Mello 2014 - panel discussion - "It's so hard to say goodbye"

The Mello 2014 investor event

EDIT: click here to listen to my Mello 2014 "debrief" audiocast with organiser David Stredder

The first ever "Mello 2014" investor show has just finished, being a 3-day event held at the Derby Conference Centre. It was an absolute triumph, and everyone seemed to thoroughly enjoy it. The organiser was my good friend, and renowned investor David Stredder, so huge kudos to him for having created such a wonderful event from scratch. I know that David and his administrator Georgina, put in a huge amount of work to arrange the event, as did a couple of dozen other helpers, who mostly worked for free to help make the event a success.

The concept was simple - a smaller event than the London shows, held over several days, with many attendees booking accommodation too, so plenty going on not just in the day, but also the evenings - with live music, a poker tournament, and of course plenty of chin-wagging & networking over drinks. David banned junior resource stocks & providers of trading systems, etc, from having stands. Instead he insisted on only having reputable companies and speakers presenting.

There were three lecture rooms of varying size, with events going on in all three at the same time. About 40 companies (mostly AIM Listed) gave half hour presentations to brief investors on their business, and answer questions. Investors who were interested could then spend more time talking one-on-one with company management later, at the company's exhibition stand in the central area, or even over a coffee or a beer.

The feedback I got from several company Directors, was that they were delighted with the level of engagement by investors, and many company meetings were very well attended, with follow-up afterwards. I think this is because David wanted to restrict numbers to only fee-paying visitors, thus serious investors only, rather than packing out the venue with people who wanted free entry & were not interested in engaging with the companies attending.

I much prefer this approach, of limiting numbers, to ensure only serious investors attend & giving good access to management. There are plenty of other free events for the masses!

I suspect that after this tremendous success, that Mello 2015 will be much bigger, and I hope in London next time - as it cost me £95 rail fare to get to Derby, and most of the people there had similarly travelled up from London or the South East. So with limited interest from investors in the North, it's no wonder events gravitate to London.

Panel discussions

I really enjoy listening to, and taking part in panel discussions. You always learn something interesting, and hear interesting anecdotes & experiences from other investors. Plus, if you're appearing on a panel (I did three at Mello 2014, so people were probably sick of hearing me by the end!), then the other panellists talking gives you time to collect your thoughts, and you can also have a debate with them.

"It's so hard to say goodbye" - i.e. when to sell

David booked me in to be one of the panellists for a discussion, called "It's so hard to say goodbye". The theme was to discuss our experiences of when to sell shares, and what strategies work best.

I was staggered when I was told that the other panellists were renowned investor, author, and FT-columnist, Lord John Lee, and top ranked fund manager, Giles Hargreave, of Hargreave Hale. David Stredder also joined us (slightly late, as always!) on the panel.

I was even more staggered when I discovered just two hours before the session started that I was going to be the chairman of the session! I've never chaired anything like that before, so after my initial nerves had reduced to manageable levels, I grasped the opportunity! It was a genuine honour to be sitting between two investing legends such as Lord Lee and Giles Hargreave. Both are immensely experienced, shrewd, and capable, so I decided to very much give them the floor, and just chip in any remarks of my own at the end, if there was time.

Lord John Lee

After welcoming the audience of about 100 people, and introducing the panellists, I handed the microphone to Lord Lee, inviting him to speak on the subject matter of when to sell shares. I had been worrying about how I would keep the discussion going, but needn't have worried, as John launched into a an eloquent speech (with no notes) on the topic.

I then began taking notes, so reproduce the main points Lord Lee made below, written as he spoke;

- There is no right answer on when to sell.

- My emphasis is on staying put - I'm a long-term investor, that's where the really big gains are made.

- As a value investor there are considerable odds of takeover bids - I've had about 50 such deals in my portfolio over the years. So if you try to time market ups & downs, you might be out of the share when a bid happens.

- I normally won't sell a share I like, unless it becomes ridiculously over-valued.

- My biggest investing fault has been selling winners too early - he gave the example of WPP, which he held when it was only a £1m market cap. Went on to become worth billions under Martin Sorrell! But how are you to know that at the time?

- Buy good companies early on, when they are small, and stay aboard.

Lord Lee then handed me back the microphone, so I invited some questions to him specifically on what he had just said.

Q1. Do you top-slice your most profitable positions (i.e. bank some profits, but keep the remaining position)

A1. Well, you can do that. Some people like to sell half when a share has doubled, and run the rest for free. That can make sense if a share has become very overweight in your portfolio. The trouble is, with phone & tablet apps, and instant prices, people tend to grab profits far too soon. So top-slicing hasn't generally worked for me.

Q2. How do you react to profit warnings in your portfolio?

A2. I'm old fashioned, and so I have a daily run-through price movements and news with my broker over the phone. You have a sick feeling when a profit warning hits your portfolio. So you have to make a judgement on the company & form a revised view on its future prospects. On balance, it's best to take the loss straight away and sell out. If you don't sell, then it can knock your confidence, looking at the loss every day on your portfolio. However profit warnings can also be an opportunity, as the share price can move down too much (this last point might have been made by Giles Hargreave, my notes are not clear & I can't exactly remember).

Giles Hargreave

I then brought in Giles, and got his comments on profit warnings too, who I think made the same point, that selling immediately is usually the best strategy after a profit warning, but of course Institutional holders are often unable to do so, due to the size of their positions.

Giles made an interesting addendum to John's comments about WPP, by pointing out that Martin Sorrell almost busted WPP in the early days, and secured for himself extraordinarily generous remuneration or shareholding, I didn't quite get the detail down on that point. "But he got away with it" - said in a way which suggested that Giles was not at all impressed!

