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Diary of a Dumb Investor: everyone says buy BP. I say run

Or at least I did. But I've been grabbed by received wisdom and dealt a stultifying blow.

 
Diary of a Dumb Investor: everyone says buy BP. I say run

Maybe I’m a bit simple. Dumb even. But I just don’t get it. What slippery logic inspired my brother – the former incarnation of the Dumb Investor, now working in the City (geographically at least) – to buy shares in oil-pusher BP? What gulf of knowledge encouraged his foray into this great lumbering calamity of a company? 

Well, you know those spiky financial charts? Take a look at the one that shows the price of oil.  Dumb Investor number one thought he could ride the rising oil price higher. So he bought in at the end of February – this neatly coincides with the summit of the oil price chart, just before it drops steeply. What a clod. 

A 20% share price fall later, what do I do?

With the oil price still falling while the global economy swoons, do I add BP (BP.L) to my growing pile of has-beens? I ditched Lloyds (LLOY.L) and I have just sold out of my US shares ETF for reasons I explained last week. I’m trying to get some cash together so I can buy some winners in the Big Rally, you see.

Where I stood on Monday: Click to enlarge

So I turned to Google again (regular readers may spot a trend here) and I have basically surmised that I need to wait before I sell BP.

The company is trying to offload its part of a Russian joint venture, TNK-BP. And investors, with their revulsion of ‘uncertainty’, are waiting for ‘clarity’ on this front. Then there is the oil spill business, with BP trying to reach a settlement with the US government.

(Incidentally and remarkably considering the American ruckus after oil spill, I learnt from a Bloomberg article that BP is upping the ante in the Gulf of Mexico: ‘BP Plc was the high bidder on 43 leases to drill in the central Gulf of Mexico where two years ago its Macondo well exploded, causing the largest US offshore oil spill,’ the article said. Short memories!)

Also, some of my fellow shareholders think BP could benefit from a bit of a change of business model. Though there is nothing to say this will amount to anything.

Finally, the City spivs say hold on. In fact apparently not one analyst says BP shares are a ‘sell’. Instead more than 30 of them say ‘buy’, ‘outperform’ (¿que?) or 'hold', each in just about equal measure. One says ‘underperform’.

I’m a little bit sceptical of these guys, but still 30-odd – presumably – experienced company analysts versus little me, a toddler of the investment world, still on stabilisers? I don’t feel comfortable with that.

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16 comments so far. Why not have your say?

snoekie

Jun 25, 2012 at 16:27

Nope, a mangy bedraggled tabby cat, once the storm that is about to strike has passed.

Until now we have only heard about the gains or losses. What about the income and what has been done with that? It would appear not reinvested.

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RL

Jun 25, 2012 at 17:02

You need to decide if you are an investor with a 3 year + time horizon or a speculator (anything shorter).

If you are an investor, you should look at the company fundamentals such as cash flow growth, but you can only be reasonably certain these will be reflected in the price on a 3 year+ basis.

If you are a speculator then you should look mainly at momentum and newsflow. If every analyst says buy, I would regard that in itself as a bear signal. Who is left to turn positive? If you are a speculator I would avoid too much research! Too much information is indeed stultifying.

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walkup

Jun 25, 2012 at 17:42

On a drop below 400 you can try a quick in and out, but that's it.

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Frank Watson

Jun 25, 2012 at 17:52

The Macondo well didn't explode. Read the FACTS!

If you arn't in a hurry I would be surprised if there wasnt at least 50% upside in five years time + the divis.

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Ladysaver

Jun 25, 2012 at 17:53

I say dump BP and buy Shell - assuming you like oil & gas, which can be a solid long term hold (if you're thinking long, that is). IMHO BP's in a bit of mess and will take some sorting out for a while. Shell had its biggest mess a few years back with the scandal of mis-stated reserves, which led to changes at the top, a root and branch shake-up of corporate structure and governance, and a better focus on strategy. In the past, Shell has been a bit more parsimonious with dividends than BP but its divs are reliable and as it's pretty conservatively managed, it should IMHO be safer from shocks, risks, and safety disasters of the kind that BP has in recent years inflicted on itself.

