The ASX share market has been a great place to find winners and long-term growth. But, there have also been a few disaster stories.
As long as the winners outweigh the losers, then the net returns can be solid. An investment can lose at most 100%, but others can rise 200%, 500% or potentially a lot more.
I wish I could say that every one of my investments turned out great, but sadly not. Thankfully, the painful experience I'm about to write about was fairly early on in my investment journey, and the total cost of the lesson was less than $2,000.
My worst investment was the lawyer business Slater & Gordon, which is now unlisted. I learned quite a few things after investing at around $6 (before the recapitalisation), which I'll go into.
Cash flow is king
There are many different ways for ASX shares to make money, which is then accounted for as a profit in the accounts.
However, the accounting profit can be massaged to make it look better, such as how a company accounts for its revenue, whether it fully expenses or depreciates an expense, and so on.
The cash flow is harder to manipulate to make the company look as good as possible. If I had focused on Slater & Gordon's cash flow, not just the net profit, then I may have seen earlier that things weren't going as well as they seemed.
It's cash flow that puts cash in the bank, that can fund dividend payments and anything else the company wants to do with the money.
Organic growth is preferable
An ASX share that is growing by its own means, rather than just acquisitions and/or debt is going to do much better in my opinion.
I'd prefer to see Wesfarmers Ltd (ASX: WES) grow its Bunnings network, or Lovisa Holdings Ltd (ASX: LOV) grow its global store network, rather than spending money on acquiring another retailer that doesn't have the same brand strength or economics.
Buyers typically have to lob a strong bid to acquire a business outright, which may not be the best move to deliver shareholder growth. To fund that acquisition, it either has to dilute shareholders by issuing more shares, taking on debt and/or using up a lot of its own cash on the balance sheet.
I had invested in Slater & Gordon shares before it made its fateful UK acquisition, but the huge debt pile and then law changes in the UK changed the picture and caused a massive destruction of shareholder equity.
Some industries aren't great for listed markets
Businesses that can deliver fairly consistent performance make a lot of sense to be on the ASX. Resource ASX shares can make sense, particularly because of the funding they require and the scale of the operations.
However, I think the nature of the Slater & Gordon business (and also, for example, agriculture operating businesses) may not suit the listed ASX share market.
So, perhaps it's unsurprising that Slater & Gordon was taken over and is now off the ASX. Incidentally, Costa Group Holdings Ltd (ASX: CGC) is also pondering a takeover approach. I'm now more focused on some sectors, particularly ones that I find easier to predict, where the opportunity is easier to understand and ones that have stronger returns on equity (ROE), along with the other areas that I mentioned above (like cash flow).
