Close, but no cigar!

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”.

Reading for results

As a young kid I never quite saw the fun in reading and books were not the most rewarding of birthday gifts for a 10 year old. Despite being surrounded by some keen bookworms in the family, most notably my father and elder brother, it was not until my late ‘20s, early 30s as I settled into married life, that the “bug” caught on.

Having said that, once it caught on, there was no going back. In more recent times, some 30 to 35 books per year have been perused, analysed, underlined, read and sometimes later quoted. It may be a cliché, but I honestly and whole-heartedly agree with those who claim that reading makes one a better investor. Just as importantly, it seems that business and investing books do not suffice and it takes a more rounded bibliography to “do the trick”.

A recent article detailing a conversation between Charlie Munger (the other half of Berkshire Hathaway’s phenomenal management duo), and renowned value investor, Li Lu, drove this point home eloquently as it referred to Mr Munger, 86 years old the time of the interview, “as someone who is never found without reading material”. Appropriately, these materials cover all manners of science and other field such as sociology and history.

Mr Munger is not alone in his approach. Virtually all successful investors claim to spend a disproportionate amount of time reading, some surely to tune out the “noise” from other sources of “mis”-information like CNBC or their ubiquitous Bloomberg terminals, others more likely to expand their cumulative knowledge base. In this respect I found an amusing reference shared by an anonymous fund manager who after being invited to spend a week of his summer holidays in the vacation home of Bill Ackman (of Pershing Square Capital), gave the following account of Mr Ackman’s holiday routine:

“he reads financial statements all day, as he always does”

Surely reading on its own is not enough.

Entering what Charles Ellis labelled the “Loser’s Game” in his eponymous book and expecting to emerge unscathed requires both a thorough understanding of business dynamics coupled with a cool and detached mind. Whilst the latter is hard to acquire due to its intrinsic nature, the former is not so and can be gleaned from our daily professional experience and supplemented with masses of reading.

Approaching the investment universe as a search for temporary pricing anomalies to be exploited constitutes the essence of value investing. I for one, see no better way to identify these valuable opportunities than to scour multiple data sources with the help of a rounded, well read and inquisitive mind.