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This summer has been a good one for many penny stock pickers on AIM. Some of the recent success stories include Cloudtag (CTAG), which has delivered 760% YTD, Sirius Minerals (SXX) 128% and Canadian Overseas Petroleum (COPL) 442%. So is AIM really delivering astronomical growth for investors or are these outliers?
The total return of the AIM All share index is shown above, by way of illustration if you had bought the index in summer 1999 you would be sitting on a 25% loss. Much worse would be If you had bought it at the height of the ‘dotcom insanity’ you would today be nursing around a 70% loss. Over the complete life of AIM, since launch in 1995 the average annualised loss is -1.5% and according to the FT, investors have lost money on 1 in 7 companies listed in AIM.
This is a woeful performance, especially when you consider the FTSE250 has delivered 200% over the same period.
Are there any lessons to be learnt?
AIM describes itself as ‘AIM is the most successful growth market in the world’. For who exactly? Overpaid boards presiding over value destruction? EC1? The Brokers, Nomads, PR firms, lawyers and transaction teams who bring often poorly suited companies to market? The AIM market has no doubt lined the markets of these advisors but has the AIM market been successful for investors? No, the facts speak for themselves.
To make things worse the AIM market is a magnet for retail investors, dreaming of the willy wonka ticket. The paradox is that these investors are the most poorly suited to these types of investments, a short visit to the bulletin boards shows you the real heartache behind ‘the most successful growth market’ where retail investors have suffered huge losses, e.g. Gulf Keystone, xCite Energy to name but a few. Stories of investors on these boards losing their life savings are all too common.
You might have no sympathy, it would be stupid though to put all your eggs in one basket right? True, but it is way too easy for someone with no financial or business acumen to buy into AIM companies. A cruise through LSE bulletin boards shows that the average investor is very misinformed, just the other day, one punter was ‘hoping for a share consolidation 10:1, to make us all rich’. This person genuinely expected his wealth to increase by 10x, little did he understand that this yes the share price would increase by 10x, but the number of shares he would own would decrease by 10x. It’s little reason why the AIM market is nicknamed a ‘casino’.
For me, I strongly believe private investors should not be allowed to trade AIM shares without the brokers doing proper due diligence on their punters.
Is there a silver lining?
You can make some serious returns on AIM. ASOS is the story is everyone knows, investing £1,000 at IPO in 2001 would have returned you £162,130. AIM is a stock pickers market and thus the phrase banded about by retail investors is ‘Do your own research’. But does the average investor really know what stock research is? Do they understand that a companies fair value is the present value of future cashflows? I therefore strongly advise retail investors without a financial or business background to seek a strong financial qualification before touching an AIM share, a CFA qualification would stand you in good stead to understand what to invest in, or at least develop some understanding of risk management.