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The sixty-four thousand dollar question: When do you pick up some cheap BP shares?
Today this is more like a $75 billion dollar question, as that's what's been wiped off the value of investor's holdings.
Most City analysts believe the stockmarket's over-reacting to BP's Gulf spill. They've been urging us to pick up BP all the way down from around £5.50, to its lows of around £4.20. The consensus view is that the company won't suffer nearly as badly as the share price suggests. The stock is cheap. And they may be right - but being right isn't enough.
There's an awful lot more to investing than simply assessing facts and data and making the right decision. If it were that simple, then clever academics would make for great investors. In this game you have to be right and be right at the right time.
Academics usually make terrible investors
Just take a look at the Long Term Capital Management (LTCM) debacle of the late 90s. Nobel prize winning economists managed a fund whose eventual losses nearly brought the financial system down.
As it turns out, most of the trades were probably right in the long-run. But we don't operate in the long-run. In the short-run, they went catastrophically wrong. They did the right thing, but at the wrong moment.
Keynes, another of the great academics, summed it up: "Markets can remain irrational longer than you can remain solvent."
It's all about timing
The question is not 'is BP a buy?' so much as 'is BP a buy right now?'
The thing that's telling me to wait is the negative sentiment. Humans tend to work on an emotional level, not rational. Notice how the Obama administration plays to the emotions of the electorate: "our job is to keep the boot on the neck of BP" says Interior Secretary Ken Salazar.
And Obama goes on: 'If laws were broken, leading to death and destruction, my solemn pledge is, we will bring those responsible to justice'. And so it goes on. The Americans aren't going to pay for this mess.
Every statement to make the US public feel secure puts fear into the hearts of BP shareholders. These negative emotions are causing havoc with BP's share price, and they're not finished yet.
What's really driving BP's share price
The estimates for how much damage this will cause BP top $25bn. But the markets have knocked off around $75bn from its market value. So why am I not picking up this ludicrously cheap stock?
Well, as I said, it's all about sentiment. Until some of the uncertainties are cleared up, sentiment will dog the stock.
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Nobody knows how long this mess is going to take to clean up. We don't even know if the latest solution will put a stop to ongoing damage. How will punitive damages be calculated? Will BP ever get new drilling licences with this terrible event hanging over them? Who's going to pick up the final tab? How much is insured? Will the rig operator be liable too?
So many unanswered questions. Questions that have led to credit rating agencies downgrading BP. This means they'll be paying more to borrow in the future. And speaking of finance, how about the dividend?
Most investors hold BP for its attractive dividend. But paying shareholders, while US citizens and the environment are devastated, looks callous. To continue paying out (what is now an 8% yield), will be politically insensitive.
It will take quite some time for the furore to die down.
There's just so much negative sentiment surrounding the stock that it'll find it difficult to climb out of its hole in the short run.
Over the next six weeks or so, I'll be looking for the stormy waves to dissipate and the waters to calm. I suspect the stock will be volatile, as good and bad news push and pull at the shares.
Will I miss an opportunity to pick up BP at the bottom? Possibly, but I don't expect to find market bottoms any more than I expect to find the tops. What matters is finding a profit without putting capital at unwarranted risk. Patience is the order of the day.
Before getting in, I'm looking for the American authorities to slacken off the political thumb-screws, the environmental damage to be contained and some news on the dividend.
In short, I'll be waiting for the worst of the negativity to abate. If you want to pick up stock now, I reckon you're onto a long-term winner. But you may have to weather some losses first.
• This article was written by Bengt Saelensminde for The Right Side free investment email.
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