When I entered my position in Clear Leisure a bit more than a year ago I realized that it was a hairy situation, but I couldn’t resist buying a company at 2p/share that announced a 2p/share dividend. The dividend payment never materialized, and in the past year the stock was more often suspended for trading than not. When you have an investment that isn’t working out you are in a tough spot: you don’t want to sell at the point of maximum pessimism, but you also don’t want to hold on to a loser. Behavioral finance suggests that this is a common mistake that is made by investors but knowing this fact doesn’t really provide a solution.
I guess I didn’t sell at the point of maximum pessimism because the 52 week low is 0.51p/share and I sold yesterday at 1.30p/share for a realized loss of 35%. But you could make a good case for the fact that I should have sold a lot earlier in 2014 when it became apparent that the 2p dividend was unlikely to happen, and perhaps in the future this sale will appear ill-timed as well. But when the stock suddenly jumped yesterday on no news I thought it was a good moment to take my losses. Fundamentally the company is not a lot different than a year ago, but the potential upside will probably be diluted soon since they are planning to raise equity.
Whether or not Clear Leisure was a bad investment remains a tough question to answer. It certainly didn’t go my way, but I recognized it as a high-risk situation and you can’t determine what the probability of a favorable outcome was ex-post. I’m inclined to think that my Clear Leisure bet was a mistake, but not because of fundamental reasons related to the company.
The biggest problem is the fact that it was trading on the AIM market in London, and that market has ridiculous trading costs because it does not have an electronic order book in which your orders can be matched against other investors. You can only execute your orders against a market maker, and as a result you are forced to pay the wide bid/ask spread. This makes it very costly to change your opinion, something that is likely to happen when you invest in a hairy situation. To make things worse, I bought this position at the new Dutch broker “DeGiro” and their trading system is so crappy that you often have to e-mail their helpdesk just to get an order accepted by their system. Otherwise, I would probably have been able to exit earlier.
No position in Clear Leisure anymore
The SEAQ AIM trading mechanism is ridiculous – spreads are super wide and even relatively large stocks (over £100m market cap) still sometimes trade through quotes and not through a visible order book. This is all to ‘protect the market makers and encourage liquidity’ of course.
I should say that not all AIM stocks are like this, though; some use SETS, which is a listed order book as you more commonly know it (the main board of LSE uses this), and some use SETSqx – which is a bit like a cross between the two systems.
You can tell which system is used for a particular stock by looking up the quote on http://www.londonstockexchange.com.
I may be teaching my grandma to suck eggs here – but I had to learn this when I started trading more actively, so it might be useful to a passing reader!
Yeah, I figured this out some time ago when I wanted to buy Argo (my first AIM stock) and I saw all kinds of trades in the stock happening at prices below the price of my limit buy order… I bet most people don’t realize how ridiculous the SEAQ AIM market is structured. I still failed to fully appreciate this fact when I bought CLP because I envisioned an exit through a liquidation payment.
Don’t beat yourself up too much AV. It is probably results oriented thinking. You are usually skeptical and objective with your investment thesis so odds are you did fine with your analysis beforehand. It is a marathon not a race 🙂
and on illiquid and ridiculous markets you probably also made some of your best gains as there is less competition because no one likes to deal with it.
Sure, but not every illiquid market is the same. Here the odds are more stacked against you than for example the pink sheets in the US.