With recent news from Patisserie Valerie, we pause to reflect on how investors can protect themselves from unwanted surprises!
Three simple steps to best protect yourself from stock surprises
Last week news hit that AIM-listed Patisserie Valerie had asked for its shares to be suspended after discovering significant, and potentially fraudulent, accounting irregularities. The board acted fast but the days that followed were filled with uncertainty for investors in the company. Thankfully the chairman Luke Johnson, who owns 37% of the company, offered up to £20m in loans to keep the company operating, and the company managed to raise £15.7m from the sale of new shares at a heavily discounted price.
For staff and investors, news of the company’s reprieve was a big relief after a tumultuous week. With this incident shining a spotlight on the risks of investing in smaller companies, many investors are left wondering if their AIM holdings could be at risk of something similar.
Investment Research Analyst Ian Forrest has looked into how investors can protect themselves from the events we have seen around Patisserie Valerie.
While there is no fool proof way of avoiding these things, especially if a finance director is determined to conceal important information, there are a couple of actions that can help:
1. Seeking out bigger, well-established companies is a good start
The AIM market is designed to make it easier for smaller, up and coming companies to list, and while these can take off and sky rocket, they can just as easily plummet and sometimes even shut down. There are plenty of more established, medium to large companies listed on AIM, and you’re looking for companies with several years of audited accounts and management teams with a good track record to be that extra bit careful.
2. Focusing on companies which have a premium listing on the main market
Looking over to the main market you can see a lot more stability when compared to the AIM market. Depending on your risk aversion, you might be looking for something with potential that’s not so volatile. A premium listing means investors benefit from higher standards of corporate governance which should reduce the risk, but keep in mind that there is still always some risk involved, no matter the market.
3. Limit your exposure to any potential damage
One tip that practically all advisors will agree on is that diversification is key to reducing risk. It seems like common sense, but you would be surprised how many investors put all of their money into one sector or even worse, just one stock. By ensuring that no single investment comprises more than 10% of your overall portfolio, you can limit any potential damage if another Patisserie Valerie situation were to occur.
Having said all that, investing in AIM stocks is always going to carry a bit more risk due to the lighter regulation, lower level of disclosure needed and the relative ease of listing compared to the main market. With higher risks, the government came up with a couple of ways to make AIM stocks slightly more appealing such as no stamp duty when buying them as well as making many AIM shares free from inheritance tax if they have been held for at least two years at the time of death.
As always, it’s a balancing act between risk and reward, and while there have been notable failures such as Quindell, Affinity Internet and Oilexco, the AIM market has significantly outperformed the FTSE 100 over the past five years, with success stories including ASOS, Boohoo and FeverTree Drinks.
The most important message is to do your research, diversify and understand the risks involved and if you take the right steps, AIM investing can play an important and exciting part of your portfolio.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.