Best of the Week
Most Popular
1.Ukraine Preface, the Emerging Dynamics Of Petro-Yuan Standard - Jim_Willie_CB
2. Speculations Reversed - Gold Price Stealth Rally 2014 - Peter_Schiff
3.Bubbleberg News Drivel Masquerading as Financial Reporting - David A. Stockman
4.Nationwide UK House Prices 9.5% Inflation, Housing Market on Steroids, Help to Buy Anniversary - Nadeem_Walayat
5.How to Profit from Palladium Huge Price Surge… - Peter Krauth
6.UK Home Solar Panel Installations Good or Bad for House Buying and Selling? - Nadeem_Walayat
7.Global Gold Manipulation Update - MAP Wave Analysis - Marc_Horn
8.Ukraine Capital Controls and 200% Inflation But Still In Better Shape Than US! - Jeff_Berwick
9.The Rise of a Euro-Chino-Russian Superpower - Stephan Bogner
10.Across Europe Secession Movements Intensify - BATR
Last 72 Hrs
Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - 16th Apr 14
High-Frequency Insider Trading - 16th Apr 14
Gold Prices 2014: Do What Goldman Does, Not What It Says - 16th Apr 14
These CEOs Will Make Investors Rich - 16th Apr 14
Climate Change, Central Banking And The Faustian Bargain - 16th Apr 14
Every Central Bank for Itself - 16th Apr 14
Social Security, U.S. Treasury Stealing Every Last Penny From Americans - 16th Apr 14
Ukraine Falling to Economic Warfare and Its Own Missteps - 16th Apr 14
Silver and Gold Miners Still Disappoint - 16th Apr 14
Silver, Gold, and What Could Go Wrong - 15th Apr 14
How I Intend to Survive the Meltdown of America - 15th Apr 14
France Wakes Up To The Multicultural Multi-Threat - 15th Apr 14
The Real Purpose Of QE - It’s Not Employment - 15th Apr 14
Peak Coal - 15th Apr 14
Flash Crash, Rigged Markets - What’s the Frequency Zenith? - 15th Apr 14
Forecasting U.S. GDP Growth: A Look at WSJ Economists’ Collective Crystal Ball - 15th Apr 14
Stock Market - Is Something Nasty About to Happen? - 15th Apr 14
How to Trade Your Way To Freedom - 15th Apr 14
Understanding (and Ignoring) the Media Bandwagon Against Gold - 15th Apr 14
When Stock Market Bubble Crashes, Take Refuge in Gold Stocks - 15th Apr 14
Bitcoin Price Strong Appreciation to Be Followed by Declines? - 14th Apr 14
Greece, Turkey, We're Shuffling The Cards on Our Europe Investing Play - 14th Apr 14
Silver Price Ultimate Rally: When Paper Assets Collapse - 14th Apr 14
Get Your Share of an Extra Trillion Euros Money Printing - 14th Apr 14
Fourth Reversals in The Gold and Silver Charts - 14th Apr 14
Stock Market Nearing Rally in a Downtrend - 14th Apr 14
London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - 14th Apr 14
Four Horsemen - Top Economists Explain the Source of Our Economic Crisis - Video - 13th Apr 14
Peak Oil And Global Warming – A Question Of Culture - 13th Apr 14
The Global Banking Game Is Rigged, and the FDIC Is Suing - 13th Apr 14
College Degree Earnings Propaganda - 13th Apr 14 - Andrew Syrios
Stock Market Potential Diagonal Triangle Pattern Forming - 12th Apr 14
Ukraine Crisis – Military Flash Drive Thinking - 12th Apr 14
Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - 12th Apr 14
Gold Preparing to Launch as U.S. Dollar Drops to Key Support - 12th Apr 14
Manipulated Stocks Markets And The Empty Bag - 12th Apr 14
Stock Market - It’s Not Time to Panic… It’s Time to Buy - 12th Apr 14
Doctor Doom on the Fiat Money Empire Coming Financial Crisis - 12th Apr 14
Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - 11th Apr 14
This Bitcoin Price Rally Might Be a Fake One - 11th Apr 14
GDX Gold Stocks Benchmark - 11th Apr 14
Silver Price Finally Outperforms – How Bullish Is That? - 11th Apr 14
Limits to Employment Participation, and Societal Change - 11th Apr 14
US Moves To Restrict Travelers Taking International Flights - 11th Apr 14
Bill Gross to El-Erian: 'Come on, Mohamed, Tell Us Why' You Resigned PIMCO - 11th Apr 14
British Pound GBP/USD - Double Top or Further Rally? - 11th Apr 14
Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - 11th Apr 14
Russia Invaded Crimea and These US Energy Companies Made a Killing - 11th Apr 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

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

© 2005-2014 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

Free Report - Financial Markets 2014