Lessons to be learned from Woodford’s fall

As the old saying goes, hindsight is always 20/20.  Every time a well-known figure or company plummets down to earth with a bump, the subsequent inquest picks up indications which could, and arguably should, have been spotted well in advance.  The rogues’ gallery of the financial world now has a new member, Neil Woodford, so in the best tradition of “with the benefit of hindsight” articles, here are some lessons to be learned from Woodford’s fall.

Pay attention to what is going on

Diversification is all very well, in fact, there are a lot of good reasons for it.  At the same time, however, it is a massive risk to diversify yourself to the point where your investments are spread so thinly that you are unable to give them all the attention they need.  It can be tempting to assume that if money is coming in, then an investment is performing well, but this is not necessarily the case and even if it is, there may be reasons why the investment could struggle in the future.

On this note, be very suspicious if a company fails to provide clear and understandable informational material for its (potential) investors.  Technical detail may be complex and may take a bit of time to understand, but it should be communicated in such a way that the average, intelligent person can understand it if they take the time to digest it properly.  If it is not, then, at the very least, there is a potential customer-service issue.

Remember that past performance is not a guarantee of future success

This warning pops up regularly in connection with the sale of financial products and services (and it applies in other areas of life too).  The key point to note is that you need to be aware of the differences between situations as well as their similarities.  For example, Neil Woodford made his name in the late 1990s when he was prepared to invest in “old-school” stocks at a time when many other people where being seduced by tech stocks.  As a result, he wound up sitting very pretty when the tech bubble burst.  In other words, there’s a definite case for questioning whether his success was mainly down to brilliance, luck or input from his Invesco Perpetual. 

The key point to note, however, is that it’s definitely not the 1990s any more, the investment landscape is different and investors should have been watching Woodford carefully to see whether or not he demonstrated the ability to adapt to the differences or whether he was essentially a, fairly lucky, one-trick pony.

Never invest against the principles of basic common sense

If something seems too good to be true, the chances are it probably is and if something seems like it doesn’t make sense to you then the safest move (and probably the smartest move) is to leave well alone.  For example, one of the biggest issues with Woodford’s fund was his decision to borrow short and lend long or in other words to hold illiquid assets in what was supposed to be (and marketed as) a highly liquid open-ended fund.

Never assume the regulators will protect you

This may seem like a cynical comment but time and time again, regulators have done nothing as individuals and organizations have sleepwalked their investors into deeper and deeper trouble.  The whole reason the FCA was created was because the FSA failed to stop the 2008 financial crisis.  While the Woodford collapse is on nowhere near that scale, the FCA still sat by and did nothing as Woodford continued to advertise his fund as Equity Income while continuing to invest in companies which did not provide an income and showed no obvious signs of being likely to do so any time in the near future.