MAGAZINE
SPREADBETTING
EDAP IT RIL IO N
The e-magazine created especially for active spread bettors and CFD traders
Issue 27 - April 2014
A Zak Mir Interview Special With THE Master Investor - Jim Mellon
www.financial-spread-betting.com
THE UK’S ONLY FREE ONLINE FINANCIAL MAGAZINE! FUND MANAGER IN FOCUS – THE LEGENDARY “TIGER” JULIAN ROBERTSON
WHERE IN THE WORLD IS VALUE NOW TO BE FOUND?
GULFSANDS PETROLEUM – AN ASYMMETRIC RISK/REWARD STOCK PROFILE
ZAK MIR AIM OIL & GAS TA SPECIAL
AND MUCH, MUCH MORE - PACKED FULL OF TRADE IDEAS FROM ALL OUR CONTRIBUTORS!
Feature Contributors Robbie Burns aka The Naked Trader Robbie Burns - The Naked Trader has been a full-time trader since 2001 and has made in excess of a million pounds trading the markets. He’s also written three editions of his book, “Naked Trader” and the “Naked Trader Guide to Spreadbetting” and runs day seminars using live markets to explain how he makes money. Robbie hates jargon and loves simplicity.
Dominic Picarda Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Tom Houggard Tom Houggard was a broker in the City of London until 2009, racking up close to a thousand TV and radio interviews on the likes of CNBC, Bloomberg, CNN, BBC, Sky TV etc. His specialisation now is investor education and he is one of the few commentators who actually puts his money where his mouth is with live trading sessions. Find out more on www.tradertom.com
Alpesh Patel Alpesh Patel is the author of 16 investment books, runs his own FSA regulated asset management firm from London, formerly presented his own show on Bloomberg TV for three years and has had over 200 columns published in the Financial Times. He provides free online trading education on www.alpeshpatel.com.
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Editorial List EDITOR Zak Mir
Foreword Can you believe that it’s April already?
CREATIVE DIRECTOR lee Akers www.coyotecreative.co.uk
They say as you get older that time speeds up; well, I can certainly vouch for that!
COPYWRITER Seb Greenfield EDITORIAL CONTRIBUTORS Richard Jennings Filipe R Costa Simon Carter Graham Kyle Richard Gill
Disclaimer Material contained within the Spreadbet Magazine and its website is for general information purposes only and is not intended to be relied upon by individual readers in making (or refraining from making) any specific investment decision. Spreadbet Magazine Ltd. does not accept any liability for any loss suffered by any user as a result of any such decision. Please note that the prices of shares, spreadbets and CFDs can rise and fall sharply and you may not get back the money you originally invested, particularly where these investments are leveraged. In comparing the investments described in this publication and website, you should bear in mind that the nature of such investments and of the returns, risks and charges, differ from one investment to another. Smaller companies with a short track record tend to be more risky than larger, well established companies. The investments and services mentioned in this publication will not be suitable for all readers. You should assess the suitability of the recommendations (implicit or otherwise), investments and services mentioned in this magazine, and the related website, to your own circumstances. If you have any doubts about the suitability of any investment or service, you should take appropriate professional advice. The views and recommendations in this publication are based on information from a variety of sources. Although these are believed to be reliable, we cannot guarantee the accuracy or completeness of the information herein. As a matter of policy, Spreadbet Magazine openly discloses that our contributors may have interests in investments and/or providers of services referred to in this publication.
According to the so-called “January effect”, 2014 is not set to be a great year for equities with global stock markets finishing down that month. For those who are not aware of this stock market rule, it is stated that the direction of the first month of the year is a good guide to how it will end. Given that Spreadbet Magazine was “maximum” short going into the start of this year, it can be said that we were ahead of the curve, not only on the proverb, but the markets themselves. However, now that we are past the first quarter of the year, it would appear that we may not need proverbs or historical trading patterns to guide us in terms of what will happen over the next nine months. This is because, even going into 2014, traders and investors were facing the prospects of the tapering of QE policy and a probable rise in interest rates over the following year to 18 months. That was the easy part of the equation. The more difficult issue on both sides of the Atlantic is how the financial authorities will be able to lead us down the road of tighter money without causing painful side-effects. The most obvious course would be to render all the good work of the post financial crisis period since 2007 defunct, as growth collapses along with consumer confidence, and those who are piled into the stock market, especially in the U.S., all decide to head for the exit at once. With the China hard-landing looking ever more likely and Putin attempting to start WWIII, things could get tricky. Hopefully, we have some decent ideas in this issue to help you navigate the always choppy waters… In this month’s edition of Spreadbet Magazine we are privileged to be interviewing “Master Investor” Jim Mellon. With “Big Jim”, we are sharing the experiences and insights of someone who has been an A-list entrepreneur and money maker in the specialist fields of biotechnology, mining and emerging markets as well as fund management, and I hope readers can take something away from his comments. We’d highly recommend popping along to the Master Investor Show too on Saturday April 26th to hear Jim and other speakers, including Richard Reed, co-founder of the Innocent Drinks company. Particularly as SBM readers get in for free! In the rest of the mag there’s a cracking piece on hedge fund legend Julian Robertson – the original “tiger”. Richard Jennings of Titan Inv. Partners has put together another of his always in-depth and insightful pieces on global markets, and, with his main Macro fund up over 40% YTD as we speak, certainly a man worth listening to! Robbie, as ever, adds the humour and I, well, I try to tackle the Wild West that is the AIM Oil & Gas market with five new picks that you can download for free in my new ebook. Here’s to a sunny spring! Zak
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Contents
A Zak Mir interview special with THE Master Investor – Jim Mellon An entertaining and insightful collection of views from entrepreneur and master investor Jim Mellon – a must read!
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As the U.S equity bull market reaches its fifth birthday – where next? SBM takes a look at the issues that have driven the long bull run and asks just how much more gas is left in the tank…
Where in the world can value now be found? A special piece by Titan Inv. Partners on relative value around the globe and how you can position yourself to capture this
The Naked Trader aka Robbie Burns’s Trading Diary This month Robbie takes a look at the good, the bad and the downright ugly of the recent spate of new issues
Sports Spread Betting Corner In the second of our new features on sports spread betting, Sporting Index reveal a potential strategy to follow in this exciting area
Dominic Picarda’s Technical Take – FX Special With equity markets range bound of late, Dom looks to the big FX pairs for potential trading ideas in the months ahead
Master Investor Show preview Richard Gill of Burnbrae Media writes about what attendees can look forward to at the forthcoming 2014 big name investor show and only one worth attending
Hedge fund legend Seth Klarman and the “bubblicious” market Hedge fund legend Seth Klarman has recently made waves with his view on equity markets. SBM takes a look to see how well founded these are
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Zak Mir Monthly Outlook – An AIM Oil & Gas special
Gulfsands Petroleum – an asymmetric risk/ reward offering R Jennings of Titan takes a look at this undervalued oil E&P play
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76 82 86 90 94
Zak offers up 5 AIM oilies that he believes are primed for gains over the forthcoming months. Download your version for free
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Fund Manager in Focus – Julian Robertson Filipe R Costa and R Jennings look back at the original “tiger” hedge fund manager and his methods that have delivered spectacular returns over his long career
Option Corner R Jennings of Titan Investment Partners explains how you can use options to make money in a range bound market
Technology Corner – Cracking the Code Resident tech expert Simon Carter looks at recent initiatives by the BBC & Google to increase the number of students following computing code with 2014 being “the year of code”
Alpesh Patel Special – How I beat the fund managers at their own game! Top performing fund manager Alpesh Patel explains how he turned the tables on the industry in generating exceptional returns for over 10 years now
John Walsh’s Monthly Trading Diary This month John explains some of the important lessons he has learnt since winning the Trading Academy
Markets In Focus A comprehensive markets round-up of under and out performers during the month of March
April 2014
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Zak Mir Interviews - Jim Mellon
A ZAK MIR INTERVIEW SPECIAL -
JIM MELLON
This month Zak interviews a true investment guru - ‘master’ investor Jim Mellon.
Jim started his career as a fund manager at Griffin Thornton (GT), later leaving to set up his own firm managing assets within Asia with Richard Thornton. Just four years later, the business was sold where he picked up a few million before rebasing himself on the Isle of Man. From there, he launched Regent Pacific and, later, specialist emerging markets’ fund manager Charlemagne Capital. Jim also has extensive interests in German property, has run over 20 marathons and is the author of ‘the top ten Investments to beat the crunch’ and ‘cracking the code: understand and profit from the biotech revolution that will transform our lives and generate fortunes’. Zak: Can you tell us a bit about your background Jim, and how you got into biotech? Jim: I was a fund manager for some twenty years, starting my career in Hong Kong with Richard Thornton of GT Management (Griffon Thornton) before then moving to San Francisco. In the early years, and especially when Jayne Sutcliffe and I started our own business back in 1992, it was very exciting. We were real pioneers in the so called “Tiger” markets of Asia, and were one of the first to get into the newly emerging Russian market in 1994; but eventually, I got bored of it, and so decided to branch out. In my life, I try and find undervalued sectors for my next investment “challenge”, and so my first foray was into mining about ten years ago, after that German property (seven years ago) and about three years ago, biotech. Biotech was then out of favour, but it seemed obvious to me that scientific advances and compelling demographics would soon get the sector going again.
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I am still involved in all three sectors. Mining is presently quiescent, but I am on the board of a great mining company called Condor Resources, and am Chairman of another, West African Minerals. Regent Pacific, the fund management company I founded and was lucky enough to have the legendary Sir John Templeton as a seed client, still has mining interests, and I am always looking to do stuff with my partner and friend Steve Dattels with whom I co-founded Uramin. It is fair to say that was a great investment being sold for cash in 2007 for a cool 2.5bn USD! Germany is a large investment for us as part of my private company and trust – Burnbrae. We have, in recent years, been paying down debt and refurbishing our estate and so we are now getting to the key point of receiving dividend flows from our approximately 3000 apartments and a further 300 commercial buildings portfolio.
Zak Mir Interviews - Jim Mellon
“In my life, I try and find undervalued sectors for my next investment “challenge”, and so my first foray was into mining about ten years ago, after that German property (seven years ago) and about three years ago, biotech.” We have many other interests in Burnbrae, but the one I am laser focussed on at the moment is biotech which, despite its three year bull market, remains my favourite investment area at present. Funnily enough, the guy I started work with, Paul Matthews (my first boss!), started his own fund management company in 1992 and I invested in the management company. My modest $10,000 investment has been a spectacular one, with Paul now managing over USD 25bn. It’s good to back your friends (at least the competent ones!) Zak: Over the past couple of years Spreadbet Magazine has interviewed quite a coterie of traders, investors and “personalities” within the investment industry. What all of them seem to have in common is above average intelligence and incredible willpower, and they all are clearly driven in terms of achieving their own particular goals.
Would you say that, rather like an entrepreneur, you either have this disposition or you do not? Jim: In a nutshell, yes. The more liquid the asset, the harder it is to get an edge over fellow investors due to the mass of information out there. Prime example is foreign exchange where there are some smart traders, and also because of asymmetric information flow in many of the big banks that less privileged investors don’t get to see. Although for the most part I get the trends right in FX, my timing is not good! In fact, I think I might just give up FX trading – it makes me only a little money, and absorbs a lot of heartache and time! In contrast, I make good money in shares. I trade both long and short, and also write options. We also hedge out positions with futures. But our operation certainly isn’t Goldman Sachs!
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Zak Mir Interviews - Jim Mellon
“In fact, I think I might just give up FX trading – it makes me only a little money, and absorbs a lot of heartache and time! In contrast, I make good money in shares. I trade both long and short, and also write options.” Zak: Your own path to success has actually been built on relatively conventional foundations – public school and Oxbridge. Would you say that this made it easier for you to succeed, was it one of many factors, or just plain irrelevant? Jim: I really believe in the value of education, both from the perspective of how to actually learn how to think, and, secondly, for networking. So yes, I wholeheartedly recommend university to everyone – I personally loved it. If I had not gone to Oxford, I most likely wouldn’t have been interviewed by Richard Thornton who gave me my first job in Hong Kong. I also do think that it’s much harder for kids these days; the competition is intense, both to get into universities and also to meet the right people for quality and fulfilling jobs. Furthermore, they have to deal with some of their peers (e.g. Mark Zuckerberg) winning in the lottery of life really early on. We could deal with the success of rock stars because very few academics are likely to pursue that route too (Dr Brian Cox excepted!), but contemporaries getting really rich, and really quickly, must be very galling to under 30s today! Zak: In your FT interview a couple of years ago, you confessed to being an “opportunistic plagiarist”. I would imagine part of this provides comfort to people who have not yet amassed a vast fortune and that they could still do so if they copied the right person. Should I just copy what you are investing in from now on and just sit back?! Jim: You wouldn’t see, of course, all that I am investing in, so simple answer here is no. But reading widely, as I do, will certainly allow you to pick up great concepts and learn how to separate the “wheat from the chaff”. Never sit back, is my advice. It’s a recipe for disaster. The important thing also, in being a plagiarist, is that you have to copy the right people.
