I just filled my boots with Kentz (LON:KENZ) two trading days before it announced two takeover approaches. Clever, eh. We’re all on here to learn so if you too want to get into a company on the eve of a takeover announcement - read on.
In the last couple of years I’ve read a lot about decision making and have become familiar with many of the concepts that hinder rational choices. One of the more obvious ones, and one very relevant to investment is “anchoring”.
Anchoring is where we latch on to a price at which we will enter or exit an investment based on some irrational attachment. It’s why we hold on to our losers, waiting for the price to return to where we came in, ignoring new information showing a deterioration in fundamentals. It occurs when we decide to buy something, but hesitate because it drops a penny, and we’ll wait until it falls another penny, instead it goes up a penny, and again, and so on, but now we’re anchored to the price we would have paid had we not hesitated.
I’m sure we can all recognise this tendency and think of painful investment experiences, particularly holding on to investments that we wouldn’t dream of buying today.
Despite my awareness of the irrationality of anchoring I again fell victim to it in the last few weeks, and I was all too aware that I was frozen like a rabbit in the headlights. And it was costing me.
Here’s the story.
Late last year I took a sizeable (for me anyway) position in Lamprell (oil support services) following a series of profit warnings. The share price had been hammered, and on valuation grounds it became very attractive. It operates in an industry that can only grow and operates out of dock facilities in the Gulf that are not easy to replicate. If it couldn’t sort out its operating problems it seemed a good candidate to be taken over. Be greedy when others are fearful etc - I managed to get in near the low at 80p.
Then this year I started looking at Kentz (oil and mining support services). I bought some. It too had a lot going for it: an excellent historic growth record, great returns on capital, operating in the same growth sector as Lamprell, a lot of cash on the balance sheet and it was cheap.
Through the summer I held big positions in both these companies. My confidence in Kentz grew during this period, and then I started to worry about the shorter term outlook for Lamprell. Both had been bought as long term investments. But I began to pick up on how the two were reporting the winning of new contracts: Kentz was, Lamprell wasn’t.
It sunk in slowly, no bad thing, as I’ve learnt knee jerk reactions to perceived short term issues can be expensive. But both companies were due to report results almost simultaneously at the end of August. I became convinced that they both had similar upsides with good results, but with the newsflow I felt it unlikely that Kentz would be issuing a disappointing report. Lamprell, on the other hand, had issued five profit warnings last year, changed its management recently, was assimilating quite a large acquisition, had just re-negotiated banking covenants and wasn’t reporting new contracts. Short term, there was quite a bit of downside risk in Lamprell. I decided that it would be eminently sensible to switch out of Lamprell and top up in Kentz with the proceeds, and I was showing a healthy profit over a matter of months (c140p from 80p).
But I couldn’t do it, I couldn’t sell Lamprell, couldn’t pull the trigger. And I knew why, and I knew it was irrational, but it made no difference. A couple of months ago Lamprell had spiked up to 180p, to sell now felt like taking a 40p loss. To sell now felt like giving up the 40p, and gambling that Kentz would deliver it instead.
I sat on my hands. Lamprell sat on its hands. Kentz didn’t - it edged up, and kept on edging up. I was doing well in Kentz, but would have been doing twice as well if I made my move. Then Lamprell started to move down a little, not much but the failure to act was costing me about 10% over a couple of weeks.
For some reason I then downloaded into a spreadsheet the daily ranges and closes of Lamprell over the last few months and staring at it, I saw that the 180p was much more of a spike than I was remembering. It shot up in a day and came straight back down again. The opportunities to get out at over 150p weren’t there for very long. It suddenly felt like I could sell Lamprell at a “loss” of about 10p. Much more palatable. The anchor promptly jarred loose and fell. The next day I was out in pretty short order and into Kentz.
It had taken about three costly weeks for me to execute the decision.
Two trading days later I woke up to find Kentz reporting two takeover approaches.
Writing this reminds me of another occasion when my remarkable judgement led me to double my position a day ahead of a takeover announcement. A few years back I bought a few shares on-line in Mouchel. A bit later in the day I checked my holding. They didn’t show up. Clearly, I hadn’t pressed the buy button at the end of the process. I entered the trade again, making sure that the order was executed. That night I checked my holdings, and found that I had placed the trade twice, the system was clearly slow updating. Cursing, I vowed to reverse the second trade first thing the next day. Which I duly did, picking up a fortuitous extra £1500 as Mouchel announced a takeover approach an hour before the market opened.
Has anyone else got any stories of accidental investment genius? Although with Lamprell and Kentz both due to report in the next few days the jury is still out on whether my decision was optimal, the execution was embarrassing.
Filed Under: Technical Analysis,