Best of the Week
Most Popular
1.Stock Market Continues Defying Gravity, Dow New All Time High - Nadeem_Walayat
2.America Superpower 2016 - Ian Bremmer
3.The US Dollar and the Precious Metals Complex - Rambus_Chartology
4.UK Immigration Crisis Could Prompt BREXIT, Propelling Britain Out of EU Despite German Factor - Nadeem_Walayat
5.The “Real Flash Crash” Will Scare You to Death - Shah Gilani
6.Gold Price Trend Forecast - Bob_Louka
7.UK Deflation Warning - Bank of England Economic Propaganda to Print and Inflate Debt - Nadeem_Walayat
8.Gold Lifeboat to Global Economies “Titanic Problem” Warn HSBC - GoldCore
9.Will Interest Rates Ever Rise? - BATR
10.Who’s Killing the Stock Market? - Shah Gilani
Last 5 days
This New Currency Could Wipe Out the Euro - 28th May 15
US Housing Market - Something Smells Fishy - 28th May 15
US Economy – Semi b2b Amps Up its Trend - 28th May 15
U.S. Fed Exported QE Travesty: Meet The BLICS Nations - 28th May 15
World War D—Deflation - Secular Bear Markets Analysis - 28th May 15
George Soros Warns of “Third World War” - 28th May 15
Why You Shouldn't Try to Invest Like Warren Buffett - 28th May 15
Stock Markets Buy and Hold is Back! - 28th May 15
We're Now Frighteningly Vulnerable to a Bond Market Crash - 28th May 15
Austerity, Economics and Religion - 28th May 15
National Holidays London and the Magic of Legoland UK Review - 27th May 15
Imminent Stocks Bear Market Signaled by Dow Theory ... - 27th May 15
Gold Price Has Bottomed – More Evidence - 27th May 15
Three Reasons You Shouldn’t Try to Invest Like Warren Buffett - 27th May 15
Gold Is “100% Guarantee from Legal and Political Risks” States Russian Central Bank - 27th May 15
Don't Drown in the Sea of Global Debt - 27th May 15
Three Reasons Why Carl Icahn Is Wrong About Apple Stock - 27th May 15
Crude Oil Price Stochastic Signals - 26th May 15
Why the Stock Market Will Crash - 26th May 15
GDP, Inflation, Employment Economic Statistics: It’s All a Lie - 26th May 15
Introduction to Peak Food - 26th May 15
Should We Dump the Euro? - 26th May 15
A Geopolitical Net Assessment of Europe - 26th May 15
Stock Market Top in Place? - 26th May 15
Best Cash ISA SBI 2.3% - 2.8 Year Fix, UK Interest Rates 2016 - 26th May 15
China Sets Up Gold Bullion Fund For Central Banks - 25th May 15
Is The Silver Trade Getting Crowded? - 25th May 15
Money Murder Mystery: Who Killed the Stock Market? - 25th May 15
Why Do We Celebrate Rising U.S. House Prices? - 24th May 15
Mario Draghi’s Slippery Downward Slope - 24th May 15
Gold : Truth is Stranger than Fiction - 24th May 15
Facebook Stock Price Forecast - 24th May 15
Make a Killing on the Coming Energy "Debt Bubble" - 24th May 15
Stock Market SPX Uptrend Inflection Point - 23rd May 15
What You Know for Certain - Huge Demand for Gold And Silver - 23rd May 15
Are We in Another Credit Bubble? And Is It Different than Before? - 23rd May 15
The “Real Flash Crash” Will Scare You to Death - 23rd May 15
Venezuela: No Rule of Law, Bad Money - 23rd May 15
Robots That Can Beat the Market by 100% - 23rd May 15
Why Shake Shack Stock Is a Bad Investment - 23rd May 15
Gold Price Primary Driver Bullish - 23rd May 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Biggest Debt Bomb in History

Petrobras a Timeless Lesson on Investing With the Government

InvestorEducation / Learning to Invest Feb 11, 2013 - 05:46 PM GMT

By: GrowthStockWire

InvestorEducation

Brian Hunt writes: Sometime in the past decade, Americans who should know better embraced a horrible investment idea...

