My take on BP

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My take on BP

Post  Max on Thu Jul 01, 2010 9:49 pm

First compare to history:
http://en.wikipedia.org/wiki/Exxon_V..._cleanup_costs

Exacerbating factors:
1) Exxon Valdez disaster cost approx $5B. BP disaster is almost certainly several times worse.
2) Political green movement likely to pressure government to take excessive action like dramatically increasing penalties retroactively
3) Current uncertainty over how the well will be plugged
4) BP has lost a lot of oil that could have been sold, and it will be very difficult for them to return the well to production.
5) Potential divided cut to fund cleanup costs

Mitigating factors:
1) BP was not entirely to blame. Transocean owned the rig, BP likely had partners on the well which may share a significant portion of the cost.
2) BP will recover some of the cost from insurance (the limit of liability is uncertain and probably insignificant compared to BPs total cost)
3) All BP's costs are tax deductible
4) Costs will be spread over many years, and the highest concentration of cash outflows will be right now as they plug the well, and many years in the future when the final court decision is made.
5) BP's financials are strong, and they have the ability to raise enough cash to fund the cleanup costs through asset sales, dividend cut, or stock or debt issuance.
6) New tax on all oil companies will pass the cost on to consumers while appearing to bill the oil companies. In order for BP to be penalized, the cost would have to be levied against BP only.
7) Downside price protection from dividend % yield (currently 9%), potential buyout by other oil companies, and Book Value per Share ($33).

Predictions:
-Dividend will be reduced temporarily.
-Price will continue to fall short term
-Government will raise the limitation of liability for oil companies retroactively to a surprisingly high amount
-The final bill for BP will be far less than anyone anticipated
-Life will go on and BP stock price will rise again, and deep sea drilling will go on under higher safety restrictions.

Max
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Re: My take on BP

Post  Max on Sat Nov 20, 2010 11:10 am

BP RETROSPECTIVE ANALYSIS

This is my first big trade working with the averaging down strategy rather than trying to time the bottom, so I want to review some of the things I learned from it. I finally had a large enough account balance, low enough commissions, and the right opportunity to make this trade happen.

A detailed price history of purchases/sales was:
Purchases
May 03/2010 100 48.64
May 14/2010 100 48.20
May 25/2010 90 44.28
May 28/2010 100 43.34
Jun 01/2010 100 37.49
Jun 08/2010 100 35.00
Jun 09/2010 200 31.94
Jun 17/2010 200 32.68
Jun 22/2010 100 30.45
Jun 25/2010 90 27.55

Sales
May 04/2010 100 51.59
May 27/2010 100 47.47
May 27/2010 90 47.47
Jun 17/2010 200 32.68
Jul 12/2010 100 36.21
Jul 12/2010 100 36.21
Jul 12/2010 100 36.21
Jul 12/2010 90 36.21
Jul 12/2010 200 37.50
Jul 12/2010 100 37.50

You can see from this that for the most part I got pretty lucky at first trading a few quick swings. If I had committed all my investment at the first price I started buying (which at the time I felt was a great price), I would have been hurt pretty badly. Still this is why I felt so strongly that it was a good buy as it got lower and lower. I broke my own rules and started ramping up my purchases once it broke through book value, because at that price, it was just ridiculous. And it kept going right down to the point where I didn't have enough US cash to buy any more shares (and didn't want to have any more US$ exposure), and beyond down to $26.75.

Could anyone have predicted it would go that low looking at the current price of $42? What if it never got that low and went down only to $35 before the turnaround? Basically you have to determine at which price it will generate an acceptable profit based on your analysis/sell target and use that for a reference.

Based on my original analysis, I was expecting BP to issue debt, sell shares, whatever it takes to raise the cash to pay for the disaster, which I felt they had adequate room to do. Instead, they sold off assets which would have produced income for many years to come for a one time cash infusion. This is why I think my initial purchases at $48 were justified even though the current price has stabilized at $42, is because it was based on a different (larger) company than it is now.

