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Value Investing Just Cost Me 100% In a Month !

October 26, 2010 | About:
Canadian Value

CanadianValue

210 followers
Every day I look at investments. Sometimes I get interested, and when I do I try to calm myself down. The thing I always remind myself of is that there will always be a better entry price because there is no way that today is the lowest price that company ABC will trade at.

So even if you are interested, buy slowly. Let yourself learn the company as you do. If the worst thing that can happen is that you miss out on one big return then that isn't so bad. Think of the other 90% of the time when approaching investing this way will enhance your returns or save you from letting yourself get excited about a stock and buy too much or too soon.

In mid-September I wrote about a Canadian company called Universal Power (UNX) that has some very interesting leases off the coast of Namibia.

Here was my article:

"Do you like a good story ? Do you want to invest today in the a company that is going to increase 50x in value ? Of course you do. Everyone does.

Somehow I managed to get myself on an e-mail distribution list that results in me receiving regular e-mails about a mystery microcap company that is sitting on oil deposits equal to what Petrobras has offshore Brazil. There isn’t much of a mystery really, by reading the promotion in the e-mail and then doing a search on a couple of key words you can quickly discover that the mystery company is Universal Power which is a Canadian company that holds a lot of acreage offshore the African country of Namibia.

The story behind Universal Power is that the acreage it holds off the coast of Africa is actually closely related to similar acreage offshore Brazil. If you look at how the tectonic plates of the earth have moved over time you can see that Namibia used to be right beside Brazil. In other words this acreage is of the same origin as the giant Tupi field offshore Brazil.

And there is some credibility to the story. Universal Power contracted independent reserve engineering firm DeGolyer and MacNaughton to evaluate just one block that Universal holds. D&M came back with prospective resource potential of 2.39 billion BOE of unrisked and 567 million risked reserves. The blocks adjacent to this are currently being explored by Petrobas and PetroSA. You can imagine what kind of upside there is should these reserves pan out for a company with a $200 million market cap.

So there is something to the story other than hype given the D&M report. And there is a little more to get interested about. Universal is partnering offshore Namibia with HRT Oil and Gas which is run by one Marcia Mello who is a 24 year veteran with Petrobras. He had this to say about offshore Namibia and Universal:

“Dr. Marcio Rocha Mello, President of HRT stated “In most areas of the deep waters from the Brazilian South Margin Basins, exploration has just exploded with the discovery, in the last three years, in the pre-salt sequence, of four of the biggest oil fields found in the whole world. The fields encompassing more than 20 billion bbls of oils of reserves are the Tupi, Jupiter, Guará and Iará, oil fields. As activity has increased in the Brazilian southern marginal basins, it became clear that the African counterpart basins such Angola and Namibia would share similar petroleum systems and also similar hydrocarbon source potential. For example, in offshore Angola, almost 16 billion bbl of hydrocarbon reserves have been found, in the post-salt sequence, in the last 10 years. By contrast, although Offshore Namibia is a significant hydrocarbon province that could rival that of Brazil and Angola, the Namibian offshore basins are entirely unexplored.

Given this perspective, it is worth mentioning Universal’s very prospective concessions in offshore Namibia. Specifically, the blocks close to the Kudu fields where more than two TCF have been discovered about 20 years ago. In those areas, if we compare with its Brazilian counterparts, the petroleum potential could be as much as 2 to 3 billion barrels of reserves. The HRT team dedicated to developing the Namibian opportunity is able to draw on decades of experience in the Brazilian context.”

Since the D&M report came out this spring the stock price has gone from under $1 to $2.50. That report and the involvement of Mello do add credibility. The problem I have is that I came across this through an embarrassingly promotional e-mail that does little to make me think anything other than scam. The delivery of the message reminds me of late night commercials that promise to make viewers instantly wealthy without actually having to do anything.

So hype, hoax or homerun ? I don’t know. Too risky for my money, but it will be interesting to watch. Maybe by writing about it someone will contact me and help me figure it out."

When I found the stock the company was trading at about $2. I bought an tiny number of shares just to track it. I wasn't all that interested, but the involvement of Mello and HRT who are credible was very intriguing to me.

A month has now passed, and I thought I'd check on the stock price as I hadn't been watching. The stock price today is $4.11 !!!

I've got a double in a month. The problem is that I have no real money invested, so it isn't going to make much of a difference.

Did I make a mistake not buying more when I found the company ? My answer is no way. I couldn't tell if the company was worth $1 billion or worth 1 cent.

