A truly terrible idea – MoneyWeek

Thebeautyof‘stagging’

Youhavetobequiteold–likemeinotherwords–torememberthepracticeof‘stagging’。

Letmejustexplaintheidea。

InmyearlydaysintheCityitpresentedanicemeansofsupplementingtheincome。

Inthosedayswhennewcompaniescameontothestockmarkettheywouldgenerallynameafixedpricefortheirshares。

Sincetheydidnotwantthesetoendupinthehandsoftheunderwriters,theywouldnameapricethatwassomewaybelowtheirestimationofthetruevalue,toensurethattherewassufficientdemandtotakeuptheentireissue。

Therealbeautyofthesystemwasthatyoucouldmakeasmanyapplicationsasyouwanted,andsincenobodyseemedtocarewherethesubscriptionmoneywascomingfrom,applicationswouldcomeflyinginfromMickeyMouse,SpottheDogetal。

Dependingonthelevelofoversubscription,allocationswouldbescaleddown。

Ifyouhadappliedfor1,000sharesyoumightonlyreceive100。

Butifyoumademultipleapplicationsyoucouldamassareasonableholdingand,bysellingassoonasthesharesstartedtotrade,youwerealmostguaranteedaprofit?

Thisflotationshouldbewarningenough

Sadlythosecarefreedayshavebeenovertakenbyplacings,book-buildingsandsuchwheezesoftheinvestmentbankers,sothatnotevenforthetroubleofinvestinginboringoldDirectLineareweguaranteedaquickprofit。

Thesharesarebeingsoldatapriceintherangeof160penceto195pence–butintheadmittedlyunlikelyeventthatthepriceiseventuallyfixedabovethelatteryouwouldenduppayingmorethan195pence。

IdownloadedtheDirectLineprospectus,which,runningonto361pages,willhavebeenanicelittleearnerforCityadvisers。

Thesectiononriskfactorscovers28pagesandevenbythestating-the-bleeding-obviousstandardofthenannystate(eg,ShareholdersmayearnanegativeornoreturnontheirinvestmentintheGroup)thisisquiteachunk。

Buttheveryfactthatprivateinvestorsarebeinggivenasniffshouldbea?

warninginitself。

IamsurethatDirectLineanditsadviserswouldhavemuchratheroffloadedthesharesintosomefriendlyinstitutionalhandswithouthavingtoworryaboutthesortofpeskyprivateshareholderswhohaveanastyhabitofstandingupattheAGMandqueryingthechiefexecutive’ssalary(£760,000?

ayear?

here,inacaseyouask)。

Thereareplentyofotherreasonsforcautiontoo。

Europeansolvencydirectivesarepushingupcosts,whileevenafterthisissue,RBSwillremainthemajorshareholderandwillcontinuetoexertsubstantialinfluenceovertheGroup。

Privateinvestorscouldgetseriouslyburnedhere

Asfortheinsuranceindustry,itwouldwinprizesforthemostannoyingadvertisementsbutnotformuchelse。

EverybodyIhaveevermetwhoknowsanythingaboutinsurancehastoldmethatitishopelesslyinefficient,slow-movingandbasicallyfundsitsownincompetencebysimplybumpingupthepremiumsthatwehavenooptionbuttopay。

Asidefromthis,insuranceisamatureindustryandhasnobarrierstoentry。

Itisintenselycompetitivewithcustomersnothesitatingtoswitchfromoneprovidertoanotheriftheycansaveafewquid。

DespitewhatChurchill(whichispartofDirectLine)maythinkithasachievedwithitsyuckydog–brandloyaltyisnon-existent。

Despiteallofthis,Ihavenodoubtthatthousandsofprivateinvestorswillpilein。

Theywillmakeallthemistakesthatprivateinvestorsusuallymake。

Althoughtheywon’treallyunderstandthebusiness,theywillgetanicewarmfeelingfromthefactthatDirectLineisahouseholdname。

Brokerswillmakeiteasyforthemtoapply,theywillhappilywriteouttheirchequesandboastaboutitinthepub。

Thisisnotthewaytobuyshares。

Insteadyoushouldwatchandwait,researchingasmanyinvestmentopportunitiesasyoucanbeforeyouarereallyconvincedyouhavecomeupwithsomethinggreat。

Afterall,youwouldn’tmarrythefirstgirlwhoknockedonthedoor,wouldyou?

TheCity’sdirtiestsecret

Infact,thesekindofofferingsarenottheonlywheezethatprivateinvestorsgetsuckedinto。

Asaformerfundmanagermyself,IknowathingortwoabouthowtheCityscalpsinvestors。

Andit’snotpretty,Icantellyou。

Infact,I’vejustwrittenareportonthatverysubject?

It’scalledTheCity’sdirtiestsecret。

InthisreportItellthestoryofadangerouscult。

Onethatbrainwashesregularinvestors–justlikeyou–intopartingwiththeirmoney。

ThiscultisoneofthemostpowerfulorganisationsinBritaintoday。

Andit’sludicrousthatnooneinthemainstreampressstandsuptothem。

Ifyou’dlikeknowjusthowtheyaresiphoningoffyourwealth,thenhaveaquickreadofmyreport。



ThisarticleistakenfromTomBulfordsfreetwice-weeklysmall-capinvestmentemailThePennySleuth。

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