"I remember some time back, at the time when the mining construction boom was at its peak, debating on HotCopper about the cottage industry of "mining service" and engineering construction companies that had mushroomed almost overnight.
Companies, that had not existed just a few years earlier, were suddenly valued at many hundreds of millions, and even billions, of dollars.
People thought you could simply take a shotgun and shoot at any old "mining service" company target and make money.
Trouble is, people never really understood the inherent business risks in the engineering construction business back then, and they still don't today.
When you have to commit hundreds of millions of dollars in fixed capital that generate billions of dollars in revenue (which, prima facie, sounds appealing from an investment standpoint) but yield only tens of millions of dollars in profits, and when getting just one project wrong, means that the entire company's profits get wiped out (and then some)... then that is a seriously risky business, I reckon.
Yet many unsuspecting investors bought into these sorts of business because they saw the demand for their services being so robust. Which I think emphasises the flaws in investing based on macro-thematic sentiment. It invariably masks the risks.
It might sound counterintuitive, but some of my most successful investments - i.e. that I have perceived to have presented the best RETURN opportunity per unit of RISK - have been made against very weak macro-thematic backdrops.
But back to the all-important, almost always neglected subject of RISK. 90% of investing, I believe very strongly, involves understanding risk. If you don't "get" risk, you are going to lose money. Period.
Which is why a forum such as HotCopper can often be a bit dangerous for the novice investor.
Because - and it no one's fault, it's merely a function of human nature - most people are innately wired into the prize of RETURN, and not into the problem of RISK (after all, it is a natural psychological instinct to think more about the joy of the prize than the unpleasant thoughts of the potential pitfall).
When have you ever seen posters talk about risk-adjusted returns? Basically, never.
I often see people making valuation statements such as, "the stock is on a P/E multiple of 8 times or 9 times, which looks very cheap compared to other stocks in the market".
Sure ASL or BLY or BKN or MAH or BOL or IMD might indeed be trading at valuation multiples half that of WES or WOW or RHC or CBA, but how much more risk do they carry than those "boring and overvalued" blue chips?
Double the risk? Treble? Fourfold? Tenfold? Twentyfold?
Sometimes the risk is so high that no matter how low the "valuation multiple", it makes no sense to invest.
FGE Price at posting:
$1.25 Sentiment: None Disclosure: Not Held