So, in summary, it wasn't a huge outsized gain like some of these junior miners. But I think for the amount of risk taken (based on my analysis, very little), I did pretty well. (I have to give some credit to Adam to pointing out the stock to me in the first place and the difference in Market Cap vs. potential cost.)



Here is a summary of my profits on BP and demonstrates how I track investments. I am concerned with tracking each individual buy order separately to see if it was a good decision or a bad one. What I learn from this is I got in way too early, and it was only those last few trades at the bottom that made all the profits to pay back the early losses. What did I learn from this? Unless I can reliably predict the bottom, early losses are just the cost of doing business. As long as I could keep averaging down in regular intervals based on an analysis I believed in, I hoped everything would work out OK. Its hard to have the stomach to see those losses piling up and keep throwing more money down the drain.


There are a few problems with this report:
1) I have a problem consolidating information about the cost, because I basically used the same funds over and over again so it does not make 100% sense to sum the ACB to determine the total ACB and the 5% aggregate % gain can be misleading (lower than it should be). Therefore the annual gain is perhaps the easier # to follow.

2) I have had to average the # of days each trade was held weighted based on the $ amount of ACB, so higher dollar value trades will skew the annual % gain more than lower dollar value trades (but I think this is logical).

3) I don't have price data. Prices for me are for day to day analysis, not for summary reports like this.

4) I am not tracking idle cash. I feel tracking idle cash is very complicated because of the definition of idle cash. Bank balances outside of trading portfolio, cash in your wallet, etc... If you are only counting cash in your portfolio, then you can cheat by transferring the idle cash outside of your portfolio. I haven't come up with a good way to factor this in, but the point to take away is that the annual return shows as if funds were fully invested for the entire year (which they were not). The real annual return should subtract some amount for the idle cash.

5) I am not tracking profits until I sell. There may be other unrecorded profits and losses not reported. I can just continue to hold the stocks and avoid reporting the losses forever. This is just personal preference. I prefer to think of unsold stocks as though the income earned does not exist until it is sold. This keeps me thinking constantly about selling.

Sell Date#Buy Date#ACB#Abs Gain#% Gain#Avg Days#Annual % Gain
5/04/10# 5/03/10# 4,872.22# 279.04# 6%# 1# 2090%
5/27/10# 5/14/10# 4,827.25# (83.38)# (2%)# 13# (48%)
#5/25/10# 3,991.79# 277.35# 7%# 2# 1268%
6/17/10# 6/09/10# 6,394.40# 142.49# 2%# 8# 102%
7/12/10# 5/28/10# 4,340.95# (721.69)#(17%)# 45# (135%)
# 6/01/10# 3,755.95# (136.69)#(4%)# 41# (32%)
# 6/08/10# 3,506.95# 112.31# 3%# 34# 34%
# 6/25/10# 2,486.45# 770.71# 31%# 17# 666%
# 6/17/10# 6,536.89# 948.67# 15%# 25# 212%
# 6/22/10# 3,051.48# 683.76# 22%# 20# 409%

### 2,272.58# 5%# 20# 96%

Maybe the most reliable # is the absolute gain. No playing around with this, if you are +, you are doing good and if you are - you are not.

Still I want to answer the following questions with my report:
1) Did I make money?
2) Did I make a good return on invested funds compared with fixed income investments (GICs)?
3) How does my return compare with other investments I have made?

I think the annual % solves most of the issues regarding comparability.

Max
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Re: My take on BP

Post  lukera on Sat Nov 20, 2010 4:43 pm

Well max, I went overboard on my calculations so I think I am off base.

I figured out an average gain of 3.92%. the problem is if you just take the sum of the total shares bought X the current market value when they were bought and divide it by the sum of the total shares sold multiplied by the current market value when sold it works out to be 5.6%.

I will email you the excel file I used to do this...if you think it works i'll post it up.

Also, I only answered 1 of your questions. The answer to question #1 is Yes Smile

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Re: My take on BP

Post  Max on Sun Nov 21, 2010 12:54 pm

One concern with the spreadsheet you sent is that you are averaging the % returns for different periods of time. However, this is not considering equal bases, so returns on smaller $ investments are weighted equally with larger $ investments.

