There have been four major Black Swan events over my investment life: the secondary banking crisis of the early 1970s; the subprime crisis in 2008; the Covid-19 pandemic of 2019-20; and more recently Russia’s invasion of Ukraine.
For me, the most important of these unpredictable occurrences was the first. In the secondary banking crisis, London & County Bank collapsed, housebuilder Northern Developments and developer Ronald Lyon Estates crashed and there were even rumours about the viability of NatWest bank.
As a relatively young investor aged 30, it showed me at first hand the impact of such unexpected events. In this case, it was that shares can plummet, with nobody buying despite blue-chip yields of 20 per cent. And it demonstrated why one should never buy shares on borrowed money.
Recovery came when certain institutions got together and started to buy, effectively reversing the downward spiral. If one was clever or lucky enough to have foreseen the initial plunge one might have sold or reduced holdings, but once prices have tumbled, I am clear that investors should stay aboard and await the recovery which usually occurs.
It seems to me that to be an investor, one has to take a moderately optimistic view of the future. If you believe that the end of the world is nigh, you should climb the highest mountain and pray, or hide under the bed with a case of whisky and a bar of gold. Neither option appeals to me.
There are three further reasons for staying aboard. First, costs have already been incurred in making purchases — selling and buying will inevitably incur more costs. Second, the flow of dividend income is lost, and third, a takeover bid or similar might arise at any time.
Additionally, if a portfolio contains a number of larger holdings like mine, particularly in small-cap stocks, selling any more than a small proportion is not really an option. Most investors panic during black swan events, fleeing the market and driving prices further down. For the more seasoned investor who takes a longer view, excellent buying opportunities always arise. “Sell on the trumpets and buy on the cannons,” as the phrase goes.
Thus, when the subprime crash hit, I selectively bought into fine businesses on very attractive double-digit yields, paying 60p and 64p for conveyor belt and sealants maker Fenner, and BBA Aviation (later renamed Signature Aviation) as low as 66p. Both were ultimately taken over. I sold my first tranche of the former in 2014 at 354p and the latter in 2015 around 290p. Thankfully both were Isa holdings and thus tax free.
At the outset of the Covid pandemic, I should have given more thought to the commercial beneficiaries. It did not require rocket science to spot companies in the healthcare sector, or those which sold over the internet, delivery companies, and packaging companies like DS Smith and Smurfit.
Most stocks plunged and whole sectors were dumped, including anything in aerospace, affected by travel restrictions. Yet a company such as air charter broker Air Partner, where I already had a large holding, was very busy flying PPE clothing and equipment around the world. At one stage its shares fell to 17p.
Thankfully, I held my nerve — indeed I bought more in October 2020 as low as 62p. Eighteen months later, the company was acquired by a US group at 125p.
When Russia invaded Ukraine in February it caused a surge in energy costs and inflation — compounded in the UK by the policies of then prime minister Liz Truss and chancellor Kwasi Kwarteng. I was in a fortunate position with significant liquidity following the takeover of Air Partner, augmented by sales of Nichols and Facilities by ADF, at a small loss.
Thus, over the past six months I have bought large-caps Aviva, Legal & General, Phoenix, and Smith & Nephew, and added to small-caps Anpario, Christies, Concurrent, Manolete and Vianet, plus a small initial purchase of global kettle control manufacturer Strix, taking advantage of lower prices. Anpario, which I bought at a depressed 380p, has now recovered to 470p. All these transactions were within my Isa.
In recent months, I have been wrestling with possible capital gains tax changes. I judged there to be a serious risk of a rate rise in chancellor Jeremy Hunt’s Autumn Statement and also a significant risk were there to be a Labour government after the next general election.
My non-Isa holdings like Nichols and FW Thorpe are pregnant with gain and vulnerable to CGT. I decided to sell portions of both — yes, incurring CGT, but at the present 20 per cent rate — and also my non-Isa holding in Appreciate Group following its bounce from a recent takeover bid from PayPoint. I am retaining my Isa-wrapped Appreciate stock for a possible higher bid.
In the event, the chancellor only adjusted future CGT thresholds. I suspect the changes were something of a political sop of little real merit — indeed I have tabled a Parliamentary written question asking for the estimated number of likely new CGT payers, the revenues likely to be raised and the extra administrative costs. I await the answers with interest.
Lord Lee of Trafford is an active private investor and a shareholder in all the companies indicated.