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That takes social networking effort and a heck of a lot of reading. I regard a good proportion of my job as basically reading and going to conferences. Zak: Would you agree that the difference between the most successful entrepreneurs and the rest of us is the ability to put ideas into action? Jim: I would largely agree with that, yes. However, for those that do make the leap, you still need a healthy mixture of both luck and circumstance. For example, I am currently writing another book, and, yes, it would be easier just to watch a box-set instead. But I have to force myself to get on with it. Not unlike what we used to go through when we had an essay deadline at university. Zak: What do you think are the key traits that make a successful investor? Jim: Hard work, application to detail, narrow focus and a recognition of one’s own vulnerabilities. In my case, it’s falling in love with investment ideas and not realising that it’s unrequited!! Recently, that has been manifested in my conviction that the euro was destined to fall and which of course hasn’t happened. Yet… Like I said, maybe I’ll just give up FX trading! Zak: In order to put one’s ideas into action, you invariably have to delegate to a team. How long did it take you to build a team you can trust, and how do you keep the team motivated through the ups and downs of the business cycle? Jim: My colleagues have been with me for a long time. They know that if we do well, they do well. Also, they have worked with me long enough to know that I am not trying to exploit them, I won’t lie to them and I also want them to succeed enormously. Also, having a small trusted team helps – it’s hard to get really good people. In our core at Burnbrae we only have about 30 people, although our business investments employ many, many more of course. Zak: Were you hurt by the financial crisis of 2007-8 or the Dotcom Bubble, given your new economy and biotech focus, and do you think that there really is such a thing as a “Black Swan” event if you are not over-leveraged/exposed to a particular investment? Jim: I wasn’t really hurt by the GFC because I had learnt my lesson in Russia in 1998, when we lost half of the money we had made in the previous two years.
Zak Mir Interviews - Jim Mellon
“Seriously though, when I was younger I thought that it was OK to attack people on boards and extract value, dressed up as activism on behalf of all shareholders; but now I think that behind the scenes constructive discussion works better. It also helps to own a pub where you can invite people for drinks!!” In 2006, Al Chalabi and I published ‘Wake Up!’ which actually foretold of a coming crash. Obviously, we didn’t do what John Paulson did (sadly!), but it did mean we were more cautious than most. My next crash prediction is in London property, which is the single most overvalued asset class I know, except for social media. Zak: We live in a very media intensive age, what with spin doctors, PR companies and many other superficial/ephemeral aspects. Is this something you regard as a necessary evil for someone in the public eye, or do you simply prefer to focus just on your day-to-day business? Jim: Every company has to communicate to its shareholders, or to potential ones. I believe in the value of honest communication. Some commentators use their platforms unwisely and either try and promote the un-promotable, or use their pieces as thinly disguised attacks on others (mentioning no names!) Zak: Biotech has been, and looks like it will increasingly be, one of the great areas of opportunity for investors. But, given how most of it is “rocket science” to mere mortals, how should the average person in the street position themselves in this area?
Jim: Probably buy a fund with good management. This is a fast-changing sector with many hyped stories and I really believe in active management, of which there is actually very little out there. I am an investor and shareholder in the Magna Bio Fund (Charlemagne Capital) run by Andy Smith and Anthony Chow. A very good team, in my opinion, who believe that UK biotech is undervalued compared to their U.S. equivalents. I am also looking for other opportunities in the UK. So far, we have bought into Plethora and Summit, as well as Pulse Boot. All of them will be at the Master Investor Show on April 26th in London. Zak: One of the characteristics of your own investment approach, certainly from the Regent Pacific days, is to act in an “activist” fashion with target companies that you perceive to be undervalued. This is an investment theme that appears to have gone out of fashion in recent years – do you see a resurgence in the near future? Jim: Yes, I do. Carl Icahn is still at it in his dotage, but I am all peace and love now, and so don’t engage! I could be tempted however – any ideas?! Seriously though, when I was younger I thought that it was OK to attack people on boards and extract value, dressed up as activism on behalf of all shareholders; but now I think that behind the scenes constructive discussion works better. It also helps to own a pub where you can invite people for drinks!!
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Zak Mir Interviews - Jim Mellon
Zak: As we have seen on the AIM market in London, for instance, there are many situations where corporate governance and transparency are not what they should be – do you think this is something the regulators really need to grasp by the nettle? Jim: Yes. Some of the foreign listings have been downright disgraceful. Harsher penalties for the directors responsible for wrongdoings is a must, in my opinion; after all, some of these “rent-a-director” people should know better.
Jim: Without pre-empting my speech in April: gold is a buy, equities are generally overvalued and bonds are difficult to evaluate. I will have some specific stocks to mention at the conference too. My calls last year excluding the euro were pretty spot on so I hope to be as successful again this year. If anyone wants my daily thoughts – JIMMHK at Twitter.
Zak: It is probably the case that most SBM readers would wish to emulate your bank balance, but, at the same time, most are trading on the shortest of timeframes. What is your typical timeframe on an investment, and do you take short-term punts on the markets? Jim: I have no specific timetable, but on average would expect to hold an investment for ten years. Sometimes you just get lucky and things happen much faster, but normally a return of 20 per cent a year is just fine and dandy for me. Capital preservation is also important when you build wealth – you don’t want to give it back. Zak: If there is just one investment SBM readers should be in over the next five years, what would you say it should be? Jim: Subscriptions to every good news and commentary service that there is, and that includes Spreadbet Magazine! Reading widely is the real key to investment success. Of that, I am absolutely sure. Knowledge really is power, but then again being able to filter out un-useful information is also important. Zak: You are to headline Master Investor on April 26th. Are you going to be taking a more optimistic line than last year’s “New Money, Old Problem” story, or do you still see looming problems ahead? Jim: I am part optimist, part fearful, and regular attendees will know that is usually the case every year. But I have some new ideas to share. Obviously not here, as I want all your readers to come. If any readers email rebecca@burnbrae.com, free tickets are on me. And if that isn’t sufficient inducement, then there are a lot of free wine tasting stands! Zak: How do you see the investment landscape panning out over the remainder of 2014? Bullish or bearish equities, gold etc.?
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Zak: What is your view on the current Ukraine situation, given your historic investments in Russia – how does it end? Jim: With a whimper. Russia gets to keep Crimea, but loses a degree of Western investment. There is no way “rump” Ukraine will join the EU, but it will get a lot of support. The U.S. and UK have no appetite for conflict – thank God, after recent forays in Iraq and Afghanistan. Real conflict is much more likely to come in China/Japan or in Israel/Iran. But I am optimistic that we can avoid real trouble here too – the alternative is just as unpalatable for both sides. In Iraq and Afghanistan the “enemies” were no real match for the military might of the U.S. and the operations were largely globally supported. Russia and China are serious foes that will result in diplomacy as a means to influence, and not militarily in my opinion. Zak: Big question: where to, in the future, for Jim Mellon? Jim: New friends, new adventures, but always with the Isle of Man and Ibiza at my heart. I am quite excited about the future – I just wish I had been born later!
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Gulfsands Petroleum Update
GULSFANDS PETROLEUM UPDATE AN ASYMMETRIC RISK/REWARD PROFILE BY RICHARD JENNINGS, CFA TITAN INV PARTNERS
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Gulfsands Petroleum Update
April 2014
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Gulfsands Petroleum Update
After nearly 20 years in the stock market, every now and again you come across an investment offering that has such an attractive risk/reward profile that it can, if things play out, completely transform your portfolio without, most importantly, having to take an excessive amount of concentration risk. They say that investment is all about avoiding losers (and also timing), and I’d certainly wholeheartedly echo this statement from my own experience, but, equally, success in investment is also about finding those trades where the upside far, far outweighs the downside – it is the few multi-baggers that really deliver the excess returns to a portfolio. Recent examples of what we call “asymmetric risk/ reward profiles” in the stock market were Kazakhmys at sub 200p, and of course the entire gold mining spectrum in early December in which we wrote here, with the somewhat unsubtle title of “Why we are mortgaging our grannies?” http:// www.spreadbetmagazine.com/blog/gold-miningstocks-timestamp-41213-were-mortgaging-ourgrann.html of the incredible value that was on offer.
GULFSANDS PETROLEUM CHART
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Needless to say, said granny has now paid off her mortgage thanks to us catching the low for the sector on this piece almost to the day! So, just why do we believe the upside far outweighs the downside in relation to Gulfsands Petroleum? The stock price had recently been forced down to just 29p, with a sizeable seller around that turning out to be Schroders Inv. Management. Quite a decline from the highs of just over 400p at the turn of 2011 before the tragedy that is the Syrian civil war engulfed the country as the chart below relays.
Gulfsands Petroleum Update
One other factor that we feel encouraged by is the composition of the shareholders’ list as displayed below:
“They say that investment is all about avoiding losers (and also timing), and I’d certainly wholeheartedly echo this statement from my own experience, but, equally, success in investment is also about finding those trades where the upside far, far outweighs the downside – it is the few multi-baggers that really deliver the excess returns to a portfolio.” GULFSAND PETROLEUM SHAREHOLDERS LIST We can see from this disclosure that almost 80% of the stock is held by the top 13 shareholders – and which is quite a concentration. Importantly to us however, just over 10% is held by Directors. We have learnt of old that where there is no Director’s alignment in a stock, that the end result is usually bad for shareholders; while vice versa, in contrast, excessively large Directors holdings, as in the case of ENRC, can also be problematic. This is because the minorities can be kicked around, particularly when the concert party holding is over the key 75% level – the point at which you can vote through special resolutions and frankly treat the company as your own.
In GPX’s case, given the balanced “Goldilocks” Directors’ shareholding (not too large and not too small) and the fact that Waterford Finance & Investment, which is owned by Russian investor Michael Kroupeev, and also Soyuzneftegas Capital Ltd. appear to have paid close to 200p per share going by the dates of their stake declarations in 2011, it is logical, in our opinion, that a placing that dilutes existing shareholders is unlikely. Of course this cannot to be ruled out totally, but we believe a scenario in which existing stockholders would be shut out of the ability to participate and so be disadvantaged flies in the face of current vested interests.
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Gulfsands Petroleum Update
In other words, there is no logical reason for a heavily discounted placing with third party investors, and indeed a rights issue is a more likely option in our opinion should a capital raising occur. At the time of writing this piece, the company has yet to release their full year results (we understand 3 April is the release date) and so an accurate handle on the cash balance is not available. We expect to have more comfort the other side of the results regarding any capital raising requirement.
For those readers who are unfamiliar with the GPX story, here’s a very quick overview: The company was, until May 2011, happily receiving handsome revenue from its oil wells in Syria in an area known as Block (26). Indeed the funds derived from here were the bedrock of the Group’s profitability.
“The imposition of sanctions by the EU on the country resulted in a state of “force majeure” being declared on GPX’s operations on the 1 Dec 2011, and, as a consequence of this, for the last two and a bit years, it has not been able to recognise the revenue from its Syrian assets in its accounts.” BLOCK 26 The imposition of sanctions by the EU on the country resulted in a state of “force majeure” being declared on GPX’s operations on the 1 Dec 2011, and, as a consequence of this, for the last two and a bit years, it has not been able to recognise the revenue from its Syrian assets in its accounts. GPX’s partner in the Syrian fields is the Chinese company Sinochem. One important element that it seems the market is not giving the company’s valuation credit for is that, according to the company, GPX continues to accrue its share of revenues during the force majeure period as relayed in this statement made by the company in Sept 2012:
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“At present, GPC are not paying the Group for its share of the oil produced, nor can it currently be accepted by the Group and accordingly no revenue has been recorded from the Syrian operations in respect of the period since 1 December 2011. There is, however, a provision within the PSC that requires a settlement of this figure after the lifting of the current period of force majeure.” There is no official updates estimate as to what this figure is, but at the first half stage in 2012 this was estimated at $55m by Edison Inv. Research.
Gulfsands Petroleum Update
Taking the $25m cash depletion figure, this results in capital facilities available of around $47m at present – enough certainly to get them a good way through 2015, and, we would proffer, hardly indicative of an imminent placing. So, as it stands today, the company is currently placed in the peculiar situation of sitting on an asset that it is presently prohibited from obtaining any economic interest from, but which it recently, in its Corporate Update, described so: “The Company understands that infrastructure in the region continues to be operational with significant production from other fields in the area operated by the central government.”
We can assume with a good degree of confidence that this is a pretty accurate figure given that the analyst would have received this information from company management. Additionally, the company only recently stated: “We are pleased to confirm that the Company’s local staff continue to monitor these important assets; the Khurbet East and Yousefieh fields remain closed in and not producing, and the infrastructure on the fields remain intact with security in place and continuing to be provided by cooperative arrangements between the central government and local communities.” It is a fair assumption that given that the fields stopped producing in late 2011 that the $55m+ interest is a good estimate of the accrual due to GPX at some stage when the state of force majeure is lifted. With a current market capitalisation of circa $75m (as at 3 March), this alone almost accounts for the company’s value. At the last accounts reporting stage in Sep 2013, net cash was circa $57.5m with management stating that they had additional bank resources of around $15m available and so resulting in gross available funds of just over $72m. To be conservative in this exercise, we assume that the company has burnt through another circa $25m of cash over the last six months with the drilling in Morocco and Tunisia in recent months, but stress that this is a rough and ready estimate as there is a dearth of analyst coverage on the stock (something in itself which is an “opportunity” as the wider market is patently not fully appraised of issues within the company, as is the case with other more widely covered stocks).
