Doubts about D1
Posted on September 13, 2007 by Richard Beddard
Filed Under Companies |
Three years ago I interviewed Philip Wood, then chief executive of D1 Oils, which grows and processes jatropha. The jatropha plant has unusual qualities. It grows in the tropics on marginal land, where it doesn’t compete with food crops, and oil from its nut is refined into biodiesel.
One of the reasons investors, and D1, are excited about biodiesel is a climate change induced EU drive to get biofuels in our petrol tanks. Now, according to the FT, the OECD is calling that into question. It thinks competition for land is pushing up food prices and threatening forests.
D1 says the rising price of food crops also used to make biodiesel, like soya and palm oil, plays into its hands as it jatropha alternative gets cheaper in comparison. Nevertheless, should politicians water down the subsidies and legislation on biofuels it could be problematic for everyone, as those targets guarantee a level of demand for biodiesel.
While it’s hard to imagine politicians going back on their green commitments, its difficult to be sure. Politicians ditch, delay, and finesse targets all the time. That doesn’t mean D1 is a sell. It’s innovative, and it ultimately expects to produce competitively priced oil whatever taxes and subsidies are in place, so long as oil prices remain relatively high.
Bit it’s a worry for investors that highlights how speculative investments in new companies with new business models can be. Here’s another: investors are discussing rival non-food biofuel crops.
Markets:
Robert Peston, the BBC’s business editor, praises The Bank of England’s refusal to bail out banks by lowering interest rates. He also makes a good fist of explaining the crisis, blaming the securitisation of dodgy loans, bought up by special finance vehicles and underwritten by banks.
Surprise! This is a bear market: The New York Times says the S&P 500’s return so far this decade has been the worst since the 1930’s. The inflation adjusted total return of the S&P500 is even worse than the 1930s (but better than the ’70s).
Joel Greenblatt says you can’t judge his Magic Formula stock picking system after a year or two, “It either makes sense to buy above average companies at below average prices or it doesn’t. If it does, that still means you need a 3 to 5 year horizon to bear that out.”
Fun:
Headline of the week: Sports direct shares boosted by lack of profit warning
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3 Responses to “Doubts about D1”
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Hi Richard,
As usual, thanks for the links and insight.
I have not read Joel Greenblatt’s book, but I think he is correct to say that if you believe in an investment strategy, and you can justify that it is behaving as expected, then it really does not matter if it performs badly in the short term.
What I have learnt, over the years, is that it is more important to know if the system you are using is behaving as expected, against the current market conditions, than to know what the results might be in 3 to 5 years time.
If you cannot explain the current behaviour of your system then you need to learn more about it, and perhaps fix it. For sure, I wasted 10 investment years, using standard strategies I did not really understand, and thinking about the basic message ‘Invest for the long term, 5 year horizon, it will all be okay in the end etc’. What a pile of croc!
Hi Robin
I remember you challenged an earlier post on Mohnish Pabrai. He’d described a trade which fell 50% before it rose 13*. But essentially that’s the deal with value investing. It’s very difficult to know when the market will catch on to the value - and it could be years away. In the meantime you mustn’t allow falls in the market to shake out out, unless you’ve changed your mind about the investment. Greenblatt’s ‘formula’ uses the earnings yield (essentially the PE ratio) as well as Return on Capital to pick stocks - essentially companies with the potential to grow on low valuations - so it’s a kind of value investing.
To the value investor, there are only two possible explanations, if your investments are underperforming:
a. you were wrong, and the share isn’t good value
b. the market’s irrational and you have to wait until other investors see reason!
On the contrary, I am sure Mr. Pabrai will always be able to make money doing what he does. I just question that your average investor could make it work.
I am actually quite sanguine about the capability of most investment strategies working in the long term, if properly executed. There will always be a group of people who can make it work to their advantage, because they understand fundamentally what to expect from it.
One thing is for sure, no one is going to use an investment strategy which has never worked in the past. All strategies depend on the expectation of certain things happening in the future. I think that there are two things which should make you worry
1) The expected events do occur but your investments do not behave as expected
2) Some unexpected set of events occur which completely trash your model.
Northern Rock is a great example of point (2) as was LTCM. Whether Northern Rock is currently good value I would not know. A business is only as good as its cash flow after all, and Northern Rock seems to have none right now. Lucky for them for the bail out