Tuesday, December 15, 2009

The Sea Artist

I read the new, posthumously-released Crichton novel last week, Pirate Latitudes. One character in the novel, which is set in the Caribbean in the 17th century, is a helmsman, who is so intuitively skilled at reading the sea and driving ships that the other characters call him "The Sea Artist". I don't know if Crichton came up with that term himself, or he came across it during his research, but it struck me as a fine turn of phrase. It would be great to be a stock artist, and have a similarly intuitive skill at investing. Maybe that's something that comes with looking at things long enough, until the patterns finally emerge.

On occasion, I think I've seen a pattern here and there, among two or three obscure stocks I follow. I still have DSNY on my Yahoo portfolio page for some reason, and when I saw it hit .52 today my immediate thought was, "If I still owned that I'd sell it right there". Of course, I sold a couple weeks back at .45, so I didn't have any intuition then that it would soon hit .52. A few weeks before that though, buying DSNY at .305 looked like a slammed dunk, so I bought it.

When I saw USEG dip below $5 earlier this week, I had half a mind to buy more there. I didn't though, and now it has traded higher on yesterday's news of the high initial production of its latest Bakken well. That one's a little trickier though. I've owned and have been following this stock for about a year and a half, but since the BEXP deal a few months ago, it's almost a new stock: new shareholders, much bigger volume, an imminent secondary offering, etc. My average price on it now is about $2.80, I think. I don't think I'll be able to buy more for less than that anytime soon. So at what price should I buy more?

The textbook value investing approach would be to come up with an intrinsic value for the company, and figure out where the current stock price is relative to your intrinsic value figure. That approach has some merit, but it also has a couple of drawbacks to it. The first is that it would be a pain in the ass, as it was to do my initial write-up of the company back in the summer of 2008. Back then, I did that with the prospect of getting paid in mind: I submitted that write-up to the Value Investor's Club when they were offering $5k for the best idea of the week. That was also my application to membership in the VIC. It was rejected, so of course my USEG write-up didn't win best idea. In any case, a similar write-up today would be a little more involved because it would have to account for the dilution of the secondary offering(s) and the inclusion of new ventures.

The second drawback of that approach is the false sense of precision inherent in any intrinsic value calculation (I didn't see the need for even attempting one with my initial write-up, as the company was trading at a ~50% discount to its book value then). To do one with USEG, you'd have to speculate on the success, or lack thereof, of additional wells drilled in its Bakken deal; you'd have to estimate production rates and oil prices going forward; you'd have to ballpark the value of its Standard Steam Trust holdings by looking at comps with publicly-traded geothermal companies; you'd have to speculate about molybdenum and uranium prices for its properties in those areas, etc. In short, you'd be stringing together a lot of subjective assumptions to come up with an objective-sounding number.


Homer315 said...

Human beings tend to see or try to find patterns where none exist. Not sure that being around long enough to see "patterns" would tend to make one a stock artist.

DaveinHackensack said...

Human behavior can also create patterns though. That was a point Vitaliy Katsenelson made about technical analysis, which -- unlike some other soi disant value investors -- he didn't dismiss out of hand. I was trying to find his exact quote about it in his book, but "technical analysis" isn't in its index. Maybe he wrote the passage I'm thinking of elsewhere.