, dividend paying shares as well, they do add security in a crisis.

pka

Hi Ken,

To put your profits over 16 years in context, it would be interesting to know how they compare with your profits over the same period if you had used the following very simple strategy: Whenever you had new funds to invest, you would have bought and held indefinitely an index-tracking unit trust or OEIC that tracks the FTSE All Share Index.

Ken Lowes

Hi pka
Never been keen on trackers, usually the charges were too high. I have used an ETF such as iShares FTSE 250. No doubt that had I done a you suggested I would probably be better off. That having been said my SP portfolio would probably have out performed the tracker without the continuous risk exposure.

18th Nov '16

With the exception of Meteor, most literature was found to have a ‘hole’ in it, in one form or another, to the extent that regardless of how much you had understood and accepted the risk you could have claimed that the literature was misleading and gained compensation through the FSCS.
For Meteor clients, the FSA wrote to them all suggesting they may be able to complain to their IFA if they think they had been misled but beyond that, no one did anything wrong. As you point out, the winding up process has, so far returned around 50%.
Does this help?

How I made £497000 profit Part 2

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Ken Lowes

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