- Run your profits! "There is no greater sin than snatching a profit!"

- Gave an example of one of his own mistakes on this front - he bought Asos at 55p, and sold at 400p. I can't for the life of me remember why I sold at 400p, it was a stupid thing to do. We bought them back at £20.

- The size of Institutional holdings & lack of liquidity, is a big problem.

- Reiterated - run your profits, sell your losers.

- Profit warnings - we've been hit by 2 profit warnings this week - TT Electronics, and John Menzies.

- Think about each share you hold, and whether it is cyclical or non-cyclical. Eg. car dealership shares, it may be time to sell - I recently bought a new car, and the discounts & finance deals available are so good, that it makes more sense to buy on finance than to buy for cash. So maybe car dealerships are now at the top of the cycle for sales?

- Giles gave an example of CVS (LON:CVSG) - saying that it looks expensive in the short term, but it would be wrong to sell. So this reinforces John's point that it's best to run your winners, even if they look expensive in the short term.

I then invited questions for Giles.

Q1. Does he react to changes in overall market confidence?

A1. I went 40% liquid in one of my funds in 2002. But it didn't help, as we weren't able to get back in at the right prices. So for Institutions, the illiquidity of small caps is such that you can't trade the market ups & downs.

Lord John Lee

I brought back in Lord Lee at this point, and asked him if he sells when the market overall drops heavily? He answered that if a company is fundamentally sound, you stay put.

- Crashes create wonderful opportunities - e.g. I was buying great companies with 11-12% dividend yields in 2008!

- "What are you meant to do when a stock market crash happens, hide under the bed with a bottle of whisky and a bar of gold?!" (lots of laughter)

- Selling signals - talking to Directors, you sense a change. I ask a general question like, "how are things going?", and in the good times you get an instant positive reply. If things are not good, there is a pause, as they search for the right form of words to avoid lying to you. That's a sell signal.

- Look out for particular forms of words in outlook statement - e.g. a company saying, "we are well positioned for when the economy as a whole improves", means that nothing much is going on! (audience chuckled).

- AGMs - the Chairman will be very stressed, and will want to get the meeting over with as quickly as possible. "So strike afterwards, when he's had a big sigh of relief, and has got his hand on the gin bottle!" (laughter)

David Stredder

Renowned small caps investor David Stredder had joined the panel, and perched on a side table, as there were no spare seats, so I invited him to comment on the subject matter of when to sell.

- I talk to companies a lot, and you learn the language of the Directors at each company over time.

- It's so important to go to AGMs. You learn so much from the interaction between the Execs & Non Execs.

- Gave an example of Conygar of gigantic & unjustified bonuses, and criticised Instituions for being unaware of the agreement to give these bonuses.

- David was critical of fund managers generally, and by implication Giles, at them not attending AGMs.

- Giles countered that he has a succession of CEOs & FDs coming into his office every day! "That's what we do".

- David emphasised that top-slicing his profitable holdings by 20% is a core strategy of his, and works very well for him, so when a share goes up a lot, he will take some money off the table. "I can always buy them back if it dips".

Unfortunately, I didn't take any more notes during this part, as I know David very well anyway, and at the time didn't have any intention of doing a write-up here. If I've missed anything important, perhaps people who attended the meeting could add more detail in the comments section below. Chairing the meeting at the same time as taking notes wasn't easy!!

Paul Scott

There was now time for me to drop in a few points of my own.

- Selling doesn't have to be a binary decision. I often sell a quarter to a half of a position if I have some doubts, and that David had taught me to top-slice into a strong share price years ago, and that strategy had generally worked well for me.

- In a bull market, newspaper tips can cause a big spike up in price that only lasts about 2 weeks, and this can be a good opportunity to sell some or all at a favourable price, and then buy back in when they drop back.

- Private investors have a massive advantage, in that our positions are usually much smaller than Institutions, so we have a lot more flexibility in when we can sell.

- My biggest mistake is to sell too early, illustrated by me buying 0.5m Asos shares at 4p, but I then thought they looked too expensive on a PER basis, and sold out ... at 9p! (much laughter). So I accept that I need to learn to be more flexible on PERs, and run my winners more, even if they look expensive in the short term.

- Certain key phrases in the commentary to results, or trading updates, are an automatic sell signal for me - e.g. "working capital is our key focus" translates into, we are close to going bust, and the bank are getting jittery.

- I'm more relaxed about profit warnings if a company has a strong Balance Sheet, as that financial strength gives them time to recover.

- Another time to sell is if there are any signs of management dishonesty.

- It's too easy to average down after bad news, and then regret it. So usually best to wait until the dust settles after a profit warning.

- Breaches of bank covenants can be disastrous, but can be anticipated by investors, if you're on the ball. So this is something to check with indebted companies.

- Suppliers withholding deliveries can threaten the survival of a company, and is usually an immediate sell signal, as if the suppliers have lost confidence that they will get paid, then the business is usually finished.

Conclusion

I was going to invite more questions, but my friend Leon Boros started frantically signalling to me by making a throat-slitting gesture! So I realised that we had over-run our time, therefore I thanked everyone & closed the meeting.

Several people who attended the session told me afterwards that it was the most interesting session they had attended, and I really enjoyed it too. Listening to insights from such experienced & successful investors such as Lord Lee, Giles Hargreave, and David Stredder, was a real treat for all of us, and thank you to them for giving their time & experience so freely.

It was a pity we didn't have a bit more time, but this was definitely a wining format, and I will hopefully have the chance to take part in and/or chair more similar discussions in future.

Please do add your comments below if you attended the session, and can add more points which I missed - this is only a partial report as my notes are incomplete.