Our read-through is as follows: as and when sanctions are lifted, an operation that covers approximately 5,414 km2 and encompasses existing fields which have produced over 100,000 barrels of oil per day in recent years will be quite speedily back on-stream. These fields delivered, historically, around $60m of pre-tax profits p.a. to Gulfsands. That is quite a beacon of light at the end of the tunnel. To us, at a stock price of 100p, the “optionality” of a resolution in the Syrian civil war, or even a half-way house where sanctions get lifted, was cheap, certainly when considering that the “core” NAV which ascribes a nominal value to Syria. The “risked” NAV with Syria in at cost makes up as follows: Cash - $45m Block (26) - $102m Chorbane (Morrocco) - $5m Rharb (Tunisia) - $42m TOTAL - $194M With 117m shares in issue and at a current FX rate of $1.67, this gives a risked NAV of 100p At the current price of 40p (time of writing) we think the discount on the stock price is beyond excessive and in fact there is a negative value to this “option”. This is the true asymmetric risk/reward profile that is offered by the stock.
April 2014
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Gulfsands Petroleum Update
Nil value in the calculation of core risked NAV is put on the Gulf of Mexico, Sicilian and Colombian assets in this exercise. The latter, however, could be particularly interesting as its permit on Block (14) is adjacent to fields that have “proved up” reserves of 365m barrels of oil, whilst their Llanos Block 50 licence is located in the mature North Llanos basis and where, 100km to the north-west, Occidental discovered the giant Canon Limon field with reported reserves of more than 1bn barrels. The company states, “At 513.7km2 in size, the block is larger than most blocks in the basin.”
“The latter, however, could be articularly interesting as its permit on Block (14) is adjacent to fields that have “proved up” reserves of 365m barrels of oil.” PROJECTS OVERVIEW The company does, admittedly, need to generate some meaningful revenue from either Morocco or Tunisia in the next 18 months absent Syria coming back on stream, and while the former has proved disappointing from a drilling perspective, it must be remembered that it sits on a circa 34mboe 2P reserves base there, and of course farm-in options are likely open to GPX.
Let’s look at the blue sky scenario however…
A good fundamental case can thus be made that before we even bring in the real “blue sky” prospect of its Block 26 operating once more, that the company is cheap and a financing call has been more than discounted.
We produce below the estimates made by Edison before they ceased coverage of the stock of what a resumption of Syria means to the valuation, and which is in fact based on a slightly lower oil price than that prevailing today.
EDISON VALUATION TABLE
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At the current Enterprise Value, the market is valuing the company on an EV/2P (“proven & probable”) basis of less than 30c a share. That’s right, 30c a share. Aside from the likes of Ruspetro, there is not another listed oil company that we are aware of that has such a miniscule valuation.
Gulfsands Petroleum Update
Once more, when the situation in Syria is resolved (and at some point it must resolve) and Gulfsands are able to operate their fields there again, they are likely to experience a very, very sharp re-rating indeed. Recall also that the company in fact fended off a bid from two Indian oil companies in 2010 pitched at 315p a share as materially undervaluing the company. This is a fair estimate of what a resumption of activities in Syria could result in on a re-rating, albeit tempered with no doubt a heavy political discount. Still, we would expect that their partners or Waterford would probably look to take over the company in its entirety if an IRR north of 30% was offered on a free cash flow to EV basis.
Another key issue in relation to such a move, though, by one of the large existing shareholders is that the balance of shareholding votes lays with Schroders Inv. Management and the new shareholder Richard Griffiths. In the event of a low ball bid of say 70-80p for the company by either Waterford or Soyuzneftegas in concert with the Directors and Abdul Rahman Kayed, they still would not have over 50% of the votes (a level which creates problems for minorities looking to extract proper value). A figure north of 100-120p pre a Syrian resolution is likely to tempt them and of course the more recent speculators.
It is important also to mention that the “exploration” licence over Block (26) expired in August 2012, but management are confident that given the force majeure in effect, that this licence will be extended as and when sanctions are lifted. This is particularly important as the company estimated that the fields contained an additional 405m boe. So, the fact that there is latent value within the Group’s portfolio should be obvious to all. The question now is how to value the potential upside? There are multitude complex ways to do this: from a DCF calculation based on the probability of the Syrian fields coming back on stream and assuming a particular year then ascribing probabilities to success in Tunisia, Morocco, Colombia etc. etc... Truth is that this is all mere guesswork. To us, even the remote prospect of a resumption of oil revenues flowing into their coffers in Syria backed by a very supportive base shareholder register that is (a) not likely to engage in a heavily discounted stock offering and (b) has an aligned and vested interest with minorities in rebuilding value, is sufficient for us to build exposure here whilst ensuring enough free liquidity to actually participate in a rights issue should there be one. The real “wild card” in our opinion is a bid by one of the large shareholders (a completely separate third party bid is highly unlikely given the entry prices detailed above of Waterford and Soyuzneftegaz who know the value in the assets and so would likely want proper triple figures for their stock) for the entire company. This cannot be ruled out and, in their shoes, if I had an inkling of a resolution to the Syrian woes, I would show my hand now while there is still possibly 5-10 times your money left begging on the table.
In conclusion then, and returning to our very opening statement, the shares of GPX present, to us, an intriguing investment mix of a negatively valued option on Syrian assets that are valued at up to £5 per share and an accrued cash pile waiting for remittance that is only slightly less than the current market cap. With exciting prospects in Morocco, Colombia and Tunisia, the reward to us more than compensates for the risk, and we rate the stock a Conviction Buy. We declare that Titan and connected parties hold positions in Gulfsands Petroleum shares. You should not take this piece as an advocation to trade in these shares and should always take professional advice in relation to your own personal circumstances. All Titan Funds operate within a spread betting account which means gains or losses are currently free of tax. However, legislation can change in the future. Spread betting is a leveraged product which could result in losses of some or even all of your initial deposit. Ensure you fully understand the risks.
April 2014
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The U.S equity bull market reaches its fifth year birthday
THE U.S. EQUITY BULL MARKET REACHES ITS FIfth YEAR BIRTHDAY By Richard Jennings, CFA Titan Inv Partners
24 | www.financial-spread-betting.com | April 2014
The U.S equity bull market reaches its fifth year birthday
After hitting the Devil’s number itself, of 666 on March 9th 2009, the benchmark global and U.S. equity index, the S&P 500, has now almost tripled in price, and in the process delivered one of the strongest equity bull markets on record, certainly over the timescale in question. This is all the more impressive as at the nadirs of the GFC and the savage bear market of 2008-09, the stock market’s valuation did not reach the price to book and PE floors of previous mega bears just after the Great Depression and during the stagflation era of the 70s.
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The U.S equity bull market reaches its fifth year birthday
As the U.S. housing bubble became ever more stretched during the mid-noughties, gravity and economic reality was finally asserted with most global financial markets imploding in 2008, and equities in particular being severely punished. The S&P 500 lost, in fact, a whopping 57% of its value between October 2007 and March 2009. If the downtrend was relentless, the current bull market not only obfuscates it now, but also veritably pushes the past into oblivion as the S&P 500 has moved to ever more new record highs.
With the last bull market lasting from October 10, 2002 through to October 11, 2007, or exactly five years and one day, many are asking just how much more this market can run for, especially considering that valuations are not cheap and the market is overstretched on a monthly basis relative to its 17-month moving average as the chart below illustrates. Deviations of this magnitude have always resulted in corrections over the past twenty years (circled points on the chart).
S&P CHART Let’s take a look at the fundamentals behind the market though, to try to understand the current bull market’s dynamics. The present run has been very strong indeed with the S&P 500 gaining almost 180% in five years. Most equity markets around the globe have actually been rising for this last five years, but the pace of growth has been particularly strong in the U.S. with all the main indices showing epic rises.
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A brave investor at the floor in 2009 in technology equities would today be around 3.5x richer as the Nasdaq 100 has recorded one of the strongest rises out of all the benchmark indices – some 250%. Still, even for those more averse to risk, the “traditional economy”, as represented by the Dow, still rose a fantastic near 150%. See table overleaf.
The U.S equity bull market reaches its fifth year birthday
“A brave investor at the floor in 2009 in technology equities would today be around 3.5x richer as the Nasdaq 100 has recorded one of the strongest rises out of all the benchmark indices – some 250%.” Consumer Discretionary, Financials and Industrials sectors were, in hindsight, and unsurprisingly given the beating that they took in 2008, the largest gainers as the near bankruptcy pricing of many of these companies was corrected, and then some.
We can in fact see in the chart below, which is a measure of Industrial Production growth in the U.S., just what a shock to the U.S. economy the GFC was. The decline was second only to the Great Depression.
INDUSTRIAL PRODUCTION CHART
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The U.S equity bull market reaches its fifth year birthday
Even the poorer performing defensive sectors like Telecoms, Utilities and Energy still recorded significant gains.
SECTOR PERF TABLE While American and Japanese investors have reasons to be much happier with the bull run since 2009, in Europe, collectively as a region, the evolution of the bull market has been much milder with the exception of the Dax. The rise experienced in other countries has also been much more limited, including the UK. The truth is that Europe has been experiencing a sluggish recovery with many of the Southern economies still in deep trouble, and, nearly six years after the worst of the crisis, still incapable of closing out a full year with a consecutive year-on-year rise in GDP.
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But, what has really made the difference between the two major economies is central bank policy. Take a look at the chart overleaf which shows the respective rises of both the ECB & the Federal Reserve’s balance sheets. A coincidence that, with the exception of Germany, the U.S. equity markets have performed so well?
The U.S equity bull market reaches its fifth year birthday
CENTRAL BANK BAL SHEETS CHART
“So, low interest rates around the world mixed with bold monetary expansion explain why the bull market has been so strong and for so long. But we believe that there is now reason for concern...” Trillions of dollars have been injected into the U.S., and, since Shinzo Abe was elected Premier in Japan, the BOJ has engaged in the most ambitious monetary plan the globe has ever seen in pure monetary terms in what could be seen as a “last throw of the dice” to turn deflation into noticeable price increases and so, finally, get the money multiplier moving again. Early signs are that it is working, but at the cost of the trade balance so far, which continues to deteriorate due to energy import costs as the yen falls. So, low interest rates around the world mixed with bold monetary expansion explain why the bull market has been so strong and for so long. But we believe that there is now reason for concern… While this bull market is the fourth strongest since WWII, the fundamentals behind it are problematic
.
SHINZO ABE In previous bull market periods after WWII, the U.S. experienced high single digit GDP growth, in particular during the 80s and 90s – coincidence that this also resulted in the strongest and longest bull market in history?
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The U.S equity bull market reaches its fifth year birthday
janet yellen
Similar rates of GDP growth are certainly not the case today. Growth in developed economies is arguably artificial – being generated principally by central bank stimulation through its QE policies. This is not sustainable over the long term, or you ultimately wind up with a banana economy. The impressive price increase experienced in stocks is, in our opinion, a direct consequence of QE monetary policy. As the FED has purchased bonds, yields have been flattened to the point where investors have been lulled into a false sense of security regarding the low discount rate applied to equity cash flows and which so supports higher valuations, or so the bulls would say! But with the rate of trend GDP growth still below 3% in the U.S., we wonder how much longer this market can continue to roll on for if monetary easing ends. And so far, Janet Yellen is now showing signs of stopping…
AAII CHART
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With the promise by the FED to in fact continue cutting the current asset purchase program every month until its extinction later this year, and that has been just under a cool trillion dollars per annum for the last three years, investors will soon be exposed nakedly to the “real” trend GDP growth and, in particular, to earnings’ growth, which is the main dynamic supporting equity prices. With corporate profits at a record high and P/E multiples some way beyond their median, and in fact with tech stocks now back at their pre-2007 crisis level, to us, an adjustment will have to occur. We believe that the risk of the rally ending sooner rather than later is increasing by the day. We leave you with one final chart and ask, precisely who is left to turn bullish?
April 2014
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Where is there value in the world?
where is there value in the world? By Graeme Kyle & Richard Jennings, CFA Titan Inv Partners
32 | www.financial-spread-betting.com | April 2014
Where is there value in the world?
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Where is there value in the world?
Emerging markets have been underperforming developed markets for over three years now, in fact since October 2010. Recent tapering of the U.S. Federal Reserve’s quantitative easing program has hit both currencies and equity valuations in these markets as investor money has flowed back into the developed world, and specifically the U.S. markets where valuations continue to stretch beyond historic norms. In looking at the chart below, savvy investors need to ask how long this shift will last and whether the elastic band has become somewhat stretched now?
There is a strong argument to be made that the sharp de-rating in emerging markets valuations has far more to do with sentiment than fundamentals, and that it could similarly turn the other way just as quickly. Our friends “the anal-ysts” come back into focus here and provide us with the real impending buy signal (remember, collectively they are ALWAYS wrong). Take a look at figure (6) below which measures the effective aggregate percent Buy recommendations on emerging markets’ stocks.
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Notice anything aside from, per usual, their being resolutely wrong at the bottom in 2009? Their collective enthusiasm towards EM stocks is pretty low presently, and, excluding the GFC lows, materially less than their usual median stance. Sell side brokers have thus lost a lot of their enthusiasm for EM stocks over the last three years, a classic contrary indicator and potential Buy signal.
Where is there value in the world?
