Mr John Farmer is a private investor. I picture a man of good British stock, grounded in our island’s culture – an upstanding citizen and a patriot.
He is proud. He likes to run his own life because he reckons he can do it better than anyone can do it for him. He is also thrifty. His luxuries are an occasional glass of good wine and weekend breaks with his faithful wife. And he has watched in horror as his fellow citizens have gorged themselves on borrowed money and shakes his head in despair at the state of the nation.
He is an intelligent man. He knows that investment into funds will do nothing except line the pockets of financiers. So he invests directly into shares. He gets his ideas from the Daily Telegraph and from his golfing partners. He will be the first to admit that he is no accountant. But he knows a thing or two about business and fancies that he is pretty shrewd.
Mr John Farmer is no mythical figure. He is a loyal shareholder in a blue chip company that has done very little to repay his loyalty. This is a company whose shares have plummeted since Mr Farmer has owned them. And yet, Mr Farmer has clung on as this company’s directors have paid themselves enormous salaries and bonuses.
Do you feel sorry for Mr Farmer? Well you shouldn’t. Because for all his fine qualities, he only has himself to blame.
“This seems to me to be a colossal disaster”
Mr Farmer is a shareholder in Cable & Wireless Worldwide and last week he trooped along to the company’s annual general meeting. The chairman went through the usual routine and then Mr Farmer got to his feet. This was his moment and he was determined not to waste it. Referring to the millions handed out to C&W’s directors Mr Farmer said “vast amounts have been paid out to the supposed prime movers in this enterprise and still the future is uncertain”. He accused the board of “arrogance” and declared, “this seems to me to be a colossal disaster and I have scant confidence in the future”.
Now, I admit that I don’t know too much about Cable & Wireless Worldwide – which emerged after Cable & Wireless was split in two last year. It is not the sort of company that I would waste my time on. But I can see that the share price has more than halved since the demerger last year. And that hardly seems to justify the £10m payment lobbed out to chief executive John Pluthero for what is laughingly called a ‘long term incentive plan’ or £650,000 dished out to the former CEO as compensation for loss of office.
Even the new chairman, John Barton, accepts that things have not gone to plan. “The demerger from its sister company Cable & Wireless Communications has not proved successful”, he admitted. “We were far too optimistic… we created expectations that quite frankly we didn’t live up to. It hasn’t created any value at all.”
Why on earth would you invest in this company?
So what have the City’s big investors, who look after all our money, done about this? They have really shaken their rattles! Oh yes! A quarter, no less, refused to back the company’s remuneration report! Almost a third voted against the remuneration plan! And – wait for it – 9% ‘withheld their votes’! No wonder the senior independent director Penny Hughes (salary £85,000) admitted that “it makes you stop and think”.
But look, if the directors of Cable & Wireless Worldwide are overpaid and incompetent and if the business is going nowhere, I don’t care.
What irritates me is the attitude of Mr John Farmer. If you think this business is so rotten Mr Farmer, why on earth do you invest in it? Many big companies have thousands of Mr John Farmers as shareholders. Despite receiving pitiful returns on their money these shareholders remain loyal. And in my opinion they should not.
Ignorance, comfortable familiarity with big household names, sheer inertia and the prospect of wine and canapés at the annual general meeting, all these have something to do with this show of faith. But private shareholders think it is good to be loyal. They get some grim satisfaction out of sticking with a company through thick and thin. However dark and long is the tunnel, they believe that there must be a light at the end.
Frankly I don’t understand this attitude. When I invest in a share, or tip one to readers of Red Hot Penny Shares, it is because I believe that it can grow and prosper and make its shareholders rich. I will be the first to admit that they do not all work out. But investment should be an active hunt for profit. Not an example of British stoicism and a belief that ‘something will turn up’. For shareholders in Cable & Wireless Worldwide, to name just one large and dysfunctional company, I see no reason why this show of fortitude will ever be rewarded.
How to hunt for penny stock winners
One of the reasons I write Penny Sleuth is to try and shake private investors out of the kind of bad faith that Mr Farmer is guilty of. There is often nothing to be gained by simply following the herd into popular blue chip investments. You have to think for yourself. And although good blue chip companies should form part of a balanced portfolio, if you see evidence that a company is not acting in your interests, don’t simply hang around hoping that things will turn around.
To be honest you’ve no excuses for this kind of behaviour. If you read my Red Hot Penny Shares letter, you’ll know that there are plenty of exciting stories beyond the blue chips. And these stocks are just as easy to invest in.
In fact, in response to ongoing requests from readers, my colleagues here at MoneyWeek have been looking into easy-to-use, cost effective stockbrokers. And there’s one that seems to tick all the boxes – TD Waterhouse. They have a cheap dealing service for AIM stocks. And they should cover any of the stocks that I mention here or advise on in my Red Hot letter. You can click here to register with them.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
MoneyWeek Ltd receives commission from TD Waterhouse for accounts opened.
Red Hot Penny Shares is a regulated product issued by MoneyWeek Ltd. Past performance and forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Penny shares can be volatile, relatively illiquid and hard to trade. There can be a large bid/offer spread so if you need to sell soon after you’ve bought, you might get less back than you paid. This can make them riskier than other investments. Please seek advice if necessary. 0207 633 3780.