Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
The Hottest Commodity Play In 2018 - 23rd Apr 18
Stock Market Correction Turns Consolidation - 23rd Apr 18
Silver Squeeze, Gold Fails & GDX Breadth - 23rd Apr 18
US Economy Is Cooked, the Growth Cycle has Peaked - 23rd Apr 18
Inflation, With a Shelf Life - 23rd Apr 18 - Gary_Tanashian
Stock Market Predictive Modeling Is Calling For A Continued Rally - 22nd Apr 18
SWEATCOIN - Get PAID to WALK! Incentive to Burn Fat and Lose Weight - Review - 22nd Apr 18
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

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

© 2005-2018 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

6 Critical Money Making Rules