100 shares of ABC x $50 = $5000. This earns a $100 return or 2%
500 shares of XYZ x $1 = $500. This earns a $50 return or 10%.

Average return is (10% + 2%) / 2 = 6%.

This is not 100% incorrect, it only depends what you are trying to track. However, for true comparability accross different stocks, I think weighting based on $ invested is the best choice.

100 shares of ABC x $50 = $5000. This earns a $100 return or 2%
500 shares of XYZ x $1 = $500. This earns a $50 return or 10%.

Average return is (5000/5500 x 2%) + (500/5500 x 10%) = 2.73%

You are taking the price per share to calculate the average. Let me think about this, since it seems to me this should work (I still dont know if it will be easy to use this method to compare across different stocks). If you revise the calculations based on the table below, it will be easier for me to compare the differences between my calculations and yours, since I gave you badly organized information before.

Also, there is no consideration of time. Making $500 in 10 days is a hell of a lot more impressive than making $500 in 1 year. For this, I am converting the absolute % gain to an annual return.

The previous table of purchases and sales for BP did not come out right, sine I hadnt figured out how to add the table, I did not consolidate the sales, and I included a purchase/sale for tax purposes (transferred stock into TFSA). I have organized it a little better below (I got this whole table thing figured out now using concatenate formulas in Excel to do it quickly).

BuyMay 03/201010048.64
SellMay 04/201010051.59
BuyMay 14/201010048.20
BuyMay 25/20109044.28
SellMay 27/201019047.47
BuyMay 28/201010043.34
BuyJun 01/201010037.49
BuyJun 08/201010035.00
BuyJun 09/201020031.94
BuyJun 22/201010030.45
BuyJun 25/20109027.55
SellJul 12/201039036.21
SellJul 12/201030037.50

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Re: My take on BP

Post  lukera on Sun Nov 21, 2010 5:57 pm

Max, should you annualize your return % on short term investments such as one day?

If yes, am I doing it right here?

Absolute gain calculation:

((51.59-48.64)/48.64)*100=6.06%

Annualized Gain Calculation

((51.59-48.64)/48.64)*100*(365/1)=2213%

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Re: My take on BP

Post  Max on Sun Nov 21, 2010 8:47 pm

In my opinion, absolutely. Your calculation is correct. If you got the same 6% return every day for the rest of the year, you would end up with 2213% return for the year. However, it is missing the opportunity cost of idle cash which should be included in the annual return, but this is a little too complicated to track (not impossible, just not worth the time). As long as you are excluding idle cash calculation from ALL investments, you will still have a solid basis for comparison.

Certainly it is ridiculous to go around telling everyone you made 2213% annualized gain, when you only made $6 in one day on $100 investment and made $0 on that same money for the rest of the year, but mathematically, it is true.

For example:

$10,000 x 6% for 1 day = 2213% return
$10,000 x 0% for 364 days = 0% return

Average annualized gain on the $10,000 is (1/365 x 2213%) + (364/365 x 0%) = 6%

But if you are recycling that cash back into other investments, you can be making multiple profitable trades during the year with the same $10,000.

$10,000 x 6% for 1 day = 2213% return
$10,000 x 6% for 1 day = 2213% return
$10,000 x 0% for 364 days = 0% return

Average annualized gain on the $10,000 is now (1/365 x 2213%) + (1/365 x 2213%) + 363/365 x 0%) = 12%

So a couple of quick trades for small % gains during the year can quickly add up to a pretty respectable return on an annualized basis. The lesson here is dont be afraid to sell early thinking you havent made enough of a profit. Lots of opportunities to make small gains and relatively few opportunities to make big ones.

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Re: My take on BP

Post  lukera on Sun Nov 21, 2010 9:41 pm

I get the point of all this now.

BUT I have to say that calculating your net gain for all of you transactions you posted it would be easiest and IMO close enough if you:

1. take the straight annualized gain of your first two trades(buy and sell)

2. take the annualized loss of your second sell order with your second buy order + your annualized gain of your second sell order with your third buy order.

