Investment Advice??
No let’s be really clear here, I’m not an investment adviser’s backside and I’m certainly not pretending to be one, so please take no notice of what is about to follow.
Investment scenario 2016: Company A current price $250
I have invested heavily (read 75% of portfolio) in “Company A” (CA) and it has returned a very good rate of return, around 20% fully franked dividend ($50) and has very strong fundamentals, a great investment. CA is only a small company, fully subscribed and if you get out there will no doubt be a fair wait before you can back in, chances are you might have to offer a premium, thus reducing your returns. The main downside of owning these shares are that if the company makes a loss then you are directly liable, this hasn’t happened in the last ten or more years, so you consider the risk low, besides CA have a very good management team that won’t allow a loss to happen.
2016/17: Company A current price $260
Another good year, about 20% dividend ($50), paid only partially franked due to poor business conditions going forward, a further update will be provided at the end of the calendar year. Book the holiday, change over the car, maybe even purchase another investment property.
2017/18: Company A current price $210
Mid-year update came out at the end of January and business conditions continue to slide and forecast ahead no better. Bad news to investors, they will be making a margin call of $10/month, effective immediately, with no end date. They have had to shed 30% of their workforce and have asked those remaining to take a pay cut and work longer hours. Expectations are that conditions should turn around soon, surely, so no need for alarm, lets just monitor the situation. I do choose to sell down 10% of my shares. Come June 30 though and dividend is $25 still I have had good returns in the past and I need to take the good with the bad, surely these tough conditions will turn around soon, besides I’ll make a capital loss if I sell now and I’ll never get back in at the same price.
2018/19: Company A current price $200
The company didn’t wait until mid-year to release an update, at the end of the first quarter the margin calls were increased to $16/month, due to what they called unprecedented dire business conditions. Certainly, many are cashing out, though I don’t want to trade shares, I bought these blue-chip shares as a lifetime investment, I was lucky to get them, mind you we will have to curb our spending. Surely these conditions should ease soon, I’m happy to just keep persevering and we will be OK, I know we will. CA has said that they have made some very good sales this year and due to very hard work from their core employees, returns have been good. Mind you better keep driving the same car and cancel our normal holiday, might even need to cash in another investment or see the bank, still we will cross that bridge when we come to it. June 30 the red ink comes out again, $84 This is really concerning now; however, I’ve come this far the company owes me, just my luck that I sell out and then the tide turns.
2019/20: Company A current price $190
At the very start of the year CA announce that due to their good management, margin calls would be dropping to just $12/month, that is good news surely the cycle will turn in our favour now. Mind you I probably should be talking a bit more to our bank as we have been over our limit for a while now and the wife is saying phone calls are becoming more frequent, still they have lots of money they will get over it. Besides this tough time will all be over soon and they will want to receive our money I’m sure, nobody would have foreseen that it could continue this long. Currently with mid-year dividends being paid we are in the red, still, $40
Footnote:
Now obviously this is a fictitious story loosely based on something that didn’t happen and many of you would say how could this happen? Does it alter anything if I changed the company name to “Merino Ewe Ltd” and the “tough business conditions” were drought?
This is just the reality that I reckon I see and have tried to document that, without judgement.
Merino ewes (Heidi Wright)