“Emerging market research produced by the LSE trio Dimson, Marsh and Staunton, going back to 2000, finds that companies that are cheap judging by their dividend yield outperformed by 4.3 percentage points per year, compared to 3.1 percentage points for developed markets.”
It is worth exploding an investment myth at this point. Generally speaking, emerging markets are not suited to momentum investing. In fact, the “value” effect is even stronger than in the developed world. Emerging market research produced by the LSE trio Dimson, Marsh and Staunton, going back to 2000, finds that companies that are cheap judging by their dividend yield outperformed by 4.3 percentage points per year, compared to 3.1 percentage points for developed markets. We certainly believe that widespread investor scepticism about the developing world story is creating pockets of real value in this asset class.
But investment strategy should not be considered straightforward. The BRIC themed approach, so universally popular between 2005 and 2010, is probably no longer applicable. In fact, any multi-year trend will be hard to find, given the macroeconomic and geopolitical backdrop in many regions. We think that a traditional value based strategy is now the correct one to employ. In short, investors should treat EM much more like DM and hunt out oversold, fundamentally sound propositions that carry the least investment risk for the greatest valuation upside.
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Where is there value in the world?
Shawn Tully (Fortune Magazine) recently commented that: “the growing gap in valuations is totally unsupported by the fundamentals. In general, the emerging markets economies are not only growing faster than the developed world, but are growing in a more fiscally disciplined way. The BRIC countries (Brazil, Russia, India, and China) generate 22% of the world’s GDP, and owe only 5% of the sovereign debt ”. He goes on to point out that demographics are another tangible long-term positive with populations that are both younger and growing much faster than the developed countries of Europe and North America. With sovereign defaults now an accepted element of global finance, it is worth expanding on the population demographics point. Fast-growing workforces and rapid growth in urbanisation and tax receipts means that over the longer term many developing countries are in a strong position to cover future interest payments.
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Tax burdens will therefore remain much lower and more of the wealth created by future growth will be re-invested in private sector investment projects. Contrast this to Western nations where fiscal austerity and risk averse banks are starving the private sector of much needed investment capital. Few developing nations shoulder total debt exceeding 50% of GDP. For the emerging economies, Brazil is that stand-out huge borrower with debt to GDP of around 68%. In contrast, most of the big Western economies, including France, Italy, the U.K. and Germany carry burdens of between 80% and well over 100%. Japan’s ratio now tops 200%. Credit Suisse Investment Strategy recently produced an excellent piece of research in which they proposed ten contrarian reasons to turn bullish on emerging markets. The most powerful of these is the collapse in EM non-financials profit margin relative to developed markets as the chart below illustrates.
Where is there value in the world?
We can see that this now sits at a 20 year low and although it is always dangerous to mistake the bottom of the page for the bottom of the chart, there are clear reasons why this should turn. For a start, EM currency weakness is increasing export volumes in countries such as China and Korea. If this trend were to continue, this would help many companies restore their competitive advantage. Also, as a direct consequence of previously rapidly appreciating currencies, the export prices of items such as Brazilian sugar and computer components from India (traded in dollars or euros) rose sharply. That trend hammered the competitiveness of manufacturers in the developing world and gradually turned the battle for market share back in favour of the European and U.S. producers. The trend reversal in currency rates we are now witnessing will systematically improve cost competitiveness against producers based in Europe and North America. Moreover, commodity producers who have reduced costs and cut production volumes will see a classic rebound in operating margins as currency depreciation starts to feed through – the so called “J� curve effect. Plug in stable to rising commodity prices and its easy to see how margins can recover from cyclical lows, improving ROE and encouraging a re-rating of shares.
The removal of liquidity around the globe in recent months has been a major factor in the underperformance of EM equities. Seemingly permanently low interest rates in the U.S. and Europe, to counter first the dotcom slump and then the financial crisis, fuelled a carry trade in which investors borrowed cheaply in dollars to chase higher yields in emerging markets. This has reversed dramatically over the last four years, driven by a recovery in growth in Western economies and now the tapering of QE. Countries with current account deficits, dependent on capital inflows to plug the gap, have been hit hardest by capital flight back to U.S. and other developed markets. Exacerbating this has been the total economic mismanagement in some EM countries. Excessive monetary stimulus in Argentina, India and Turkey caused a dangerous surge in inflation that has led citizens and companies to flee their currencies for dollars and euros. To stem the flight of capital, all three nations have sharply raised interest rates. On Jan 29, the Turkish Government took extraordinary action, lifting the rate on overnight borrowings to a punishing 12% from its previous level of 7.75%. But now consider the chart below.
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Where is there value in the world?
This 25 year chart shows how EM equities outperform developed markets 60% of the time when U.S. industrial production is growing in the range of 0% and 3.5%. The hit-rate is even higher in extended periods of stable economic growth, as this appears to encourage risk taking and lead investors to seek returns from less predictable global regions.
If Western economies continue their benign performance, then, empirically, EM should start to out-perform. Countries that would benefit most include Turkey, Russia and Thailand (see below).
A further catalyst to EM’s potential outperformance is the scenario in which the ECB injects additional liquidity into the eurozone to stave off disinflationary pressures or in an attempt to re-capitalise the banking sector. History tells us this usually leads to increased investment from the eurozone into emerging market assets, in particular the equities and currencies of neighbouring Central and Eastern Europe including Russia, Czech Republic, Turkey and Poland.
The following chart shows how the ECB has shrunk its balance sheet by around US$1tn over the past 12 months and now has the capacity to inject liquidity if this action was required, which it arguably is.
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Where is there value in the world?
So, where does one invest? Russia looks particularly interesting to us. The Russian market has been a screaming buy on value screens for many months now. Before the military escalation in Crimea, it was the cheapest of all emerging markets, according to MSCI, when measured by either earnings or book multiples (a few countries had higher dividend yields). Russian shares were available for less than 70 per cent of their book value on average. Despite this, the Russian stock market has sold off sharply when it became clear President Putin was mobilising troops on the Crimean border. The Russian market is now at barely half its post-crisis peak. This looks like the kind of capitulation that marks the end of a bear market, a classic green light for the value investor. And the saying “Buy when there is blood on the streets� may literally be the case here. Much is also made of the slowing infrastructure investment in China and the knock-on effect on other EM countries. But this only affects countries such as Chile, which is dependent on metals exports. The likes of India, a net commodities importer, should actually benefit.
We would also argue that commodity prices have overshot on the downside and so any stabilisation will allow mining companies that have downsized costs and cut production volumes to recover their operating margins from cyclical lows. This would be a major positive for equity prices. Mexico is also well placed to cash in on the U.S. recovery due to the NAFTA trade block. And well under the radar are some African countries such as Botswana that are enjoying the urbanisation and consumption growth that for so long was China’s calling card to global investors. One caveat, however, is how you treat value screens in emerging markets. The Financial Times notes that corporate governance has generally been worsening in these regions post-crisis. The stocks most obviously cheap on value screens include formerly nationalised energy groups, or Chinese banks (big avoid!), where the issue of governance is particularly acute. Additional due diligence must be carried out to determine the true intrinsic value of a company and in particular the corporate governance track record. Buy value, but avoid the value traps!
April 2014
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Robbie Burns’ Monthly Trading Diary
ROBBIE BURNS’
monthly trading diary It’s simply amazing how many new issues are flooding the market right now. If one was perhaps being cynical, then I am sure this could be a suggestion that many are trying to cash-in while the going’s good. Cynical about markets? At Spreadbet Mag? Surely not?! There are, as ever, the good, the bad and the ugly. Which of course is a “classic” movie I’ve never seen, by the way; is it any good? Back to stocks… I’ve bought one or two new issues recently, pondered on buying a few more, thought one or two might be good to revisit later in the year, and had a good laugh at the cheek of the valuations of one or two.
And we all know what happened to Betfair… AO, of course, went to a massive premium nearer £1.7bn value at a share price of over 400p. AO profits? £8.7m. Betfair’s profits at float? Around £18m.
I’m just a one or two kinda guy. If pushed, I’ll always go for two. So, call this is my Good, Bad and Ugly new issues special... We’ll start with the ugly, then go for the bad, and end up with a bit of good. Which sounds a bit like my dating history, but that’s another story altogether!
THE UGLY AO World Ha, ha, ha!! I have never laughed so much in recent months as I did at the silly valuation of this company. Well, except for Betfair when that was a new issue. In fact, coincidentally, both Betfair and AO were valued at around £1.5bn on flotation.
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Betfair’s share price halved or more in the months after floatation. The same thing is probably going to happen here, in my opinion. At near 400p, this is a massive short. My value on it is half, if that, and which is nearer 200p. I would have thought a market cap of about £500m is right, not £1.7bn. It sells fridges and stuff over the internet, for God’s sake! It’s not about to come up with a cure for cancer or something similarly sexy.
Robbie Burns’ Monthly Trading Diary
Getting a short on, though, is pretty difficult via a spreadbet, but I am trying as I write this! Circassia
It’s an oil services company that has an excellent history of improving revenues and earnings, and I’ve bought some near the float price of 135 with a longish term view.
Ugly valuation. Supposedly worth £500m, but it hasn’t made a penny yet, and not expected to till 2016.
XEROS
What the company does isn’t ugly though: trying to find a cure for cat and dust mite allergy. But it is going to take ages for this to get approved, and in the meantime I think it’s pointless holding them. Interest will die off – one to come back to next year, methinks.
It has a washing system using polymer beads that can cut the price of doing laundry for big users like hotels. Cuts energy and water usage too, so I can imagine how well this could do. But, at time of writing, it hasn’t yet floated, and there is no concrete news on the valuation, so hard to weigh up. What I do buy here is the “story”. There is potential to be an amazing winner in the future, and I am likely to be in, unless the valuation is totally bonkers!
THE BAD
Plenty of potential with this one.
BooHoo XL MEDIA Some of you will already be going “boo hoo” if you bought this at the top near 80p. Sells clothes to young and supposedly “trendy” people. So I have a good idea. Let’s all short it, buy BooHoo clothes, and take our middle-aged and elderly selves out on the streets. The trendy young things will gasp: “The old farts are wearing our clothes! Quick, let’s wear something else.” That should work, right? Anyhow, as I write, it went to a crazy premium at 75p valuing it at over £800m. Profits of £3m are expected to grow to £15m. There is no room here for disappointment – and with fashion being fickle, the youth of today could move on, quickly leaving this one a real boo hoo of a share. The next ASOS? Could be, but it’s already in the valuation, and that’s the problem.
THE GOOD Yes, I think there is some good, and my main fancy is Gulf Marine Services. This should not be confused with mug punter stock, Gulf Keystone! Gulf Marine looks like a sensible valuation. Valued on float at 472m, that looks fair on profits of 72m dollars. In fact, that looks reasonably cheap, and could possibly be another Kentz in the making.
I quite like the look of this one and think this could also be a winner. It’s an online gambling marketing company and its aim is to get traffic for them. A decent looking business, and, again, if the valuation isn’t mad, I might tuck a few of these away. Finally, a look at the two big ones. Pets At Home and Poundland. Both were floated at quite expensive prices, but with these two you can see why. They have plenty of expansion ahead though. People love their pets and will spend whatever it takes on them (well I will anyway), and margins are good. Poundland is expanding abroad and that could drive bigger profits, so both look like a long-term tuck-away. Neither are cheap, but maybe in a year or so it’s possible they will look cheap, and two years down the line there’ be some nice capital gains. The only doubt with Poundland is... how wise is it to invest in a company that can never put its prices up? Hmmm... Before I go, thanks to all the lovely people I’ve met at recent sell-out seminars. My next one is May 12th, so if you fancy a day out with me and live markets, mail me at robbiethetrader@aol.com with “seminar interest SB mag” – I’ll make sure SB mag readers get a discount!
April 2014
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Sports Spread Betting Strategy
Sports
Spread Betting Strategy
44 | www.financial-spread-betting.com | April 2014
Sports Spread Betting Strategy
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Sports Spread Betting Strategy
Sporting Index traders are the best around at making accurate predictions on a massive number of sporting events. With access to huge swathes of data, statistical models and the finest odds-compiling software in the industry, trying to get the all-important ‘edge’ on sports spread betting can be difficult. But it’s by no means impossible. Every type of betting inevitably comes down to opinion. The difference between your opinion on an event and that of those creating the markets is where you can gain an edge.
Villa were hosting on the back of a 4-1 home win over Norwich. There was enough to suggest this wouldn’t be a straightforward affair for the favourites.
Let’s have a look at some recent Premier League fixtures. On 15th March, leaders Chelsea were travelling to 11th-placed Aston Villa.
So while the original supremacy quote was fair, there was ‘value’ in a sell, if you believed this would be tight and Chelsea would struggle to win by a two-goal margin. In the end, Villa won 1-0. Chelsea’s supremacy over Aston Villa (number of goals they would win by) was pitched at 1.1-1.3. The Blues would need to win by a two-goal margin to secure buyers a profit of 0.7 times their stake. At first glance, that seems fair. But Chelsea’s recent away form would have given cause for concern. They had beaten bottom-of-the-table Fulham 3-1 on their last trip, but had failed to win at Galatasaray, Manchester City and West Brom in their previous three on the road.
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The big match the following day, Manchester United v Liverpool, had United’s supremacy trading at 0-0.2. Buyers would need the hosts to win by at least one goal. Yet United had already lost four League games at Old Trafford this season, and Liverpool were lining up on the back of four straight wins in which they had hit 15 goals. Keep a look out for games where the favourite may struggle to make up its supremacy quote, particularly if they have little to play for.
