Monday, May 28, 2007

Signs of Irrational Exuberance ?

One of the many signs of irrational exuberance is excessive optimisim in the common man on the street. As retail investors, we are exposed to a myriad of stimuli from our colleagues, friends, peers, relatives, family and the general public. All this stimuli culminate into a general feel of the "ground", meaning the psychology of the market and the optimism level of the people.

In the last week alone, I have had experiences which point to mild signs of irrational exuberance. OK, perhaps we should not use the word "irrationa;" just yet; let's call it rational exuberance then ! The key word I wish to highlight is "exuberance", which means unbridled optimisim and enthusiasm (this is NOT a webster definition).

I have a meeting up with 3 other friends once a month to discuss our lives and investment strategies as well as the market in general. Recently, these 3 friends (2 are active traders and one is a laid-back investor) have expressed much optimism in the Singapore as well as China market. One friend even quipped that she felt like quitting her job just to trade in the market, as anything you buy now will go up ! I cautiously pointed out to her that buying lemons or duds in a bull market can also land one in trouble; looking at the sad cases of GEMS TV (new low of 77 cents today) and OSIM (new low of 68.5 cents). I have also noticed a marked increase in trading activity among the 3, with frequency of trades and number of counters increasing by the month. This is a rough gauge of optimism and opportunism as they wish to catch the "trend" and "ride the momentum". Of course, buying a stock just because it is going up is, according to Mr. Warren Buffett, the stupidest reason to buy a stock. I kept that knowledge to myself as I did not wish to offend anyone at the table.

Another instance was when I went out with another guy friend. Over dinner, he mentioned that he and his 2 other friends have been egging each other on to "buy and buy". This was to capitalize on many money-making opportunities as they traded their way up the stock's price. My friend had made many rounds from a single counter and he credited this to the bull market. Also of mention was another friend of his who supposedly (I can't verify this) mortgaged his parent's landed property for S$1.7 million last August 2006 so that he could pump ALL of it into the market ! As of this writing, he reported that his friend proudly proclaimed that he had made S$900,000 out of his initial investment, giving a return of roughly 50+%. The problem I realized was that people don't see things ni % terms, but rather always look at absolute numbers to judge performance. To my friend, S$900,000 is a lot of money and yes, it is a heck lot of money to most of us who are earning a monthly salary of between S$2 to S$5k. But when one looks at the capital involved, it is just over a 50% gain. I mentioned that his performance was not good if he only managed a 50+% gain during a massive bull run, and my friend gasped in surprise. This actually ties back to the phenomenon where people judge stocks based on their absolute price rather than seeing the value behind an investment. Commonly, I have heard of friends who can pump 100 lots into a 10 cent counter with zero potential, yet only manage a miserly 3 lots on a $2.00 company with a lot of latent potential. To me this is plain skewed ! If the company has value you should simply buy more (as I did for Swiber and Boustead even though they were above $1); buying lots of a DUD company is much worse than buying a little of a fantastic company.

Anyhow, I digress again. There are apparent signs of slight exuberance and optimism and stories of people plonking tons of cash into an over-valued market (let's face it, most companies are either fairly valued or over-valued now). In a major correction, these people are more likely to be subjected to emotions because they were so excited in the first place buying all the way up. Thus, the key is still to purchase after objective analysis, and leave yourself a margin of safety.

Ezra Holdings - CLSA Corporate Access Forum (An Update)

A brief update on Ezra Holdings. I managed to obtain a short report on Ezra from CLSA which held their corporate forum recently. Mr. Lionel Lee, MD of Ezra and Mr. Chan Eng Yew (Assistant General Manager) briefed the analyst who prepared the report. The salient points are:-

1) Ezra have recently (on May 1) opened an office in Aberdeen and this will help it to focus on business in Europe and America. I see this as a good platform and springboard for them to extend their reach beyond Asia, but take note that they face major players like Solstad and Tidewater.

2) It is adding 30 vessels this FY and most will be delivered in 2H FY 2007. Today's BT also featured a full-length article showing Ezra unveiling the Lewek Penguin, which is a 12,000 bhp AHTS vessel. Thus, it would appear that vessel delivery is on track and Ezra's corporate communications is willing to spend the $ to enhance their visibility to the public and to shareholders.

3) The vessels are increasingly catered towards deep-water and Ezra will be bidding for another FPSO in the next 12-18 months. It also started an engineering division in London which will employ and research on technology for deep water capabilities. This point is promising as it shows Management is investing for the future (i.e. FY 2009 and beyond).

4) The company sees good potential in China and hopes to increase contribution there by 10x from US$10 million to US$100 million with enlarged bhp capacity. This point is a little ambiguous as I did not think that China had contributed much to Ezra's top line in the past. What the article is saying is that Ezra plans to grow revenue by 10x, which is a little too ambitious in my opinion. Perhaps a more conservative target could be 2-3x, in order to avoid over-optimism. This is because Ezra has not reported taking any concrete steps to capture a share of the China market, yet the Management seem to be making such optimistic claims. As a shareholder, it is natural that I have doubts on whether they can deliver.

A little note: KS Energy announced today that they are purchasing Norway's Atlantic Oil for US$80 million. This will allow them to diversify their product offering into support vessels as well, thus making them effectively a direct competitor of Ezra. Also, this acquisition opens up new markets for them and broadens their reach. It remains to be seen if the acquisition is earnings-accretive as they did not disclose the earnings for Atlantic Oil (also, I am unable to determine the PER used in the purchase, but it is likely in the low to mid-teens as most oil and gas companies are trading at such multiples on the Oslo Stock Exchange). Thus, this news does NOT bode well for Ezra as they have another potential competitor to contend with.

No comments: