Are any future Capital Killers™ lurking in your portfolio?

By Howard Coleman

If this question causes you angst, read on.

The ‘magic’ of compounding means 15% p.a. will multiply your wealth by 4 times over 10 years; while 20% p.a. will multiply your wealth by 6 times over 10 years – patience pays a premium!

But even the premium patience provides won’t multiply your wealth by 4-6 times in 10 years if your share investment portfolio contains several lurking Capital Killers™.

Through understanding what causes Capital Killer™ risks, you should be able to avoid killing your capital.

Capital Killer™ risks for all businesses come from one or more of the following:

1. Management does something stupid with our money;

2. Great management retires, leaves, or is ‘hit by a bus’;

3. Management makes a major mistake in execution;

4. Remuneration causes management to act against our best interests;

5. Management uses shareholder funds in an untrustworthy manner;

6. A major shift in world events, economies, technology, or disruptive competition;

7. We mistakenly invest in a poor business, or one with untrustworthy management;

8. We buy into a business when at an unsustainably high P/E ratio.

In the years since we started Teaminvest, I’m not aware of any risks of Capital Killers™ outside of these eight types – please let me know if you find any I've missed.

So what now if you've recognised future Capital Killers™ lurking in your share portfolio?

Do you sell them immediately, perhaps at a loss, or do you wait?

Warren Buffett says: “Time is the friend of the great business, the enemy of the mediocre”.

If you’re unsure as to whether or not a company in your portfolio is a lurking Capital Killer™, ask yourself three questions:

1. Am I concerned about the performance of the business or am I simply fretting about the share price?

2. When I bought into it, was I confident about owning it for at least five years?

3. Do I now have genuine concerns it falls into one of the Capital Killer™ risk types covered above?

‘Patience pays a premium’ when owning great businesses. ‘Procrastination Kills Capital’ when holding on to mediocre businesses. You may receive a bit more from a potential Capital Killer™ by waiting for Mr Market to cooperate, but the chances are you’ll lose more money by waiting longer.

Are you interested in improving your ability to identify Capital Killers™? Perhaps just as importantly, do you want to get better at finding Wealth Winners® for your own share portfolio?

Conscious Investor® is a powerful stock picking software that contains proprietary tools developed over decades by Teaminvest co-founder Dr John Price. Teaminvest members enjoy full access to all ASX stocks on this proven stock selection tool, along with member intelligence, SMaRT workshop summaries and company reports. To find out if Teaminvest is right for you, and if you would be a good fit for Teaminvest, book a call with long-time member Chris here.

Conscious Investor® is a registered trade mark in the US and Australia. Other trade marks used on this site and in Conscious Investor include Capital Killers™ and Wealth Winners®. All trade marks are used under license.

This article contains general investment advice only (under AFSL 334339). Authorised by Mark Moreland.