Sports Spread Betting Strategy
“In summary, smart spread bettors are those who can look at a market and accept that traders have done an accurate job of predicting a result, and therefore refrain from betting on it.” One of the advantages of betting with Sporting Index is that you can cash-out your bet, whether in-play, or after a stage of a competition has finished. There are a number of ways this can be used, both to secure a profit and limit a loss. Big tournaments, whether it’s Wimbledon in the tennis, or football’s Champions League, will generally have a warm favourite or favourites that govern the market. On the 31st October, Bayern Munich were trading at 52-55 on the Champions League Outright 100 Index (100 pts awarded to winner, 75 pts runner-up, 50pts semi-final, 25pts quarter-final). Having made the quarter-finals, the German outfit are now up to 63-66. Buyers at 55 can now sell at 63 and make a profit of eight times their stake. Grand Slam tennis tournaments have 128 players in the first round, and the Outright Index will be dominated by those at the head of the rankings. Even players just outside the world’s top ten can be bought for small prices, and, knowing they can make up 25 points for reaching the quarters alone, can be a profitable buy.
In cases where you feel the favourite is vulnerable, you may want to buy a horse with solid place claims. Remember, they will generally pick up 25pts or 20pts for just finishing second, and if the favourite underperforms, there’s a good chance you will scoop a nice pot. In summary, smart spread bettors are those who can look at a market and accept that traders have done an accurate job of predicting a result, and therefore refrain from betting on it. To be successful, you need to find markets where your prediction and Sporting Index’s calculation is different, or where you see value in going against a favourite, or, in contrast, where you believe something has been underestimated.
Is there a player, you think, who can take advantage of a kind draw and find themselves in the quarter-finals, for example, allowing you to cash out a nice profit before they have to take on a heavyweight? Horseracing also offers excellent value for spread bettors. Indices that pay right down to fifth and even sixth place in big-field races, and often four places on high-quality contests, offer far superior terms than fixed-odds operators. It can pay handsomely to find races where there’s a hot favourite that, for whatever reason, is opposable. A horse quoted at 36 on the 50 Index, for instance, would make a profit of 14 times your stake by winning, but even finishing second would incur a loss of nine times your stake.
Both bettors and traders will be hostage to fortune. It’s impossible to predict pre-game a last-minute penalty that might scupper your sell of total goal minutes, or the freak 8-2 scoreline that ruins your sell of total goals. But these can always work for you as well as against you, and are all part-and-parcel of the exciting and exhilarating unrivalled experience sports spread betting provides.
April 2014
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Dominic Picarda’s Technical Take
Dominic Picarda is a Chartered Market Technician and has been responsible for the co-ordination of the Investor’s Chronicle’s charting coverage for four years. He is also an Associate Editor of the FT and frequently speaks at seminars and other trading events. Dominic holds an MSc in Economic History from the LSE & Political Science.
Dominic Picarda’s Technical Take An FX Special The worst of the credit crisis is now more than five years behind us. Economic growth has picked up across the developed world, while inflation remains under control. Investors are increasingly betting on a continuing recovery, switching from safe haven assets like bonds and gold into riskier ones. But is it all for real? While low interest rates and printed money have kept the financial system ticking over, they have also fuelled potential bubbles in real estate, equities and junk bonds. At the same time, the developed world’s underlying problem of over-indebtedness has not been solved. Renewed turbulence in financial markets therefore threatens to catch traders off guard again this year. With further volatility, of course, will come great opportunities. The gains in sterling and the euro are reflecting expectations of ongoing recovery in the UK and the eurozone. But the recovery in these economies is more fragile than it seems. Weaker currencies, rather than stronger ones, are needed in order to keep them on track. So, while further gains may follow in the immediate future, I am looking for big reversals in EURUSD and GBPUSD going forward.
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Dominic Picarda’s Technical Take
“Weaker currencies, rather than stronger ones, are needed in order to keep them on track. So, while further gains may follow in the immediate future, I am looking for big reversals in EURUSD and GBPUSD going forward.”
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Dominic Picarda’s Technical Take
GBP/USD Britain’s economic recovery has taken a lot of commentators by surprise. Originally, many forecast that cuts in government spending would keep the UK’s growth rate enfeebled for a long time. It really hasn’t turned out that way, though. Having grown at 1.9% in 2013, the British economy is set to expand at a 2.7% clip this year. In response, sterling has strengthened to its highest level against the US dollar in more than four years. The make-up of the British recovery is a worry, however. The improvement has relied too heavily so far upon consumer spending and housing activity, and too little upon exports and businesses investing. The strong pound is one problem here.
GBP/USD CHART
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If exports are to recover full-bloodedly, sterling needs to weaken from current levels. Textbook economics puts fair value for GBPUSD at $1.44, well below its recent level of $1.68. In time, I see a substantial drop in GBPUSD happening. For now, though, I would continue to respect the clear uptrend that is in force. An assault on the 2009 highs at $1.7042 could well be seen. A bounce from around the 50-day simple average would make an obvious buying opportunity. Meanwhile, a breach of the 21-week EMA would likely confirm the start of the eventual downtrend.
Dominic Picarda’s Technical Take
AUD/USD Australia is one of the developed world’s greatest success stories of recent years. Thanks in particular to rampant demand for its abundant natural resources from the fast-growing economies of Asia, it has enjoyed uninterrupted expansion ever since the early 1990s. But the recent slowdown in China and other emerging markets is now beginning to make itself felt in Australia. Lower demand and plentiful supply has sent mineral prices sharply into reverse. The Aussie dollar has already dropped by as much as one-fifth from its 2012 highs against its US counterpart.
Things could worsen yet further for AUDUSD looking ahead. America’s Federal Reserve is set to keep paring back its programme of money-printing, which should further boost the US dollar’s appeal. At the same time, there is a real risk that emerging markets suffer a deeper slowdown. In this environment, I expect AUDUSD to weaken below its January trough at $0.866, and perhaps down to $0.842. The current reversal around the 200-day average makes an obvious shorting opportunity, with further possible entries as the price rallies to and recoils at its 20-day average.
AUD/USD CHART
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Dominic Picarda’s Technical Take
EUR/USD Has the eurozone really turned the corner? Things have plainly brightened up in the single currency bloc in recent months. Some of the most troubled economies of all have seen at least some upturn in their fortunes. Spain, for example, saw its first drop in unemployment in February since the onset of the financial crisis. Falling wages in certain economies have eased the eurozone’s overall lack of competitiveness. But such gains are under threat from the buoyancy of the single European currency, which has recovered near to the $1.4000 level for the first time since April 2011.
EUR/USD CHART
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To ensure the eurozone’s comeback continues, the European Central Bank is likely to have to take aggressive action to keep borrowing costs low and weaken the euro. A significant drop to around $1.30, and perhaps more, could well be on the cards once that process begins. A short-term short-selling opportunity would occur upon a crossover of the 13 and 21-day exponential moving averages. I would cover shorts on daily closes back through the first of those lines, re-entering on drops back through it.
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April 2014
Spread Betting | CFDs | FX
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Master Investor Show
The ONLY Investor Show to visit in the UK supported by Spreadbet Magazine For 12 years the Master Investor conference has been one of the highlights of the small/mid cap investment calendar. From speculative oil explorers to junior miners, exciting technology firms to British manufacturers, the exhibition showcases a multitude of investment ideas and opportunities under one roof. Held in the convenient location of the Business Design Centre in Islington, London, this year’s show will be held on Saturday 26th April from 9am to 5pm.
Main stage speakers... Dominating the front of the Master Investor exhibition hall is the main stage, which plays host to some of the biggest and most successful names in the world of investment. The combined wealth of our main stage speakers this year comes in at nearly £1 billion!
According to the Sunday Times Rich List, Jim has an estimated fortune of £800 million and is the 110th wealthiest person in the UK. Previous show attendees will know that Jim is a passionate, entertaining and intelligent speaker, always performing to a capacity crowd.
If there ever was a Master Investor it is Jim Mellon, our headline speaker at this year’s show. For those who do not know him, Jim made his fortune in the emerging markets of the 80s/90s as a fund manager, before branching out into areas as diverse as mining, property and most recently the biotech arena.
Jim is joined by entrepreneur and co-founder of smoothie success story Innocent Drinks’, Richard Reed. He founded Innocent with two friends in May 1999, turning it into a £100m revenue business just eight years later, selling over two million smoothies a week in the UK and Europe. Richard spoke on our “Rising Stars” stage last year, but due to attracting a (more than) capacity audience he graduates to the main stage in 2014.
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Master Investor Show
“If there ever was a master Investor It Is jIm mellon, our headlIne speaker at thIs year’s show. for those who do not know hIm, jIm made hIs fortune In the emergIng markets of the 80s/90s as a fund manager, before branchIng out Into areas as dIverse as mInIng, property and most recently the bIotech arena...”
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Master Investor Show
An ever present and ever popular main stage speaker at Master Investor is Simon Cawkwell, the UK’s best known short-seller, perhaps even better known by his pen name “Evil Knievil.” As ever, Simon will be giving some of his best short selling ideas at the show, along with a few long options thrown in for good measure. Traditionally known for retiring to his dedicated sofa, attendees have the opportunity to meet Simon after his speech. Other Main Stage speakers include author of the controversial Accounting for Growth and Chief Investment Office of Fundsmith, Terry Smith, leading healthcare industry expert Professor Sir John Bell, with one other big name speaker to be announced.
Exhibitors... The heart of Master Investor is the exhibition floor. Here, investors have the opportunity to meet with top company executives, find trading ideas and discuss investment opportunities. What makes Master Investor stand out from other shows is that it provides direct access to the men and women in charge of running their public companies. Represented at CEO and Finance Director levels, attendees can gain unique insights into both current potential new investments. We expect up to 80 exhibiting companies at this year’s show, with those currently signed up including: Manx Financial, Alliance Pharma, e-Therapeutics, Summit Corporation, Plastics Capital, Fastnet Oil & Gas, FXCM, Learn to Trade, Rambler Metals, Oilbarrel, Killik & Co., EMED Mining, Cytox, Fundsmith, Liquid Investments, Synergy Pharmaceuticals, Gensignia, Trovagene, Minesite, Thundelarra, ContraVir Pharmaceuticals, Pulse Boot, Union MedTech, Central Markets, Avation, Condor Gold, Platinum Portfolio Builder, ECR Minerals, Alumni Oil, t1ps. com, Plethora Solutions, Kris Kon, Wealth Training Company, Arrowhead Research, Port Erin Biopharma, Webis Holdings, Alluvia Mining, Miraculins, Regent Markets, LendInvest, MoPowered, Conroy Gold & Natural Resources, West African Minerals, London Stone, Eurasia Mining, Ariana Resources... with many more to be confirmed in the coming weeks... Following a well-received layout change last year, investors are able to take a break, chat to other attendees and relax with a coffee in our special Networking Zone on the exhibitor floor.
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The restaurants, bars and other delights of Islington are also available just a short walk away.
Breakout sessions... If there wasn’t enough to see at the show already, Master Investor also showcases a variety of other investment speakers across breakout rooms and our “Rising Stars” stage. The breakout sessions kick off at 9:15am with our special breakfast presentation, where four hand-picked companies will present their investment cases. Lunch sees the ever popular “Trader’s Session”. Hosted by our very own Spreadbet Magazine editor Zak Mir, this is an hour long session with other top traders including “Psycho Trader” John Piper and charting guru Alpesh Patel. Other presenters during the day include Fastnet Oil & Gas, Thundelarra and show sponsors FXCM. Over on the Rising Stars stage, our more intimate location, headline speakers include Paul Kavanagh, Chief Investment Officer of Killik & Co., and James Fergusson, who has over 25 years of experience as a stockbroker, sector analyst and macro-economic strategist. There is also a multitude of exciting small cap companies presenting, including Plethora Solutions, Arrowhead Research, Aluminum Oil, West African Minerals, EMED Mining, Summit, along with many more throughout the day. Best of all, we have complimentary tickets especially for Spreadbet Magazine readers. Master Investor takes place from 9am to 5pm at the Business Design Centre in Islington, London on Saturday 26th April. Spreadbet Magazine is a media partner of the show, and readers can claim up to 4 free tickets each for the event (worth up to £20 each). To claim your free tickets CLICK HERE and enter the promo code SBM. Hurry though, as we only have 25 free tickets left as part of our allocation, and expect them to go fast!
For more information visit http://www.masterinvestor.co.uk
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April 2014
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April 2014
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Fund Manager in Focus: Julian Robertson
Fund Manager in Focus
By Filipe R. Costa & R Jennings, Titan investment Partners
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Fund Manager in Focus: Julian Robertson
Julian Robertson, along with George Soros & Stanley Druckenmiller of the legendary Quantum Fund, is one of the true titans of the hedge fund industry. A man whose name and money making ability towers over many of the current modern day so-called “hedge fund managers” and who are simply levered, one way beta chasers. Indeed, Mr. Robertson could in fact be described as one of the founding “fathers” of the hedge fund industry. It was Robertson’s superb performance that, in the mid-late eighties, really caught investors’ attention, and was one of the catalysts for fresh money and resources being injected into what was, at the time, a nascent industry. We can trace back to a key article published in 1986 in the Institutional Investor publication which highlighted his strong performance that marked the start of the huge growth experienced by hedge funds. Now aged 81, Julian Robertson is officially “retired” from the fund management game, but, after dedicating the majority of his life to finance and fund management, he will leave behind a legacy to be proud of and is a true legend inside the hedge fund industry. Here at SBM, where we do not give plaudits out freely (!), we believe that he deserves the same kind of prominence as the likes of Warren Buffet and George Soros.
