PrivateCapital.ca

A Low Risk Investment

H. A. van den Berg — Fri, 08 May 2009 11:24:01 +0000

This week I added to my investment in Colabor Income Fund convertible debentures (CLB.DB). Colabor distributes food and non-food products, to independent wholesalers that redistribute these products to their customers, primarily in Quebec. Even during economic downturns, people still require food.

Normally, I am interested in the potential for conversion, but an examination indicated there were very few opportunities. Ignoring conversion, I focused on yield and time to maturity. The yield of the debentures were within a reasonable range of 5% to 7%, and they mature in about 2.5 years. Higher yields are associated with higher risk and lower yields are available elsewhere with less risk. I am not prepared to risk beyond 3 years given the recent global ‘quantitative easing’ that has taken place. Finally, the trading volume suggested that I should be able to sell the debentures prior to maturity without paying too much for liquidity risk.

Swine Flu Opportunity?

H. A. van den Berg — Wed, 29 Apr 2009 09:38:02 +0000

The two companies that produce drugs that may provide some relief from the swine flu are considered by some to present attractive investment opportunities. Both Roche, which produces Tamiflu (or oseltamivir), and GlaxoSmithKline (GSK), which produces Relenza (or zanamivir), are expected to report record earnings. But Roche recently indicated that ramping up production of Tamiflu was not that simple. From synthesis of the drug to packaging requires a lead time of eight months. Swine flu may have run its course by then.

It will be interesting to see how the share prices of those companies rise, more in reaction to press hype, than in relation to swine flu deaths. When prices peak, it may be an opportune time to go short Roche and GSK.

In the meantime, I’m washing my hands.

Which Options to Buy or Sell?

H. A. van den Berg — Fri, 24 Apr 2009 10:10:38 +0000

It is probably safe to assume that most professional option traders rely on some form of the Black-Scholes option pricing model. So the time-value and the intrinsic value (if any) of an option are incorporated in the price. If you plot an option’s strike price against the premium, for a number of strike prices around the current market price, you will notice that the points on the graph can be calculated with considerable accuracy using a logarithmic equation. This applies to both bid and ask prices for an option, but obviously the curves will be separated by the bid-ask spread. With the curves being so smooth, it is probably a good guess that they are mathematically derived and evidence of market efficiency. Accordingly, if you are looking for an arbitrage opportunity, you will not find it here. Occasionally however, I have found an option priced out of line with its neighbours. I’m assuming that the bid-ask spreads are controlled by the market makers, so that probably means that the option with the outlying price is being offered, or bid on, by an individual investor like me. That individual is someone really interested in a trade, not merely in maintaining market-maker spreads. So the options that are out of line are the ones I tend to trade.

Investing Behaviour and MFC 2011 LEAPS

H. A. van den Berg — Thu, 23 Apr 2009 17:32:02 +0000

I’ve reflected on my investing behaviour, since I will be exposing it on this web site. By nature my style is generally conservative, with the odd uncharacteristically bit of risky behaviour thrown in. It has generally served me well. I am probably overly analytical, but it helps ensure that my riskier bets are calculated to win.

In the current market environment, I have been reluctant to commit to equities to any great degree. The securities I am monitoring most closely right now are my long call options on Manulife (MFC) that expire in 2011. I have been buying these LEAPS because I believe that by 2011, the financial crisis should be more or less behind us, and because MFC has been dragged down by virtue of being similar to AIG.

Let’s get started

H. A. van den Berg — Wed, 22 Apr 2009 17:54:08 +0000

What I hope to present on these pages is my adventures in investing, with a Canadian slant. Sometimes the news will be profitable, and other times it will be less so. By sharing my adventures and misadventures with you, I hope you will benefit from my decisions and learn from my mistakes. So let’s get started.