Friday Reading

Falling Knives

I hope my title has clued you in on the stock in question for today’s first link. If it’s not the first falling knife that comes to mind, think retail, think operating lease commitments, think HMV all over again. Depressingly I suppose that goes for more than a few businesses in today’s market, but the one I was thinking of was Game, which Mark Carter covers rather nicely in his post. Effective leverage (through lease commitments) rears its ugly head again here, as it serves to multiply the ‘correctness’ of any call one makes on the stock  – I’m not really sure there’s a middle ground for Game any more. It really looks like a binary outcome – bye bye to your investment as an equity holder, or a big gain. Either way the current share price doesn’t really look sustainable for any long period of time. I find the whole thing fascinating but am keeping my distance as I really am split. Every contrarian bone in my body wants to think the market is, as it so often does, overestimating the speed of decline in a declining industry. If I’m right, that’s an deeply entrenched psychological error we all make, and is an edge I can use to get one up on the market. At the same time, though, I think Game is a bad business with nothing to add to the market, propped up largely by purchases from less savvy consumers – parents etc. It really is a lose-lose; as I searched for the cheapest place to buy a game the other day, Game came up cheapest, but I wasn’t filled with joy that they are being more competitive – I was just filled with doubt that they can really make any money by undercutting online companies with costs so much lower than them. Not a good place to be.

Nick Kirrage from the Value Perspective also had a good piece on iii this week, discussing primarily how volatility creates opportunities for investors. As usual, his advice is clear, concise, and logically single-minded; to ignore the fluctuations of the market and focus on the fundamentals that’ll create strong long-term returns. He also touched on the dividend/gilt yield crossover – not something which I keep up with or even noted had happened, but a curious factor nonetheless. It certainly is quite a telling sign of investors’ risk appetites when the monumental long-term benefits of equities over gilts are outweighed by the, in my view, relatively insignificant long-term risks. From a capital allocation perspective it’ll always be depressing when that behemoth of inefficiency, the government, is deemed a better place to put your money than in the far more dynamic private sector, on much better terms! Such is the way of uncertainty and the Euro crisis.

Finally, I’ll leave you with 3 posts that’ll set you up with a rather well rounded picture of a business sector that sits in firm value territory at the moment – shipbroking. Richard Beddard’s posts on the shipping cycle, Braemar and Clarksons will see me taking a look at the businesses over the weekend, as it looks like an interesting sector to analyse and rather cheap indeed. The life of a value investor isn’t an easy one, though I shouldn’t complain. Running only a few trades a month certainly sounds simpler than running the thousands a day some professional traders do!

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