Robertson was born in Salisbury, North Carolina in 1932. The son of a textile company executive and a community helper (his mother), many of the characteristics he has displayed during his life imply much was borrowed from her with a strong sense of community and teamwork being particularly evident traits as we will see. The teamwork element no doubt proved very important as it seems he recognised that there are other brilliant minds out there to work with, and that, collectively, great things can be achieved. Having graduated from the University of North Carolina in 1955 with a degree in business administration, he actually first served in the U.S. Navy before embarking upon his career in finance.
It was in 1957 that he found his first job at Kidder, Peabody & Company (now a subsidiary of UBS AG) and where he was to stay for some 22 years working as a stockbroker. During his career at Kidder he would rise to become head of Webster Securities, then a subsidiary of the company. Having always been a good learner paying sharp attention to what happened around him, Robertson learnt both the buy and sell sides of the business so he could understand it from both perspectives, and that would prove fruitful later when striking out on his own.
Tiger Management – the origins It was at the relatively mature age of 48 that Robertson decided to try his luck at the fund management business. After a small pause in his finance career following some time spent in New Zealand with his family and where he actually wrote a book, he returned with renewed vigour and the financial backing to start the new venture. So, Tiger Management was founded with the modest sum of $8m in 1980. The new company would go on to be one of the most successful hedge fund businesses ever created, growing to be, in 1997, then the second largest hedge fund in the world, with $10.5bn of assets under management – 1000 times the firm’s initial capital.
“The new company would go on to be one of the most successful hedge fund businesses ever created, growing to be, in 1997, then the second largest hedge fund in the world, with $10.5bn of assets under management – 1000 times the firm’s initial capital.” April 2014
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Fund Manager in Focus: Julian Robertson
It was following the end of the gold standard era in 1971 that a new period of financial deregulation was about to commence. As the 80s got underway, the new financial landscape and the start of the “cult of equity” began to attract other companies and investors to the financial markets. In 20 years of trading between 1980 and 1999, the S&P 500 recorded an amazing 18 annual rises and just two declines – the strongest and longest bull market on record. An investment of $1,000 at the start of 1979 would turn into $26,850 at the end of 1999 (including dividends and excluding transaction costs), increasing at a stunning pace of 17.9% compound per annum.
In particular during the 1990s, the hedge fund industry experienced exceptional growth due to this continued bull market.
During the late 1990s, Tiger Management entered a real acceleration phase. In 1996, assets under management amounted to $7.2bn, in 1997 they rose to $10.5bn and in the following year they hit a whopping $22bn. Although in capital mass terms this marked the greatest years of Tiger Management, the late 90s also marked the beginning of the end for the company.
The year of 1997 was a particularly good year for the equity market. The S&P 500 rose around 31% and the frenzy around technology companies was beginning to reach its crescendo. After so many years of stellar returns by Tiger, and after recording a stunning 40% return in 1996 with its flagship fund called “Jaguar”, Robertson began to turn cautious and so began selling part of his fund’s equity positions and so increasing his cash holdings. Timing, as in comedy, is everything however…
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The rise of technology companies during the 1990s attracted new capital to the market and investors reacted to the gold rush in the manner they usually do: rushing to jump-in expecting unlimited upside. Of course that was not to be…
Fund Manager in Focus: Julian Robertson
The S&P 500 continued to push on in 1997, and at the half-year stage Tiger Management was struggling to record a decent return. The onset of the currency crisis in Southeast Asia in 1997 saved the year for the firm, as the large short position that the company assumed in Thai Baht proved prescient and counterbalanced a good chunk of the muted returns from its less bullish equity portfolio. Without the returns reaped from the devaluation of the Thai Baht, profits would have been dismal. The continued rally during 1998 only served to increase Robertson’s suspicions about the future direction for equities. With Robertson’s views and the market dichotomously opposed, Tiger Management struggled to deliver the “alpha” that it had generated so frequently in former years. In what would prove, per normal from the investing herd, to be an act of folly, some of his investors began to withdraw capital from the funds, which in large part led to his decision to close the business in 2000. After closing the business, Robertson retained a portfolio of just six stocks and continued to invest on behalf of key close investors. Now, six stocks is massive concentration; and one of the companies that he insisted on keeping were the shares of U.S. Airways, with which at one point he amassed a stake amounting to some 25% of the voting rights in the company. Ever ahead of the curve, Robertson was right about the upside potential, as in May 2000, as the rest of the equity market was imploding, United Airlines offered $60 per share to acquire U.S. Airways. Sadly for him, an unfortunate mix of events would send the stock tumbling over subsequent months… First, the Justice Department blocked the takeover deal in July of that year, so putting the company in limbo. Then came the terrorist attacks of Sep 2001 that put the whole airline sector on the brink of bankruptcy.
When the market reopened a few days after the attacks, the shares of U.S. Airways were trading around just $4.50 – a fraction of the initial bid level by United. In 2002, the airline would go on to declare bankruptcy and the remaining shareholders’ value was completely wiped out.
Irrational Exuberance The late 1990s were certainly tough years for serious value investors focusing upon company fundamentals. The now infamous Greenspan coined period of “irrational exuberance” had kicked in. Traditional valuation techniques looking at earnings’ growth and at price-earnings’ ratios were substituted by a buy-it-all technique, where, in relation to the “dotcom” stocks in particular that were enjoying a real mania surrounding them at the time, companies were valued by the number of ‘clicks’, ‘eyeball’s’ etc. and a whole new range of substitutes for the traditional bottom line – good old fashioned solid earnings. Sound familiar? It should be, as we are in exactly the same type of environment now with stocks like Facebook and Twitter veritably off the clock in relation to any semblance of traditional valuation. We highly doubt that Mr. Robertson is presently long these! As most of the early stage tech companies had no record of earnings whatsoever, our old friends the “anal”-ysts were particularly creative in finding new ways to value stocks. In the end, companies that had never recorded a profit and never had any chance of doing so were valued as if they were multi-million dollar businesses. Those companies that actually had tiny profits saw their stocks trade at 200, 300, 400x their earnings. Sounds amazing, but it really happened!
April 2014
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Fund Manager in Focus: Julian Robertson
At the then ripe age of 67, Julian Robertson decided that he did not belong to such an irrational world. He understood the dynamics behind the “real” economy, but not the tech frenzy. In a letter to investors just before closing Tiger Management he stated: “As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much.”
“As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much.” The Aftermath…
His words clearly illustrated his dismay and disbelief about the new herding behaviour investors were following at the time. Following the crowd and unquestioningly accepting the huge overvaluations simply was not a rational strategy for Robertson. Problem was that sticking to the correct line and shunning the market was leading to massive withdrawals from disappointed investors greedy to take part in the technology boom. Who can blame him for taking his bat and ball home and managing capital only for his true believers and acolytes? Mr. Robertson was, however, to have the last laugh as the dotcom boom turned to bust during 2000 and 2001 and his views were vindicated. At the time, Robertson wasn’t alone in his views of the so-called “old economy” and “new economy” stocks, with none other than the investment luminary that is Warren Buffet struggling to show decent returns during the late 1990s also. Other mogul investors such as Robert Sanborn, once a top mutual fund manager, found the period difficult, and he resigned from Oakmark Fund after an awful 1999 performance.
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One of Julian Robertson’s and Tiger Management’s real legacies, however, was the creation of something that is close to a hedge fund dynasty: the so-called network of protégés known as “The Tiger Cubs”. Since the inception of his own business, Robertson has helped and encouraged young analysts and portfolio managers to create their own fund management businesses. In 1993, Lee Ainslie left Tiger Management to start Maverick Capital and currently now manages more than $10bn. In 1997, Stephen Mandel began the now well-known and highly respected Lone Pine Capital. In 1999, Andreas Halvorsen founded Viking Global. After closing Tiger Management, Robertson created a network especially for the company’s former analysts and portfolio managers to help them become successful by branching out on their own – basically like a true tiger mother! It is said that Robertson helped seed many of the new funds and also served as their mentor. As of September 2009, Robertson has helped launch 38 hedge funds in return for a small stake in each of them.
Fund Manager in Focus: Julian Robertson
Business Week Dispute One, no doubt, bone of contention for Robertson came about in 1997 when Business Week published the now infamous cover story entitled “The Fall of the Wizard” that was very critical about Robertson’s performance and attitudes. The article was quite overt in its statement: “It is a story of bad choices, grave missteps in high-stakes currency and bond plays, and atrocious management--including the waste of some of the most brilliant analytical brainpower on Wall Street. Above all, it is the story of a man who rose to greatness--only to be foiled by his own over controlling management style and hot temper.” We doubt very much that story would have been published if they had waited for the tech bubble to burst… The poor performance reported in 1997-1999 due to Robertson’s resistance to buying overvalued stocks with the crowd certainly resulted in severe critiques. Criticism that of course later would prove to have been on shaky ground. Robertson actually sued the magazine for a cool $1bn, but the case was later settled without any cash being paid to him.
Philanthropy In returning back to the values instilled in him by his mother, Robertson is now an active philanthropist and serves on the boards of several organisations and universities. He founded the Robertson Scholars Program to give full support to 36 students who study at the Duke University and the University of North Carolina each year. He was also made an Honorary Knight Companion of the New Zealand Order of Merit due to his dedication to the country and to his philanthropy. In 2010 he donated $27m to the New York Stem Cell Foundation to support its research activities.
Final Comments Unlike many other hedge fund managers who have been forced to close their businesses due to awful performance – as is the case most recently with John Taylor’s FX Concepts, and who proved to be no better than a naïve investor – the case with Robertson is rather different. Just before closing his business, he had grown the capital of an initial investor by a stunning 85 fold.
That is not a misprint. He in fact recorded a tubthumping 25% annualised return since the fund’s inception in 1980, beating the S&P 500 return by a decent margin, and most certainly generating the coveted “alpha” for his investors.
“One, no doubt, bone of contention for Robertson came about in 1997 when Business Week published the now infamous cover story entitled “The Fall of the Wizard” that was very critical about Robertson’s performance and attitudes.” Those short sighted and greedy investors that contributed in part to Robertson closing what was one of the best managed funds ever probably regret their decisions now. Of course, in a final irony, almost precisely at the time his fund closed its doors, the technology bubble began to burst and all those stocks valued on a “per click and per potential user” fell back to earth with many being valued ultimately at nothing. Unwise investment decisions that Robertson didn’t understand, or want to be a part of, led to the wise decision of closing to the investing public and getting out on top. Investors like Julian Robertson and Warren Buffet remind us that the real returns are achieved through thorough analysis, in many instances contrarian investing at extremes, having patience and the conviction in your beliefs. All the traits that we endeavor to follow here at Titan Investment Partners with our investment processes.
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Hedge Fund Legend Seth Klarman
Hedge Fund Legend Seth Klarman AND the Bubblicious market The high profile investor and modern day hedge fund legend Seth Klarman has recently been ruminating about the bubble that is forming in the equity market. A stance we have some sympathy with here at SBM as regular readers will be aware of. Klarman believes that tech shares in particular, like Tesla Motors, Amazon, Facebook and Netflix to name a few, are now in “nosebleed valuation� territory.
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Hedge Fund Legend Seth Klarman
In his last newsletter to investors he went as far as to say that he believes “a market correction is on its way”. In looking at the chart of the Nasdaq below over the last five years and its deviation from its 37 week moving average (our favourite measure to assess the under or overvaluation of a market), it is certainly hard to argue with him, particularly given the divergence in price action and the RSI too. An ominous sign indeed when coupled with the valuation backdrop.
NASDAQ CHART SBM is not alone in warning about the growing mismatch between equity prices and their underlying fundamentals. When one looks at the factors that sit behind the current record-high prices, we see red flags all around. Companies trading at 100x earnings multiples, multi-billion dollar valuations without showing a single record of profit, IPOs galore on eye watering multiples, aggregate and near record directors selling in tech in particular. To us it’s plain madness, but of course timing these things is damn near impossible. Picking an exact date for the end of a bull market is just pure luck, but what we are certain of, and history is well and truly on our side here, is that the best of the bull market is certainly behind us and that the risks are to the downside.
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The saying for late comers to this party of “Picking up pennies in front of a steam roller” springs to mind.
“Companies trading at 100x earnings multiples, multi-billion dollar valuations without showing a single record of profit, IPOs galore on eye watering multiples, aggregate and near record directors selling in tech in particular. To us it’s plain madness, but of course timing these things is damn near impossible.”