3. take the average of your next 6 buy order(taking in to account the weight or # of orders) and taking the annualized gain with your second last sell order, then again for your last sell order.

I think thats the quick and dirty way of getting you close...

Excel has a function called "XIRR" which gives you the internal rate of return for a schedule of cash flows. that might be how you do it right there but i couldn't get it to work right for me...

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Re: My take on BP

Post  Max on Sun Nov 21, 2010 10:26 pm

I have to admit, you lost me a little bit. It is hard to visualize.

What I have been doing is generally considering each purchase as a separate decision and using the annualized % gain to determine if it was a good decision or a bad one in comparison with all trades I have made.

The problem only really comes up in trying to total these gains for a period of time (1 year), all time, etc....

1) I can add the ACB of all purchases together, but if I am using the same money over and over again, is this misleading? Does it make sense to have a total cost of $100,000 when the total portfolio is only $10,000 just because the same money was used for 10 different purchases of $10,000 during the year? I don't consider if the same money is reinvested, I just consider each purchase separately, and yes I have a ACB far in excess of my actual portfolio total.

2) I can add the absolute $ gains/losses together. This is the most reliable figure, but it ignores the cost. If I earned $5,000 on $2.5 Million total portfolio, it is not a good return. So maybe I can just take this as a % of the ABC in point #1 above, but that still has the shortcomings outlined in point #1.

3) I cannot average the # of days, since I could have outliers of small investments throwing off the average. Just because I had a couple of $100 investments that were invested only for 1 day, I don't want this to skew my average # of days. Instead, I have weighted the # of days based on the ACB for each investment. This makes sense to me because I want the trades with the largest dollar amount given priority in my average, which will encourage me to put more $ towards winning trades and less $ towards losing ones.

The rest is calculated based on these 3. Formula: ((#2 / #1) / #3 x 365).

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Re: My take on BP

Post  Fred on Mon Nov 22, 2010 3:48 pm

Why bother with all these calculations? I consider each trade individually as well, but differently. I buy, and when I sell I have a percentage gain (or loss)... it doesn't matter what time frame I am looking at (unless it is a long time, which I explain in a note at the end). My annual gain is based on the difference in the value of my protfolio at the begining of the year from the value at the end of the year.... therefore annual. I often make trades where I get 10% in 2 months. That is my own target... I made a 10% return, so calculating how much this would have worked out to be if I had the same return continuously for an entire year doesn't mean anything to me. I made 10% on the money I invested... I might do this a few times a year, but in the end the actual percent gain is the difference between what I started with on Jan. 1st and what I ended up with on Dec. 31st.

to explain my earlier reference: I do calculate roughly the interest charges that I have incurred as a result of owing the money I have invested, and use those charges to calculate what price I would need to sell at in order get a real profit (including the additional fees from the interest).

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Re: My take on BP

Post  Max on Mon Nov 22, 2010 7:53 pm

I figured you would be making the case for simplicity. To some extent, you would be right. It all depends what you want to track, and is different for each investor. Beginning and ending portfolio value is fine if that is all you want to track.

But IF you want to truly compare performance of one investment to another, you will need something more. Being the nerd that I am, as well as taking a generally contrarian approach to things, I prefer to have scientific proof that I am doing the right thing and my strategy is working. I don't know in advance what lessons I will learn from it, but I am analyzing the data anyway hoping it will prove valuable and allow me to further optimize my approach.

One thing I have found is that many small gains earned on the same money over short time periods during the course of a year is better than a single large gain in terms of same reward for much less risk. This would not have been as obvious and may have taken much longer to learn by relying on less detailed metrics.

Your 10% absolute gain is meaningless to me without annualizing it. 10% over 2 months vs. 10% over 2 years makes a difference, and without putting it in equal terms (annualized) I have no way to compare your performance to mine. Time matters. But you are right that the annualized return has no meaning when trying to determine the tangible return on investment. I track absolute $ gain (am I making money), % gain (am I making enough money), and annualized % gain (am I making more money than I could make somewhere else) to get a complete picture.

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