Use The Shipping Man to ‘Beat the Market’

A recent reviewer of The Shipping Man claims the book holds the keys to investing successfully in the shipping market.

The editor of financial blog Whopper Investments posted the following analysis of the book:

Why can investors beat the market? Book review: The Shipping Man

I loved the book. It’s a quick read, it’s interesting, and it teaches a lot about ship financing and high yield financing.

There’s also an “investing” benefit to the book. I don’t want to give too much of the plot away, but I promise you that if you read it you’ll have begun to put shipping into your circle of competence. I also promise you that after reading this you’ll set the bar pretty dang high for investing in a shipping company.

So I encourage you to read it. Something that I frequently thought while reading the book: this is the reason smart investors can outperform.

What I mean by this is there are numerous points in the book where someone is willing to invest significant amounts of money without doing any due diligence or having any edge. Obviously, the book is a fictionalization, but it’s written by an experienced ship financier and I’m sure that many of the stories have a strong basis in real life.

For example, the investment banker in a bond deal in the book notes that to sell a bond she needs a “cornerstone” investor who other investors will follow blindly into the deal, assuming they don’t need to do any homework because the cornerstone investor will have done it for them.

There are a few other fun examples. There’s an investor doing a major deal with no due diligence because of a combination of deal fever and drunkenness. And there’s the investors in a bond deal who ask management for trailing figures and future projections without bothering to ask where the current market is at.

So what does it teach us? First: avoid initial offerings from banks! There’s no edge to be had here. Companies are raising money and paying bankers a huge fee for a reason, and you can be sure it’s not because they think a good deal on the securities they’re offering.

Second: all of the money in the market isn’t rational. Big money investors are just as human as the rest of us, and they are just as prone to puking up shares in panic or buying without doing enough due diligence and making sure they have an edge.

So look for places where you can take advantage of those situations.  Look for places where investors are selling in panic without any regard to fair value. For example, late last year Vanguard dropped MSCI from several funds. The earnings lost from the drop represented no more than 5% of MSCIs operating income. Check out the market’s response:

That’s a 25-30% drop for a 5% drop in earnings. The stock stayed down there for a month, but now three months later it’s recovered basically back to where it was before the announcement.

Were there other things going on here? I believe there were. But look at the volume after the announcement. There were people who wanted to get out, and price was no issue.

Those are the type of things you need to be looking for.

Keep your head cool and a long term view when people are panicking, and you can generate some serious alpha.

The reviewer goes on to disclaim that the article should not be considered an official source for investment decisions, but we enjoyed his clever approach to reporting on the book.

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