Hedge Fund Legend Seth Klarman
Investors have, in recent months, been underplaying risk, and it appears are not prepared for the end of what has been an almost unmatched in living memory period of ultra-loose monetary policy. Extraordinary times are coming to an end. Keeping rates super-low for so long has certainly led to wrong investment decisions being made and misallocation of capital as the recent bout of emerging markets’ volatility so acutely illustrated. When the central banks step aside, we expect markets to experience a necessary and deep correction. Before 2014 is out, we would not be surprised to see a rout of 15-20% from peak to trough in the S&P 500 and Nasdaq in particular. In fact, it would be odd if this did not occur. Klarman highlighted in his latest newsletter to his Baupost investors (the company he founded and manages) that “when markets are rising everyone believes the best strategy is to buy the dips but as soon as the market reverses, the mentality changes to “what was I thinking?”. What Klarman means is that retail rarely see the end of a trend and generally run for the hills at the bottom and chase the ambulance at the top. Precisely the method of investment that can only result in losing money. In the long run, aside from us all being dead (!), for equity markets what matters is fundamentals. A company valued at hundred-times its expected earnings cannot be a good long-run investment and it is the first to be brought down when the market crashes. Indeed, the early stage backers of the flotations are the ones who are really clever, flipping these companies on at the most optimal point – Twitter anyone?!
Retail investors generally buy and sell often, with the industry conditioning you to do this. Truth is, the more you trade, the less chance you have of making money. It pays to seek value, invest and then wait patiently as Warren Buffet advises and exactly as is the modus operandi of our sister, Titan funds.
“Any year in which the S&P 500 jumps 32 per cent and the Nasdaq 40 per cent while corporate earnings barely increase should be a cause for concern, not for further exuberance,” Klarman wrote.” In this sense, shares with very high valuations should be avoided, as indeed should the whole market when it is overvalued, which is arguably now. “Any year in which the S&P 500 jumps 32 per cent and the Nasdaq 40 per cent while corporate earnings barely increase should be a cause for concern, not for further exuberance,” Klarman wrote. One could argue that we are in fact experiencing another round of the infamous “irrational exuberance” coined by former Fed Chairman Alan Greenspan in the late 90s. Seth Klarman founded Baupost Group, a privately held investment partnership, back in 1982 and has made his name as a very conservative investor, often holding more than 50% of his portfolio in cash. Rather than buying and selling with the crowd, he positions his portfolio on the sidelines as soon as he smells the smoke rising. Unlike what you may initially think, this strategy hasn’t actually prevented him from generating exceptional returns for his investors. In fact, he shows an annualised 18% return since 1983, and has returned a stunning $21.5bn to investors thus far. He was recently ranked as the 4th best performing hedge fund manager ever, just below Soros, Dalio, and Paulson – hallowed company indeed.
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Hedge Fund Legend Seth Klarman
“Your initial investment of $1,000 would now be $143,370, or 143 times your initial money. Had you put the money in a tracker of the S&P 500 you would have, in contrast, made just 11 times your initial investment.” If you had invested $1,000 with him instead of putting it in the market, just look at what it would have been turned into…
BAUPOST RETURNS Your initial investment of $1,000 would now be $143,370, or 143 times your initial money. Had you put the money in a tracker of the S&P 500 you would have, in contrast, made just 11 times your initial investment. Lesson? It pays to be patient, and, in particular, to bet against the crowd!
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SBM Monthly outlook
SBM MONTHLY OUTLOOK AIM OIL & GAS IN FOCUS One of the more perplexing developments within the Oil & Gas markets over the past couple of years has the been the divergence between the oil price and the shares of those companies that search for and produce the so called “black gold�, and on which, despite great strides in recent years with alternate energy forms, most developed economies still remain highly dependent.
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SBM Monthly Outlook
Whilst the difficulties faced by “Big Oil” of ever increasing capex requirements that are needed to recover resources in more and more extreme locations are plain for all to see, together with the associated environmental pressures and concerns, it remains something of a mystery as to why the small cap players in the sector should have been penalised to the degree they have. Primary reason put forth is the woeful capitalisations of the balance sheets of many of the minnows and the seeming perpetual bogeyman of fresh (and so dilutive) capital raisings. We have some sympathy with this view when one looks at recent events at the likes of Bowleven and many others. The Falklands’ oilies have embarked on a round of consolidation, with Desire Petroleum falling to Falklands Oil & Gas with a merger in the latter’s favour. We expect that similar deals to this will occur during 2014 through 2015 as consolidation becomes the name of the game in order to bolster assets and create bigger balance sheets; that and increasing “farm-ins” by the majors.
What is also odd but, to us here at SBM anyway, offers opportunity akin to that seen in the gold mining spectrum in the last half of 2013, which we were so vocal about at the time, is the propensity for the equity market as a whole to “tar” all small cap E&P stocks with the same brush. This has created a rich stock picking landscape for those investors who are prepared to do their homework and stick to their convictions. The chart below plots the E&Y Oil & Gas eye index against Brent crude since 2008. The EY index is made up of a basket of twenty AIM listed E&P stocks with market capitalisation ranging between £140m and £1.7bn, and as such is an excellent proxy for Small Oil as a whole.
E&Y BRENT CRUDE CHART As we can clearly see, the index has underperformed Brent crude consistently since the spring/summer of 2012, and any sensitivity that the sector has shown to fluctuations in crude prices has been marginal on the upside with the downtrend in full control. Until recently that is.
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Whilst markets have been happy to mark and keep down the share prices of smaller cap E&P companies as a group, those companies that have looked to raise cash have found appetite — a signal perhaps that the market is ready to re-rate the better capitalised companies with good prospects and the ability to see drills through.
SBM Monthly outlook
In 2013 secondary and new issues across both AIM and the main markets in the sector in fact raised a total of £1.175bn of new cash, with the majority of the fund raising emanating from AIM listed stocks, Q4 2013 contained some £212m of new funds raised alone.
Below, in unison with our editor Zak Mir, we list five stocks that have good balance sheets and improving technicals that we think could be in the vanguard of any price recovery in the sector — in fact the last damsel waiting for a dance in this long bull market…
Bowleven (BLVN): Target 47p Stop Loss 32p Year Low / High: 28.5p / 102.5p Market Cap: £105.1m Next Earnings’ Date Due: 20th March, 2014
Recommendation Summary: What with the controversy over its recent rights issue, and uncertainty over whether the company can survive as a going concern, this does not exactly sound like a recipe for a solid fundamental play but, in the case of Bowleven, it could be that with the Cameroon focused explorer we have the perfect backdrop for a recovery. It helps that November’s cash call is out of the way, and the latest update from the Etinde asset offshore Cameroon was positive. The run up to further testing and the passage of time since the autumn fund raising should mean that, along with a general underlying commodity revival, we see at least an intermediate rebound for Bowleven shares. The favoured target on the technical front is, ironically, towards where the stock price was before the collapse through 50p.
Technicals: What can be seen on the daily chart of Bowleven is the way that there has been a descending price channel ruling the roost with a somewhat iron grip for quite some time now.
While we may have had good cause to call the bottom before now, it is probably right that new lows below 30p had to be made before any lasting turnaround could be constructed. At this stage, the best call here is that after two clear legs to the downside since the beginning of November, we could now see an intermediate rebound off the floor of the June descending price channel to take the stock back towards the former December support/50 day moving average zone of 36p over the course of March. Only a weekly close back below the February 28.5p low to date would even begin to delay the bottom fishing argument. This is especially so given the clear bullish divergence in the RSI window since the middle of November when the share price gapped down, and since then as the share price has probed lower. In fact, at this stage it could be argued that the only cause for hesitation was the way that the 20 day moving average at 32p had not yet been broken. But now this barrier is out of the way, the upside target is the top of the June 2013 price channel target at 47p, and perhaps over the next 4-6 weeks.
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SBM Monthly outlook
BOWLEVEN CHART
Recent Significant News: Feb 22 (Reuters): Bowleven announced its IM-5 well in offshore Cameroon has found liquids rich in hydrocarbons in both the Middle and Intra Lsongo reservoir objectives. Nov 14 (Herald of Scotland): Bowleven said it is raising another £13m from investors, but a decision about whether to proceed with its key project off Africa has been delayed. The Edinburgh-based company is raising the money at 45p per share, eight years after it initially tapped shareholders for £55m at 650p per share. Bowleven now expects to make a final decision by mid 2014 on whether to sanction the huge investment required to bring the Etinde asset off Cameroon into production rather than by the end of this year.
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Directors said a further delay to the decision may have implications for the Group’s status as a going concern.. Chief executive Kevin Hart emphasised Bowleven still aims to deliver first gas from Etinde in the second half of 2016. Nov 6 (Reuters): Bowleven said British oil services company Petrofac (PFC) will help it develop its Etinde Permit blocks, offshore Cameroon, and invest up to $500m there. Petrofac said it will provide engineering capability to Bowleven’s Cameroonian subsidiary Euroil to chalk up a Field Development Plan (FDP) for the first phase of development at Etinde, where Bowleven operates three shallow blocks.
SBM Monthly outlook
Fundamentals: Any fundamental look at Bowleven worth its salt would probably have to address the rather controversial issue of the recent cash raising by the company given the way that the November move to raise £13m was not the first time in recent years that the explorer has upset its shareholders as it seeks to bolster its financial position. Perhaps the only real plus point as far as the autumn 2013 placing is concerned is that it was far smaller than the £55m the company sought in 2005 when the shares were way up at £6.50. Indeed, this event reminded us that disappointment has been the watchword over much of recent history at this company, and it is not yet clear whether the fundamental jinx has entirely disappeared. However, the November cash raising aside, it would appear that the newsflow of late has been of an improving nature, a point witnessed in particular by the deal with Petrofac (PFC), announced just before the cash call. In some ways, the announcement in early November that Petrofac is to invest up to $500m in Bowleven’s offshore Cameroon project made it all the more surprising that there was such a negative reaction to the share price in the wake of the call for more spondools.
“I belIeve that sentIment towards thIs stock has been overly negatIve and therefore may stIll take some tIme to recover, even as the news flow Improves.” For instance, even the reaction to the positive revelation that the IM-5 well in offshore Cameroon had found hydrocarbons in the Middle and Intra Lsongo reservoir objectives was only met with a relatively muted response in terms of a share price recovery from below 30p. I believe that sentiment towards this stock has been overly negative and therefore may still take some time to recover, even as the news flow improves. Secondly, given that the bad news/cash raising is now out of the way, we could be now looking at a bargain-hunting opportunity. Such an opportunity exists independently of the latest strong initiatives by the Cameroon government to get oil production levels back up again, with bidding rounds on tap for leading players in the region such as Bowleven. Potentially a bid target at these levels.
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Option Corner
option corner
Using options to generate income in a trendless market By Richard Jennings, cfa Titan Investment Partners
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Option Corner
It’s been a while since we had an option column in Spreadbet Magazine and so this month, in keeping with our “trend ending/listless” overall market outlook, we thought it appropriate to take a look to see how you can generate extra income in a portfolio in such conditions.
Covered Call Strategy Let’s first consider what to do with a portfolio of underlying stocks/CFD positions/spreadbets where you are happy to hold the underlying stocks for the medium-long term but are anxious about a market wide correction that could hit your holdings in the short-term. We would argue that such a scenario is highly applicable to the current environment. Simple issue is to top-slice the portfolio and so build a cash reserve. However, there is another alternate and that is to sell Call options against your portfolio. Ideally you would calculate your portfolio’s beta relative to the underlying option instrument (for example the FTSE) you intend selling, and then sell a percent that you are comfortable with based on the delta of that option.
Here’s an example. Looking at the chart of the FTSE below, we can see pretty clearly that for the last eight months the price action has been contained between 6400 & 6800, with the index reversing when popping outside either of these bands. With the RSI presently falling, and with us now moving towards the seasonally weak May-Aug period, you could therefore decide to sell say the May or Jun 7100 Calls against your portfolio.
FTSE 100 CHART
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Option Corner
If the market did rise above 7100, then one would expect your portfolio to rise with it and so you would be pretty content. If the market did not rise however, and remained listless, or in fact declined, then the premium generated will go some way to offset your losses/generate extra income. Of course the ideal scenario is that your portfolio rises as you have picked such great stocks and the FTSE moves sideways/declines and you win both ways!
“Sod and law” will usually dictate that the opposite happens, but, still, you can see how this works. Here’s a profit & loss profile of a Covered Call write based on an out of the money (OTM) sale akin to what we have illustrated here.
BUY-WRITE CHART Of course, the measure of ‘out of the money-ness’ one can sell an option series against is down to your trade-off between upside and premium receipt. The more out of the money the option is, the less premium you generate but more upside you have until you hit breakeven of the option leg. Incidentally, betas on stocks can be found on free sites like Yahoo Finance and Google Finance.
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This strategy is one that we have in fact been playing at Titan in recent months: selling call options on instruments correlated with our mining plays, for example the NUGT ETF or beta adjusting and selling pro rata options against the S&P or FTSE (depending on the underlying geographic bias of the mining exposure).
Option Corner
Selling a strangle Don’t be put off by the name – “strangle”! This strategy, if used appropriately, can also be a useful one in the trader’s armoury. We’ll start with the diagram in this instance. Again, referencing the FTSE chart too, we can see from the diagram how if one expects the price action of the index to remain contained within the current frame of 6400-6800 that selling both a Call and a Put with strikes of 6400 & 6800 (the month being dependent upon how confident you are that it will remain contained within the range) will generate premium. There is an extra dimension in this strategy, however, in that if the index does fall through the range and it takes your portfolio with it, although you have the combined premium, losses will accrue from the strategy should the index fall through the 6400 (using our example) strike less the premium receipt. For example, let’s say the premium receipt combined is 120. At 6280 (6400 – 120) you would begin to accrue losses on this leg. STRANGLE CHART This strategy is, to us, useful when you are prepared to take on additional exposure at a lower price point. By this we mean that if the FTSE was to fall through 6400 in our example, we would be prepared to buy the index in any event at 6280 or, alternately, close the strategy and perhaps buy more of the stocks in our portfolio.
