Locals rise to the top in Bellyflops

Amid all the plenty of the resources boom there is a little cloud of gloom that doggedly follows a certain class of Perth investor; true believers in buying local. While such a sentiment is fine when applied to fruit and vegetables it can be a fast way to go broke when applied to the stock market – while also providing plenty of candidates for the Briefcase ‘Bellyflop awards’.

Briefcase, which has rabbited on before about the need to think beyond the Darling Range, had his attention drawn to this latest crisis of sinking locals by the observant eye of a noted non-investor, Mrs Briefcase.

ERG, a company steeped in WA history, sank to an all-time low of 7.8 cents last Friday. To call that price a fall does not do justice to the word. At 7.8 cents, ERG is a crash of monumental proportions, albeit one that has taken place in slow motion.

Six years ago, on June 30 2000 to be precise, some unlucky local paid a whopping $26.13 per share for a parcel of ERG paper. At the latest price he has incurred a loss of 99.7 per cent on the investment (see share graphic).

The ERG disaster earns the inaugural ‘Bellyflop award’ for the biggest shareholder wipe-out in WA business history without actually disappearing from the scene (Bond Corporation, Rothwells and Bell Group are equal first in the complete wipe-out section of the Bellyflops).

What went wrong with ERG? It was a technology development business with close connections to some of the great names of WA business. It was also a business that paid generous salaries and fat bonuses to its executives, who must surely now be feeling more than a little guilty about taking the money and not delivering a successful business.

The average shareholder who believed the sales spiel from ERG has effectively had his capital wiped out – though if he would care to drive around certain beach and riverside suburbs he can see where part of his investment has gone; into what some people refer to as the ERG houses.

For the amusement of readers, Briefcase suggests a glimpse of the ERG share price over the past 10 years makes for an illuminating study (see graph) into why it is not always wise to buy local.

To be fair to ERG management, past and present, it should be pointed out that they are not alone in costing Perth investors most of their capital – though they are the best (or worst, depending on your interpretation of the situation).

Other offenders include Evans & Tate, Chemeq, and the technology stock to rival ERG, Orbital Corporation.

Orbital, which started life as a business dedicated to an engine developed by real estate tycoon, Ralph Sarich, comes a close second to ERG in the Bellyflop (survival division) awards.

According to a check of the records by Briefcase, the top price paid for an Orbital share was $24 in October 1986. At the latest price of 9.8 cents, the capital wipe-out factor is 99.59 per cent, a modest underperformance to ERG’s 99.7 per cent, but spread over more time so perhaps it should get the ‘lingering lethargy award’.

The other two nominees for Bellyflops, Evans & Tate and Chemeq tried hard, and might do better over time, but at their latest share prices they have a fair way to go to knock off ERG and Orbital.

Evans & Tate, which has only been listed since early 2000, has done well with its slide from $1.63 in late 2001 to around 6.6 cents today, a fall of 95.9 per cent in less than five years – a fine attempt.

Chemeq has almost matched Evans & Tate with its fall from $7.28 in mid-2003 to around 43 cents today, an impressive decline of 94 per cent, but not enough to even win a bronze medal in the Bellyflops.

Is there a lesson to be learned from the four case studies selected for examination? Yes, and in a few words it is look beyond local stocks when picking an investment – and if anyone disagrees with that advice switch your focus to the property sector for definitive proof.

•••

In the property spotlight today we have Westpoint, a business claiming to have been wrongly targeted by the Australian Securities & Investments Commission (ASIC) over some of its investment schemes.

Unless Briefcase has a failing memory, the same allegation was made when a series of investment schemes run through Perth’s mortgage brokers went into that well-known crash-and-burn phase of corporate life.

Perhaps this time the property saga involving Westpoint really is different; perhaps the alleged losses of investors have been incurred in an entirely new manner.

Somehow Briefcase thinks this is not the case, and what we have at Westpoint is a dead ringer for countless occasions in the past, such as when Rothwells and Teachers Credit Society offered sky-high interest rates to attract deposits, or when mortgages through brokers offered returns roughly double bank rates.

One part of Briefcase says it’s a shame investors are being hurt. The other side cannot shake the old saying about a fool and his money being quickly parted.

•••

“Every hero becomes a bore at last.” Ralph Waldo Emerson