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Investors Profiting From the One Thing Which Has Not Changed

Companies / Investing 2009 Apr 17, 2009 - 12:56 AM GMT

By: Q1_Publishing

Companies Best Financial Markets Analysis ArticleFor better or worse, we’re living in a world of change. It’s no secret. There’s going to be a lot of changes in the next few years. Regulations, accounting rules, taxes, money supply, healthcare tech, and on and on – it’s all changing. And it’s changing faster than ever.

Change, while creating opportunity for prudent long-term thinkers, has created a lot of uncertainty in the short term. The markets have reacted the same way they always do to increased uncertainty - negatively.


That’s why it’s safe to say one thing hasn’t changed at all. It’s the same today as it has been for centuries past and will continue to be the same for a long time to come.

I’m talking about human nature. And since the markets are driven by human action, it’s safe to say the market hasn’t changed either. So if you started to lean towards the “this time it really is different” mentality, don’t worry, it hasn’t.

Want proof? This week we got the perfect example of why this time is not different. The best part is, if you cut out all the “noise” and look closely enough, this example will show you how to get more reward while taking less risk with your investment than 99% of other investors. Let me explain.

Hope and Pay

We’ve gone over the herd mentality of investors and traders many times before. We see it all the time. Bubbles of all shapes and sizes form and eventually burst. Investors fearing they’ll miss out on something big. As a group, they jump in when a stock has a strong run up and sell out when they finally give up on all those expectations.

One of the perfect examples of this happened this week. You see, investors have been betting on lifting of the U.S. trading ban with Cuba for years. Every time there is a development in Cuba which could lead to a lifting of the trade embargo, shares of companies which could directly benefit from the lifting of the ban get bid up.

So earlier this week, when President Obama announced a few changes in the long-standing U.S. policy towards Cuba, investors piled in with great expectations. Shares of Carnival Cruise Lines (NYSE:CCL) and Seaboard (NYSE:SEB), a shipping company with significant operations in the Caribbean, were both higher following the announcement.

But the real fireworks were, as they always are when it comes to Cuba, in shares of Herzfeld Caribbean Basin Fund (NASDAQ:CUBA). This is a closed end fund (which means it trades at a discount or premium to its actual value) which invests in companies which would benefit directly from a lifting of the Cuba trading ban. It’s basically a quick way to place a diversified bet on the U.S. opening CUBA’s borders.

As you can see in the chart below, it always runs up when hope of the Cuba trading ban are revived.

Hope Springs Eternal Fleeting

CUBA shares more than doubled when Fidel Castro announced his brother, Raul, would be running the country while he was having surgery. Volume increased as hope-fueled speculation pushed shares higher and higher and drew more and more believers into the mix. Hope, as it usually does when it comes to investing, faded.

Then in early 2008, Fidel Castro announced he would not be “running” for President again. CUBA’s shares jumped 30% on the news. Again, hope quickly faded over time.

Then this week, the U.S. President announced some minor changes to the rules in opening up a new era of cooperation with Cuba (or some other change as part of some “grand plan” - I don’t pay much attention to the words anymore) . Volume spiked. The herd piled in. CUBA climbed more than 45% in a day.

There’s no reason to expect “hope” to hold out any longer this time around considering what has happened every other time in the past three years. Odds are though CUBA’s shares will continue to fall even as the market rally continues. And that’s where you’ll see why I’m so confident the markets haven’t really changed much at all.

Priced to Sell

There are a lot of different ways to value a company and its shares. Some value investors look at P/E ratios, price-to-book value, and/or takeover value. Some growth investors look at earnings and/or revenue growth. Here at Q1 Publishing tend to focus on operating margins and backorder logs as a good place to start.

There are lots of ways to do it, but when it comes to valuing a closed-end fund, it’s a much easier process. All you have to do is look at the value of its holdings, or net asset value (NAV). You can find daily NAV values at web sites like www.etfconnect.com.

So, as rational investors, all we have to do is look at CUBA’s NAV to get a good idea of where its share price will eventually end up. When the change in policy was announced on Tuesday and CUBA’s shares climbed to nearly $8 we knew it was a bit too rich. CUBA’s NAV was barely above $5.

That’s a premium of about 60%. And when you consider CUBA is holding shares of companies like Carnival Cruise Lines and Seaboard (which are easy to buy on the market), the premium is way too high. They were priced as if all trade restrictions with Cuba had suddenly been lifted.

As you might expect, CUBA’s share price has fallen back to reality and last changed hands for $6.29. Shares now have a premium over NAV under 40% and probably going lower.

Buying High and Selling Low

Although I don’t think CUBA is worth putting money into right now (especially with a premium of 40% - it’d be like buying dollar bills for about $1.40 each), it is a good example of how much has really changed during this downturn. Which is not much.

The markets (and the investors, traders, and other participants) have consistently proven they’re still willing to pile in at the top and invariably sell out at the bottom. The herd mentality is as strong as ever. There are plenty of examples of it across the markets. CUBA just happens to be a very timely one.

That’s why I’m not really worried too much here. Yes, the markets are rallying and will likely continue to do so (possibly, well into the summer). But not much has changed.

For those willing to take a step back, think a little bit about what they’re doing and what’s over the horizon, they will be able to profit handsomely and still stay well protected. That hasn’t changed.

So if all the change has got you concerned, there’s no reason to be. Just take a look back and look at how much has really changed. It’s times like these when I remember the words of author Irene Peter, “Just because everything is different doesn't mean anything has changed.”

I think the same is still true.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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