Watch out next time you see someone apparently throwing good money after bad, says Alistair Blair. They may just be on to a winner, and you could cash in, too.
'Over-arching confirmation' is a pompous label for an investment concept, but that's the one that came into my head when I first recognised it.
You won't find the OC in an analyst's report. It is the sight of someone sensible doing something they wouldn't do unless it was going to make serious money. It must involve their own money, and ideally it will depress their share price.
In 1995, I came across a little Irish stock called Arcon that, years earlier, discovered a big zinc deposit in Ireland. The stock soared but later sank again when investors realised how long it can take to get a mine into production. Well, Arcon finally got its mining licence, but there was a catch ... a huge rights issue to finance construction. Punters who buy into stocks like Arcon are not looking for rights issues. As they sold out, the share price more than halved, to 20p. That in itself looked a promising buy signal - after all, nothing had changed except that the mine was finally going to open. And then came the OC. Tony O'Reilly, the Irishman who runs Heinz, sank £22 million of his own money into that rights issue. Now, O'Reilly is a regular stock-market punter and he doesn't win every time. In 1992, he poured £8 million into Arcon at 75p per share.
But it seemed to me that the good money after bad argument had no credence when he was quadrupling his investment at one quarter of his earlier price.
I tipped Arcon as a buy in the Investors Chronicle at 20p and bought some myself a few weeks later at 23p. A few months ago, I sold them at 46p.
I've only seen the OC on one other occasion. In 1995, I was looking at Clinton Cards, run and part-owned by the Lewins family. In 1994 when recession hit the high street, it had bought a big loss-making competitor, sending its own shares down. A year later, barely recovered from this, it bought another loss-making competitor. That was the OC. The Lewins would never have made the second acquisition if their accounts weren't telling them the first one was already a winner. In both cases they paid peanuts. That one, I tipped at 35p and as I write, it's 99p.