If you've ever bought a stock because an investment guru told you it was "state owned" and backed by the government, chances are good you fell for a common mistake... And chances are good you lost money on the deal.

In today's essay, I'll show you why this is the case... and why you should always be leery of investing with "state owned" companies.



To drive the point home, we'll look at a poster child of "state owned" investing – Brazil's oil firm, Petrobras. It's a popular stock among investment advisors and fund managers. If you watch a financial television program about "investing around the globe," you'll probably hear someone gushing about Petrobras and its "state owned" status. After all, how could you go wrong partnering up with the national government?

Answer: very easily.

Below is a two-year chart of Petrobras. It tracks shares from early 2010 through 2012. They've plummeted from $40 per share to $17 per share... a loss of 57%. This horrific performance was produced in a rising oil price environment. During the same period, other "Big Oil" companies like ExxonMobil and Chevron registered gains.



How could the "experts" be so wrong about Petrobras? How could investors in a big "state backed" company get killed while investors in regular oil companies did well? It's easy to explain. But we have to leave investment La La Land and remember how things work in the real world...

Remember how your average government agency works (or doesn't work). The bureaucrats running government agencies are not incentivized to produce profits. They are not incentivized to improve the long-term value of a business. Bureaucrats are incentivized to spend their entire budgets and grow larger. This allows them to acquire more power... and bigger budgets for next year... which allows them to acquire more power and bigger budgets for the year after that.

Compare this to an entrepreneur who has his own money on the line. He's going to do his best to keep costs down, instead of intentionally blowing his budget. He's going to do his best to hire only employees he needs... rather than hire as many people as possible. He's going to keep a close eye on his cash flow, or he'll go broke.

Most smart people know this is the difference between government and business. But when it comes to investment, even "small government" republicans and libertarians lose their minds and line up to buy shares in inefficiently managed, state-owned companies. It defies belief. They'd be better off partnering up with a crack addict.

As for Petrobras, the company has phenomenal assets. It controls some of the biggest untapped oil fields on the planet. But they are offshore oil fields. Developing them will cost enormous amounts of money. That's why the company has trumpeted its planned $200 billion-plus capital-spending plans. It's believed to be the biggest corporate-expenditure program in the world.

This absurdly large amount of spending will be overseen by bureaucrats. Take a guess on how that will turn out. While you're forming your guess, remember that if an entrepreneur opened a lemonade stand, he would work by himself and turn a profit. If a government opened a lemonade stand, it would have a dozen employees and go broke in three months.

Don't get me wrong: I'm not saying you should never buy shares in a state-owned company. They can work out as trades. Also, I'm not saying all government is bad. I'm not saying government employees are horrible people. Save your hate mail.

But just remember what happens with most every government agency or program. They are not run for a profit. They are not incentivized to keep costs down. They are incentivized to grow bloated and inefficient.

The next time you're considering "partnering up with a government" – and buying a state-owned company – remember how government works.

You'll probably do better with a lemonade stand.

Regards,

Brian Hunt

P.S. About 10 days ago, I attended the Orlando MoneyShow. It's a huge conference where financial services providers try to drum up new business. Petrobras was one of the few large public companies that sent a team of "representatives" to the conference. I'm sure the trip cost shareholders tens of thousands of dollars (maybe hundreds of thousands). There was no team from ExxonMobil or Chevron.

Regards,

Brian Hunt

http://www.growthstockwire.com

The Growth Stock Wire is a free daily e-letter that provides readers with a pre-market briefing on the most profitable opportunities in the global stock, currency, and commodity markets. Written by veteran trader Jeff Clark, and featuring expert guest commentaries, Growth Stock Wire is delivered to your inbox each weekday morning before the markets open.

Customer Service: 1-888-261-2693 – Copyright 2009 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

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.

Growth Stock Wire Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History