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Raj Thamotheram

Jun 25, 2012 at 18:03

The behaviour biases of the sell side analysts on companies like this are well documented

Like this means events which are conveniently described as being "exogenous" and where there is a stong link to "non financials". (What a silly phrase when you think it covers an initial 50% drop in share price!)

For a good case study on these analyst biases re BP see Hersh Shefrin: http://bit.ly/OkVOaU

But there are also buy side biases. It took 2 years for investors to act on the Chair of the Safety Committee: http://digital.utpjournals.com/i/66288/69

What am I saying? Chasing alpha is what have been trained to do (and may be you are (belatedly!) right on this one. But securing beta is something that would serve our customers better. But hey, what do they matter?!

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Rustie

Jun 25, 2012 at 21:30

Bloody hell Raj, who are you tring to impress with that finance babble bullshit? "Behaviour biases"..... "Chasing Alpha"........"securing beta"

You need to get out more....a lot more!!!

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Steve123

Jun 26, 2012 at 00:17

Blimey, what exactly do these phrases mean?

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Steve123

Jun 26, 2012 at 00:20

From Wikipedia:

"Alpha is a risk-adjusted measure of the so-called active return on an investment. It is the return in excess of the compensation for the risk borne, and thus commonly used to assess active managers' performances. Often, the return of a benchmark is subtracted in order to consider relative performance, which yields Jensen's alpha."

"In finance, the Beta (β) of a stock or portfolio is a number describing the volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to. This benchmark is generally the overall financial market and is often estimated via the use of representative indices, such as the S&P 500.

An asset has a Beta of zero if its returns change independently of changes in the market's returns. A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset's returns generally move opposite the market's returns: one will tend to be above its average when the other is below its average.

It measures the part of the asset's statistical variance that cannot be removed by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index."

This hasn't heped much!

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Rustie

Jun 26, 2012 at 08:04

To Steve 123: The techno/finance babble spouted by various and sundry - particularly those who make a living in the financial sector - is used to mask what is in essence ongoing gambling with a veneer of "science" in an effort to hoodwink the gullible into believing that they know what they're doing. Where this is given the lie is in the horrendous losses incurred by these witchdoctors and charlatans who purport to manage your money scientifically. Put simply, it's all smoke, mirrors and bizarre derivatives..........its a con.

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Jack Daniels

Jun 26, 2012 at 10:28

Bore off Rustie. I have no idea what you're even doing on this site if you don't 'believe' in the stock market.

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Christopher

Jun 26, 2012 at 12:12

Ladysaver I'm with you. I wouldn't touch a JVG with the gangsters in Russia and I never did like the TNK deal, the Rosneft deal etc. Shell were legged over in the far east but they have kept theiir Russian business pretty clean and seem to be doing some good work in Kazakhstan.

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Rustie

Jun 26, 2012 at 20:46

Do you live in pseuds corner as well Jack?

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walkup

Jun 27, 2012 at 01:38

Rustie has 99% street cred.

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Jack Daniels

Jun 27, 2012 at 08:37

Rustie is clearly a well drilled and moderately successful troll.

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mike88

Jun 29, 2012 at 14:34

When BP was originally bought I said that it was a bad idea. With market uncertainty surrounding the Company's serious exposure to litigation in the USA the price of BP shares will continue to be depressed even if the Company out performs expectations. BP is not an investment ............it's a gamble and the same goes for Lloyds which sensibly has now been sold.

Holding poor performing shares for too long is a serious mistake. Lloyds has been a basket case for many years acquired mainly by dividend seekers and day traders. No sensible investor should ever hold onto a share just because the price has fallen off a proverbial cliff. If an oiler must be held then the case for acquiring Shell for example is a far better one.

BP is a strong sell in my book.

I hope Dumb Investor Mark 2 will introduce a stop/loss system as that was the greatest single mistake made by his predecessor.

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