I held off on the purchase of Quarto, which I still plan to buy, after a reader emailed me asking about one of the portfolio's holdings which hasn't done so well - H & T (LON:HAT) . I bought the pawnbroking group in full knowledge of the problems they were facing; most notably, they made a lot of their money through the recession in the booming gold buying industry. As that source of profits is drying up, both through competition (minor) and the rising gold price (far more important), one has to ask what the underlying value of the core group is - which should be, and has to be, the pawnbroking business doing what pawnbrokers traditionally do. There's other stuff on top of that, of course - the cheque cashing, for instance, but that's clearly directly related in a consumer finance sort of way. The gold seems more to me far more one-off. Perhaps that just says more about my view of the gold price than anything else!
The purchase decision needs a bit of scrutiny, though, because as I mentioned in my 2-year review, HAT is down a pretty significant 40%. The bulk of that fall has come since their May trading update this year, which was rather bearish. What I want to know, primarily, is twofold - firstly, did I identify the potential weaknesses in the first place? This is mostly for my own interest. While a falling share price doesn't mean I got the decision wrong, it does mean I feel I should scrutinise my thought processes. I want to know I'm thinking about the right things when looking to buy a company. Secondly, and more importantly, where do I go from here? This has two obvious competing sides; if I bought HAT at a price far higher, this might suggest at this price the stock is even cheaper, and I should buy more. On the other hand, if things have materially changed, or my decision was flawed in the first place, it's a fool game trying to chase losses. Better to cut and move on.
The first question, I think, has a pretty simple answer. Yes, I did identify their glaring weakness, and the damage it might cause the company. Here's the bit from the May trading statement that soured sentiment so:
"Overall results…
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