invest in your knowledge base

While many HC members are still numb from the FGE debacle of the past 4 months, I thought it might be opportune to try to offer some broader investing advice whilst the FGE thread is still alive.

As some will recall, I posted twice in the past two months that FGE was in serious trouble. Like a ship that had been seriously damaged from a broadside hit, it needed help fast, but two subsequent hits, coupled with ANZ finally pulling the pin, meant that the SS FGE had to sink.

The reason for my previous postings was not to try to 'downramp' as many accused me of, but to try to share my serious concerns for FGE based on 25 years in ASX listed companies in senior executive roles across Finance, Treasury, Investor Relations and Capital Management.

The purpose of this post is to encourage all HC members to invest in their knowledge base, to ensure they are better equipped to avoid these disasters, plus to make a few other observations.

The first thing to note is that if you are visiting a specific stock thread on HC, be aware that probably 95% of the participants own the stock or are thinking about buying the stock. This "coalition of the willing" can create significant bias, which may lead to collective group think and even euphoria. More importantly, the posters are anonymous, so when people said FGE was going back to $2, it could have been based on anything ranging from pure analysis to pure bias. Also, you need to remember that for larger stocks like FGE, the posters on HC reflect a very small percentage of the overall holders of the stock.

I read various posts in the pasts few months mentioning various conspiracy theories - that the stock was being manipulated by the institutions, "big guys", traders etc. Teh reality is that no manipulation was occurring - the stock opened post a trading halt in Novemebr at what turned out to be the right price - 30 cents - because FGE had tried to raise capital but couldn't. It raced up to $1.90 on speculation, not fundamentals, but then fell below $1 based on subsequent announcements which were in fact worse than the initial announcement.The euphoria in the last few days of trading was because the retail punters thought a data room meant that a deal would occur, when in reality it was merely a hospital emergency room. The patient couldn't be saved.

As I posted previously, FGE's balance sheet was in serious trouble. How did I know ? The information was in the public domain, yet many didn't know where to look, or when they did, how to interpret the results. The concept that FGE could survive without raising capital, unfortunately pushed by too many on the FGE thread, was false and has caused significant financial and emotional grief for too many. Those who suggested the need to raise capital were shouted down, as the broader "coalition of the willing" and long bias held sway.

In light of this, I offer some tips for those wanting to improve their investing skills.

1. Read the annual report, especially the financials, and in particular the balance sheet.
2. Read the ASX announcements - and make sure you can interpret what they mean. FGE didn't lose $25 million as has been reported - that was after the one -off losses. These were ignored and FGE and the press only reported the pro-forma loss. The one off-loss was a circa $160 million EBITDA loss. When your net assets are $213 million, losing $160 million plus is a massive hit.
3. For smaller companies, like the speccies, read the quarterly cash flow and activities announcements. This tells you how much money they have in the bank, and more importantly, how much money they spent in the past quarter and where they spent it. Capital raising is an investors worst enemy, and the quarterly 5C statements provide significant info on the likelihood and timing of this occurring.

If you can't do 1,2 and 3, my message to all HC members is invest in your knowledge base so that are capable of doing this. It will be the best investment you make. Warren Buffett's number one rule is the best investment you can make is in yourself.

In addition to financial skills, invest in your money management skills - people on HC posting that stop losses will save you are 99% correct, but they won't save you when a stock goes broke overnight. So the principle of diversification, risk adjusted returns, expected returns all come to the fore. Please, please ignore the HC 3-bagger, 5-bagger, 10-bagger dream, unless you have the financial resource to withstand the downside. And if you do chase the dream, bet small.

Use history as your learning tool. Less than two years ago, Hastie (HST) went broke in an eerily similar situation. It wasn't really mentioned on the FGE thread over the past 3 months, yet all of the announcements are available on the ASX announcements webpage (insert HST and 2012). Sons of Gwalia, MFS, Allco are other examples, again all available on the ASX website.

Don't expect to get rich quick - it only happens when you play the lottery but 99.99% of people playing lotto are poor dreamers who can't do math (sorry about the harsh call here). Buffett got rich by beating the index, year in year out, but more importantly by not having negative returns. Low returns are much more manageable than negative returns. And positive compounding over time always helps.

Like watching an accident about to happen, I wish in hindsight I had posted louder and more often about the risks with FGE. in a small way, I hope this helps other HC members in ensuring the impact of this type of investment disaster is avoided/minimised in the future.