They have prospects off the coast of Namibia. But this isn't like looking at Penn West with hundreds of thousands of acres in the Alberta Cardium and knowing that that is a resource play where the boundries have been defined (and are being widened). If you have land in the Cardium you have a pretty good idea what it is worth. There are acreage transactions every month by profit motivated and educated acquirers of surrounding properties in the play that can guide you. A big potentially oil bearing structure deep under the water is another matter.

So there you go. I missed a double in a month. I won't even try and calculate the annualized rate of return that implies. Thanks a lot Buffett, I should have been listening to penny stock newsletters instead of you.

About the author:

CanadianValue
http://valueinvestorcanada.blogspot.com/

Rating: 1.8/5 (20 votes)

Comments

yswolinsky
Yswolinsky - 3 years ago
Even with a value stock you can lose 100% of your investment, it is the winners usually that make up for the losers. Without getting too complex as to what risk really is this is one reason I favor diversification.

http://www.valuewalk.com/

prakash123
Prakash123 - 3 years ago
So what if you failed to double, you did not lose. Always remember never lose your money.

A value investor, picks a good stock if it gets to a bargain price, due to market inefficiency or bad news, and holds on to it, till the market finds some correction.

The four laws of value investing,

1. The investor should be able to understand the business

2. The investor should make sure that the business has good competitive advantage

3. The business should have a capable management team, who believe in the business

4. The most important, the investor should be able to buy the business at a good bargain price, margin of safety.

DocMoney
DocMoney - 3 years ago
Yep, Prakash... An understandable business that enjoys a competitive advantage, has capable management and is bargain-priced. You forgot the final criterion - A business that is, for some strange reason, ignored by everyone else!

:)

Sometimes I think that value investing, as originally defined by Ben Graham, is very difficult these days. Those net-nets are just not around that much anymore. Perhaps value investing has morphed into a mixture of GARP, business investing per F Wall Street, market overreaction investing and what I call "Crampon investing" - avoiding big stupid preventable slips.
tkervin
Tkervin - 3 years ago
Anyone who hasn't had this happen to them a number of times........hasn't been in the game very long.
prakash123
Prakash123 - 3 years ago
Can you explain

"_Perhaps value investing has morphed into a mixture of GARP, business investing per F Wall Street, market overreaction investing and what I call "Crampon investing" - avoiding big stupid preventable slips."

a bit.
DocMoney
DocMoney - 3 years ago
Sure. GARP - Growth At Reasonable Price - to me, means an investor knows he is paying fair value for the business but also knows it has good prospects and will likely yield good returns. Example from Buffett: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." One knows he is not exactly getting a bargain, but one still should not overpay... But how much to pay?

For example, business investing, per fwallstreet.com's Joe Ponzio, asks a question: what would a company be worth to a private owner? He suggests not overpaying for the money a business will generate for you, the owner, as measured by cash yield, CROIC and DCF formula.

Market overreaction investing - uncertainty may create bargains for a short period of time. This does not always mean a value guy can necessarily make more sense of the situation - it just means the markets often blow things out of proportion and overcorrect in either direction. Examples - BP/drillers after oil spill, healthcare stocks after reform, defense stocks now and select tech stocks after the tech bubble deflated.

"Crampon investing" is my term for avoiding preventable slips. Not overlooking a huge pension liability, a large pending law suit, rising unmanageable debt, increasing adverse government regulation etc - big red flags that need to be only looked at to be avoided, and then one may do better than the general market that must include all these ticking time bombs.

I try to do all 4, mostly GARP and business investing. Market overreaction investing is difficult psychologically but I am learning. Crampon investing is what I try to use as my baseline.

IceMaster
IceMaster - 3 years ago
Didn't you read my last comment? Maybe this time:

You complain about being unable to calculate acreage worth in Namibia however, as I said before, there's more than one company exploring Namibia; these help to determine a market price for boe/km^2. You also have the valuations of Brazilian acreage that Byron King alludes to in his coverage, also look at the Angolan acreage next door, in fact all the way along West Africa - if you want something closer to home why not check GoM acreage from a few years ago. The numbers are there.

UNX is still cheap, but the other companies like Chariot Oil and Tower Resources are even cheaper.

Buffet may have passed on UNX, assuming he even invested in small cap oil explorers, he would have taken a position in one of the others.
IceMaster
IceMaster - 3 years ago
Chariot Oil released an indepedent CPR today stating EMV of 4.6 Billion GBP. Current market cap 0.29 Billion GBP makes you think...

http://www.chariotoilandgas.com/chariot/media/press_releases/2010/28.10.2010/28.10.2010.pdf
prakash123
Prakash123 - 3 years ago
Thanks for explaining your methodology on;

1. GARP

2. Business Investing

3. Crompton Investing

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