Exactly a month has passed since I ventured head first into a 500-word expose on the virtues of BP’s common stock as a potentially lucrative investment opportunity (see http://www.juliovildosola.com/2010/06/bp-classic-value-or-major-trap.html.) Furthermore, a $25 limit order at was set for a sizeable purchase (by my standards that is), as the stock hovered around $27 to $28.
By now, it should be clear that said price was never reached as the market’s gross overreaction to the Deepwater Horizon disaster came to a sudden halt right around that precise date. Judging whether the recent 35% rise to its current $36 price tag represents a return to investing common sense or simply a further knee-jerk reaction on the part of jittery speculators, might seem to be nothing more than an interesting academic exercise but for me it has served up a great lesson.
Putting aside a considerable, though manageable, sense of regret at the missed opportunity, I take great comfort to see my investment thesis confirmed in such a short space of time. Clearly, companies no matter how unpopular, do not trade at 4x earnings for long, especially not those with rock solid balance sheets and deep war chests.
Whilst there is obviously no price for being almost right, I don’t walk away form this experience “empty handed”. By the way, for those of you who may remain curious, at $36, BP equity no longer has a margin of safety so compelling as to merit a purchase at this price.
The downside to today’s message however, (there’s always a flip side), is that after seeing this once-in-a-while idea evaporate, there are none to replace it. Current valuations across asset classes, and geographical locations assume a return to peak earnings and minimal debt defaults in the near future. Such over optimistic assumptions do not bode well for returns and leave little margin for error.
Given how poorly the odds are now laid out, it’s unlikely that opportunities of BP’s calibre will be on display for all to see. Be that as it may, I’ll continue to keep in mind one of Benjamin Graham’s timeless maxims in the search for winning bets.
“The market is there to serve you, not to guide you”.
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