If you’d like to be exposed to a true retail hedge fund that utilises these strategies and many others in generating returns, all the while within the wrapper of a spread betting account, click the banner below.
The beauty of both strategies is that the wonderful concept of time erosion works in your favour: that is, the option, all things being equal and ignoring volatility for a moment, will fall in value each day as the time to expiry approaches.
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April 2014
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Technology Corner
Technology Corner
Cracking the Code By SIMON CARTER
While some have branded it a PR disaster, the BBC and Google backed Year of Code government initiative is the latest to try and attach itself to the bandwagon that is the coding movement. But how is it that such a generic tech term wound up as a political buzzword? Will everyone and his mother soon be spending their days coding? And, wait, just what the hell is coding anyway?!
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Cracking the Code
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Technology Corner
“All of that said, the word “code” is a vastly generic one that barely scratches the surface of what it’s trying to describe. Not only that, using such a simple word, while seductive, is leading to confusion among those who would quite like to learn but aren’t sure just what it is they should learn, or why.” Open a simple text editor on your computer. Something like Notepad will do. Once it’s opened up write “<html><head><title>Cracking the Code</ title></head><body>Spreadbet Magazine taught me to code!</body></html>” Now, save the file as sbm.htm, close Notepad and double-click on your file. Voila! The file opens up in your web browser, and just like that you’ve coded your first webpage. Of course, it’s not online, it’s not part of a site, and it’s possibly not the best looking of pages, but it’s still a webpage. And there ends your first coding lesson. While the above may be a very simplistic example of coding, it is illustrative in that it introduces the concept of what it means to code. How did your web browser know to write “Cracking the Code” in the page tab, and that snappy sentence on the page itself? It’s because you told it to, in a language it understands. A little bit like telling a dog to “Sit” rather than telling it to “take the weight off, old chap”. Coding is the magic key that unlocks the mysterious world of your PC, your smartphone and the Internet.
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All of that said, the word “code” is a vastly generic one that barely scratches the surface of what it’s trying to describe. Not only that, using such a simple word, while seductive, is leading to confusion among those who would quite like to learn but aren’t sure just what it is they should learn, or why. For instance, the example in the beginning of this piece was a snippet of HTML code which provides the backbone for almost every webpage out there. But to make it look good, you should also learn some CSS. You want your page to be interactive? Best learn some JavaScript (or at least JQuery). You need to collect information or send emails from the site? You probably need some PHP. Those four languages are enough to keep anyone occupied for a good few months and will make you a quite competent Web Designer / Engineer, but if you want to build web applications for your site, you’ll need to start learning Ruby, Python, or perhaps even PERL. If you were hoping to build the next million selling App, then it’s Objective-C for Apple or good old Java for Android.
Cracking Technology the Code Corner
Which is all pretty exhausting, and that’s kind of the point. The first step in coding is not necessarily to join Hour of Code or to look up the basics of HTML, but to think about why you want to learn and what you need to learn. Think about it, sitting and learning an entire programming language that you’ll never use is about as much use as spending the next three weeks learning the native tongue of a long lost Amazonian tribe! Start the right way though, and the possibilities are endless. Imagine having the ability to write a little personalised program to help track and manage your portfolio. Or to create a web app to perform your own personal trend analysis. Or you may even decide to make an Android game based on spread betting the markets. It’s all possible and it’s all accessible. If you know how to knock up a spreadsheet, you’re on your way. There’s no longer any need for you to just use software and applications that other people have made, with a little bit of time and dedication, you can make your own.
“there are, as In the fInancIal world, those who wIll take thousands of your pounds for the prIvIlege of sIttIng In a semInar, but If you have a computer, an Internet connectIon, and a hunger, you’ll be codIng In no tIme.” Of course, we’re all way past our primary school days, so what’s on offer for those who are a little bit longer in the tooth? If you do want a taster of a few different languages, just to see what fits, Code Academy is a great place to start, as is Code.org. And once you’ve picked your code of choice, there are plenty of free online courses out there, some even provided by Universities around the world. There are, as in the financial world, those who will take thousands of your pounds for the privilege of sitting in a seminar, but if you have a computer, an internet connection, and a hunger, you’ll be coding in no time.
And this is why the UK and US governments want school children to start to learn how to code. The fundamental core of any coding language – logic – is something that doesn’t come readily to children (and some adults arguably!), so the theory goes that teaching this, along with a few cool skills, will create a future utopia where the whole population can program their own device. It’s the modern day version of Home Economics.
So coding may not be the answer to all the world’s problems, but if you’ve ever wondered what makes your computer tick, you could be on the verge of an exciting chapter in your life.
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Patel On Markets
Alpesh PATEL The myth of fund managers & how I have beaten them for 10 years
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Patel On Markets
Ever since the press release regarding the software system I designed for trading the stock market, which I have been working with for over 10 years, was released, I have been asked the story behind it. Not surprising really, as it has outperformed over this period no less an investment legend than Warren Buffett, and every other long-only UK company fund manager! The story behind the system is two-fold.
So how do I compete with that?
Like Buffett, it actually helped that I was not a fund manager at a big firm, as I was able to run with fresh thinking. My objective was to avoid all the psychological traps investors and fund managers make, and that is the base recipe as to how I designed the market-beating system.
I developed various formulas, based on years of experience and a great deal of analysis. Not for me: evenings out and holidays! Even on rare vacations, I would be perfecting the formulas I would eventually use. My magnificent obsession! My nickname among my closest friends became ‘Alpy the obsessed’.
As an investment committee member of the Royal Institute of International Affairs, I have to decide the best places in the world to put our money. Her Majesty the Queen is our patron, and so it is a particularly heavy responsibility. These kinds of responsibilities reinforced my desire to pick stocks well. Before I knew anything about the story of Moneyball, I had asked the UK’s largest seller of private investor software if they would create a piece of software for me based on my personal investing criteria. The deal was that they could market it licensing my name, and so call it the ‘Alpesh Patel Special Edition’ of their main software. I knew if I was to beat the biggest fund managers with their teams of analysts, I could not do so by simply trying to outspend them. I could not do so by replicating their strategy too. I had to look for their perceived strengths, and try to outsmart them by turning those strengths into weaknesses. You see, the biggest fund managers are not now, nor have they ever been, very good. They are marketing machines. Statistics show they rarely outperform putting your money in a passive index fund. The reason they are able to market so effectively is that they have so much money under management. Their “success” is not based on their performance. With so much money under management, they can only invest in the UK’s largest companies. Moreover, with so much money, they have to spread those funds across so many of these big companies that they end up replicating an index like the FTSE 100. And then they turn that into a virtue by measuring their performance relative to such an index!
The systems aim was that no one stock that I picked would be the best, but, in composite, my team of stocks would outperform the biggest managers picking their BPs and Shells. I would ignore some of the criteria for picking stocks that conventional wisdom says is important and add ones, which my research showed, would be good predictors of outperformance. After all, I may not be a Yale economist, but I am an Oxford one.
“You see, the biggest fund managers are not now, nor have they ever been, very good. They are marketing machines. Statistics show they rarely outperform putting your money in a passive index fund.” I would thus turn the perceived strengths of the big managers against them, and my perceived weaknesses in my favour. I would not outspend them, but instead I would use computing power – the great leveller.
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Patel On Markets
I’ve been investing since the age of 12 and so would use my experience in knowing precisely what to look for. I saw this as a vocation, while my ‘competitors’ saw it as a job. I live and sleep this stuff, yet they clock off. I would X-ray and dissect thousands of stocks. I would not have billions under management, and so I could pick smaller companies and fewer stocks. My performance would then not simply track an index. I did not have a brigade of assistant managers to meet the companies and the boards I would invest in, so I would have to make sure I analysed their financials in great depth.
The result? In 2004, we launched the Alpesh Patel Special Edition of Sharescope. Since then, year on year, it has beaten the biggest and best fund managers in the UK. In fact, it has trounced them. Not every stock has been brilliant, but, in aggregate, the portfolio as a whole won hands down. How does the story end? In the film ‘Moneyball’ Brad Pitt’s character is offered a multi-million pound contract to play for one of the big teams. He turns it down. He wants to change the game of big money baseball management forever.
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“I would thus turn the perceived strengths of the big managers against them, and my perceived weaknesses in my favour.” How does my story end? You can watch the movie ‘Moneyball’ in the cinemas. A ticket costs around 10 pounds, or you can buy my software from www.investingbetter.com/sharescope – it costs around 100 pounds a month. My annual performance track record is laid bare for all to see. I could have worked for Goldman Sachs. I prefer not to. I do not charge you 2% to manage your money. You have the software and the power in your own hands. Has the game of big money management changed forever? You decide. Me? I’m still waiting for Brad Pitt to play me in the story of my Moneyball. Alpesh B Patel
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John Walsh’s Monthly Trading Diary
john walsh’s Monthly Trading Diary Lessons I’ve learnt since winning the Trading Academy
Well, here we are again, another month gone and into spring – can you believe it?! They say “time flies when you’re having fun” although, truth be told, I’m not having that much fun at the moment! Hey ho, that’s how trading goes sometimes… This month I want to talk about what I think are a couple of important points that I have learnt since winning the Academy, and which I believe are key to being a successful trader for the long-term. They are key points that actually sometimes get overlooked by new traders.
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John Walsh’s Monthly Trading Diary
1. Knowing that you actually want to trade – This is really important because if you haven’t the personality profile (think meek, mild, risk averse), then how can you expect to be successful at it? From this profiling of yourself then it is down to what asset class you want to trade. Is it Forex, Indices, Stocks, Commodities or any of the other instruments that can be traded these days or even a combination of some of them? FX is real seat of the pants stuff, and indices, as followers of my last task at the Academy will know! Stocks, a little more sedate (if that’s the right word!!)
To start with, I closed two long running positions at a loss: they were Mondelez International (MDLZ) and Colgate-Palmolive (CL) – the latter was my longest running trade which I had held since the end of October. It was not going anywhere so I decided to close it. I also got stopped out (again!) with my Green Mountain Coffee Roasters (GMCR) trade for my biggest single loss to date, and I also manually closed my Michael Kors (KORS) trade at a small loss. It wasn’t all doom and gloom however (thankfully!), as I closed some previously mentioned trades – Red Hat (RHT) and Walt Disney (DIS) – both at a profit.
2. Knowing the timeframe in which you want to trade – How long do you want to hold positions: do you want to be a day trader, in and out throughout the day scalping a few points here or there, a so-called “swing trader” where you hold positions for a few days before closing hopefully at a profit, or do you want to be a “position” trader where you hold for weeks or even months hoping to capture gains from the big moves?
Regarding my current running trades, they are all new positions which have not been previously mentioned and which are all long positions, and I’m looking to hold ‘em through the current market downturn. They are Akamai Technologies (AKAM), Monster Beverage Corp (MNST), Walgreen Co (WAG), FleetCor Technologies (FLT) and General Dynamic (GD).
The answer to those two points can take a little time, mainly through trial and error, but once you can answer those then you will start down the right path. Moving forward, once you have been trading for a while it becomes pretty obvious that you must have a strategy; no point just throwing darts at a dartboard hoping for the right trade to come along. As the saying goes, “fail to prepare, prepare to fail”. One of the most important, if not the most important, parts of any trading strategy is trade size: knowing how big your trade should be with respect to your trading account is crucial, as you don’t want to blow your account through trading too big when the market turns on you (which it can and I’m certain will do at some point). If you have no money left in your trading account, then you can’t trade, which brings me to another important point: always try to preserve cash in your trading account. So, have a strategy that fits the asset class you’re trading and that fits with the timeframe that suits your personality, and have the discipline to stick with it. With respect to my own trading this month, it’s been pretty much the same as the previous month (basically not that great). The situation in Ukraine has everyone walking on eggshells and is causing a serious lack of confidence in the markets.
I usually like to hold around eight positions, but as I have increased my trading size slightly I thought it best to bring down my number of holdings. So, regarding my trading for the last six months that I have been keeping records of for my ‘Rolex Trading Challenge’, at the time of writing I have made 49 trades, with 28 being winners and 16 losers, and, as previously mentioned, I currently have five running which leaves my trading account including dividend payments and rollover fees (which I had not previously mentioned) at a positive P’n’L of 7%. This is the second month my account has had a drawdown in a row, but after the way the market has been treating us and considering my increased trading size (I have to admit, it might not have been the best time to increase my trade size, only time will tell on that one…) I’m still very pleased to be in the black, as I’m sure there are plenty of traders who are not. That’s enough from me this month, please continue to follow me on Twitter @_JohnWalsh_ where I keep everyone up to date with my trades as I open and close them, be it at a profit or loss, and any thoughts I have regarding trading in general. I’m also happy to talk to other traders anytime. Remember: you control the trade; the trade does not control you. John
April 2014
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Markets In Focus
MARKETS IN FOCUS MARCH 2014
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Markets In Focus
April 2014
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MAGAZINE
SPREADBETTING Thank you for reading. We wish you a profitable April!
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