A truly terrible idea

Thousands of private investors will have piled in to the Direct Line initial public offering (IPO). But they’re making a grave mistake, says Tom Bulford. Here, he explains why.

Hardly a day goes by without an email dropping into my inbox inviting me to buy shares in insurer Direct Line. Have you seen them? It’s not long now till Direct Line launches its initial public offering (today is the last day you can apply). And investors around the country are lining up right now to invest.

Should you do the same? Well in the old days this might have presented an opportunity to make a fast buck – I’ll tell you about that in a moment. But not today. I think investing in Direct Line is a truly terrible idea. And today I’d like to show you why.

The beauty of ‘stagging’

You have to be quite old – like me in other words – to remember the practice of ‘stagging’. Let me just explain the idea. In my early days in the City it presented a nice means of supplementing the income. In those days when new companies came on to the stock market they would generally name a fixed price for their shares.

Since they did not want these to end up in the hands of the underwriters, they would name a price that was some way below their estimation of the true value, to ensure that there was sufficient demand to take up the entire issue.

The real beauty of the system was that you could make as many applications as you wanted, and since nobody seemed to care where the subscription money was coming from, applications would come flying in from Mickey Mouse, Spot the Dog et al. Depending on the level of oversubscription, allocations would be scaled down. If you had applied for 1,000 shares you might only receive 100.

But if you made multiple applications you could amass a reasonable holding and, by selling as soon as the shares started to trade, you were almost guaranteed a profit.

This flotation should be warning enough

Sadly those carefree days have been overtaken by placings, book-buildings and such wheezes of the investment bankers, so that not even for the trouble of investing in boring old Direct Line are we guaranteed a quick profit. The shares are being sold at a price “in the range of 160 pence to 195 pence” – but in the admittedly unlikely event that the price is eventually fixed above the latter you would end up paying more than 195 pence.

I downloaded the Direct Line prospectus, which, running onto 361 pages, will have been a nice little earner for City advisers. The section on “risk factors” covers 28 pages and even by the stating-the-bleeding-obvious standard of the nanny state (eg, “Shareholders may earn a negative or no return on their investment in the Group”) this is quite a chunk.


But the very fact that private investors are being given a sniff should be a warning in itself. I am sure that Direct Line and its advisers would have much rather offloaded the shares into some friendly institutional hands without having to worry about the sort of pesky private shareholders who have a nasty habit of standing up at the AGM and querying the chief executive’s salary (£760,000 a year here, in a case you ask).

There are plenty of other reasons for caution too. European solvency directives are pushing up costs, while even after this issue, RBS will remain the major shareholder and “will continue to exert substantial influence over the Group”.

Private investors could get seriously burned here

As for the insurance industry, it would win prizes for the most annoying advertisements but not for much else. Everybody I have ever met who knows anything about insurance has told me that it is hopelessly inefficient, slow-moving and basically funds its own incompetence by simply bumping up the premiums that we have no option but to pay.

Aside from this, insurance is a mature industry and has no barriers to entry. It is intensely competitive with customers not hesitating to switch from one provider to another if they can save a few quid. Despite what Churchill (which is part of Direct Line) may think it has achieved with its yucky dog – brand loyalty is non-existent.

Despite all of this, I have no doubt that thousands of private investors will pile in. They will make all the mistakes that private investors usually make. Although they won’t really understand the business, they will get a nice warm feeling from the fact that Direct Line is a household name. Brokers will make it easy for them to apply, they will happily write out their cheques and boast about it in the pub.

This is not the way to buy shares. Instead you should watch and wait, researching as many investment opportunities as you can before you are really convinced you have come up with something great. After all, you wouldn’t marry the first girl who knocked on the door, would you?

‘The City’s dirtiest secret’

In fact, these kind of offerings are not the only wheeze that private investors get sucked into. As a former fund manager myself, I know a thing or two about how the City scalps investors. And it’s not pretty, I can tell you.

In fact, I’ve just written a report on that very subject.  It’s called The City’s dirtiest secret.

In this report I tell the story of a dangerous cult. One that brainwashes regular investors – just like you – into parting with their money. This cult is one of the most powerful organisations in Britain today. And it’s ludicrous that no one in the mainstream press stands up to them.

If you’d like know just how they are siphoning off your wealth, then have a quick read of my report.

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