Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 8/4/2012

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This blog has been quiet in recent days after my wife quite rightly insisted that we take advantage of the unusually good weather here in Ireland and head to the seaside for a short break. In addition to sunburn, one of the other things I got from the break was that the lack of internet connectivity where we were meant that I could spend a bit of time thinking about investing tactics, more of which anon.

 

Before we get down to that, let’s catch up on what has grabbed my attention in recent days. Steve Baines, who is a must-follow on Twitter if you don’t already follow him, highlighted that a shortage of rigs is delaying planned drilling activity in East Africa. This may well be affecting one or more of the Irish businesses with a presence in the region, such as Tullow Oil, Cove Energy and Aminex. Speaking of the energy sector, one theme I’ve droned on about on this blog for some time is the step up in M&A activity within the space. Proactive Investors put together an interesting piece on how the North Sea is a hotbed of activity in this regard. On that note, I have been meaning to do quite a bit of work on Xcite Energy in particular, which is a favourite of some members of the wider ‘Twitterati and blogging community’. If any of you think there’s a more intriguing North Sea prospect that I should take a look at first, please post about it in the comments section below.

 

I was interested to see that Bank of America-Merrill Lynch has upgraded cider maker C&C to ‘buy’, citing long-term growth potential in new markets, including the USA, and its valuation as key attractions. Mind you, brokers like to upgrade C&C before the summer – if the weather’s hot C&C makes out like a bandit and the broker looks like a genius, and if the weather’s bad, the broker has a ready made excuse if the shares don’t perform. However, I’m sure this has nothing to do with the timing of the BoA-ML upgrade.

 

In terms of investing tactics, in between burning things on the barbecue and gorging on Easter Eggs I found time to reflect on my trading history, and the lessons I’ve gleaned from it, this weekend. I decided mainly to focus on the losses, because many of my ‘wins’ have come from times when the markets have been rising and it’s dangerous to try to discern the extent to which I ‘won’ because of where I specifically chose to place my chips and the contribution made by rising markets more generally. Also, focusing one’s attention on investment successes opens the door to hubris and all the potential pitfalls that brings. My reflections gave rise to several key learnings, namely:

 

Do your homework – In terms of destruction of value, the greatest concentration of losses in my portfolio stems from the Irish financials. I can only say that these losses are simply down to Neanderthal stupidity on my behalf. During the Celtic Tiger years, I watched as my bank shares soared in line with the economy. When the wheels came off it, I found myself severely lacking in terms of my understanding of just how exactly banks operate. However, despite this major gap in my knowledge set, I lazily decided to outsource this to others, and elected to take heed of bullish commentary about the prospects of a ‘soft landing’ for the Irish economy and also the banks’ capacity to absorb losses. Had I known then what I know now, I would have understood that even (in hindsight) conservative assumptions on losses on their domestic loanbooks would have seen the Irish banks’ capital base massively eroded, and this would have signaled loud and clear that I had to get out of them ASAP. As I say, I can blame nobody other than myself for this. Since then I have sought to build my own detailed models on companies to understand fully their financials. This exercise is in part manifested in the ‘Case Studies’ section of this website. This has imposed considerable discipline on my investing style, and prevented some of the kneejerk trades that I might otherwise have made.

 

Invest in what you know – A few weeks ago a dear American friend invited me to meet her parents, who were holidaying in Ireland. On learning that I had worked as a stockbroker before, her father discussed some of the shares in his portfolio with me. While I was unfamiliar with the ones he mentioned – I focus my attention on UK and Irish equities primarily – what impressed me was his deep understanding of the companies he is a shareholder in. This was mainly driven by the fact that many of the shares he owns are ones in companies located near to where he lives. As he outlined the range of products a manufacturing company he holds makes, I was reminded of two of Warren Buffett’s quotes – the first being to “never invest in a business you cannot understand“, the second (and I’m deliberately chopping off the end of it) being: “I never buy anything unless I can fill out on a piece of paper my reasons”. While my past experience of covering a range of industries from luxury goods (Waterford Wedgwood) to recruitment (CPL Resources), media (INM, UTV) and transport (ICG) to name but four of the sectors I covered while working as an equity research analyst means that I’ve been lucky enough to have gained exposure to plenty of industries, this advice certainly holds true for me also. I generally steer clear of pharma and biotech stocks (what I know about the science underpinning many of their products could probably fit on the back of a postage stamp!), while my near-Luddite status when it comes to technology means that I seldom venture into that sector. And how have I learned this? Mainly by losing money in stocks (that I still hold) such as Datalex and Datong.

 

Don’t overestimate yourself - This goes back to the hubris issue I mentioned above. While some financial and economic commentators I’ve encountered both on- and off-line like to pretend they know it all, the reality is that if they did, they wouldn’t be spending their time pontificating on blogs. Certainly if I was as good an investor as I’d like to be, I would be living off my profits in the Cayman Islands!

 

Sometimes bad things happen to good people – In addition to trades that are mistimed, misjudged and misguided, there will always be some trades that blow up for factors one couldn’t be reasonably expected to foresee. My heavy losses to date on PetroNeft have been due (chiefly) to technical issues with oil extraction in Western Siberia. And my BP shares nosedived after Macondo – another event I couldn’t have forecast. Such is life. In ‘The Prince’ Machiavelli advised that: “If an injury has to be done to a man it should be so severe that his vengeance need not be feared“. Investors should modify that line and ensure that they’re never so financially exposed to a company that if something goes horribly wrong that it will do them severe damage.

 

Anyways, the above are just some of the things I reflected on while I was in County Wicklow over the weekend. They are not, of course, meant to be an exhaustive toolkit for investors, but certainly some of the reflections will be incorporated into my trading tactics over the coming months. If you’ve any similar pointers that you’ve picked up over the years, I’d love to hear them.

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Written by Philip O'Sullivan

April 8, 2012 at 6:17 pm

Posted in Market Musings

Tagged with , , ,

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