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Just back from Los Angeles and recovering from a friend’s 50th birthday bash. The highlight was his wife assuring us that she’s requested some old Paul Oakenfold tunes from our clubbing days. Turns out the DJ knew them only too well.
The legendary disc jockey was faultless on the decks. Unlike me last week, when I committed what is known as a “fat-finger” mistake. Typing in a trade, I pressed the wrong key and now have almost a fifth of my portfolio in Asian equities.
Oops! Time will tell whether I win or lose versus the roughly 15 per cent allocation I wanted. Has anyone else ever done this? And please email me your best examples of riches made from genuine screw ups.
I need reassurance because my error is giving me panic attacks due to a similar blunder more than 20 years ago. It was the worst of my professional life and also got my wonderful boss in a lot of trouble.
The asset management firm where I was running Japanese equity funds was implementing a huge allocation switch. At the same time we were rejigging every portfolio and I had been working all weekend.
Japanese stocks have high unit prices, so we had to make difficult investment calls, name after name. For example, although I might have wanted a 3 per cent weighting in one company, the maths meant only a 2 or 4 per cent allocation was possible.
All of which is to say that having entered what felt like was my thousandth trade of the evening, I didn’t notice the extra zero added to a buy order for NTT Data. Trigger warning, Gen Z: next morning I received a clip round the ear.
An asset manager’s fiduciary duty means we had to reverse the trade immediately. If the stock went up, the client’s fund would book the gain. If it fell, they are reimbursed by us.
Sod’s law guaranteed the share price dropped overnight, and so my mistake cost a lot of money. Worse was NTT Data then soared over the following days and weeks. I swore never to forget the lesson. It seems I have.
Fat fingers are not uncommon, though we probably can’t use that phrase any more. Let’s just say that a healthily proud digit was supposedly responsible for a 6 per cent fall in the pound in 2016. And the year before, a colleague of mine accidently sent £6bn to a client upon inputting a gross instead of net number.
Usually, errant trades are spotted by software. Or clients agree to reverse them, as in the case above. But the likes of you and me are stuck with our plus-sized errors. I couldn’t find any information on how to cancel or revise a trade on my broker platform.
That said, the correct response when a salad-averse finger takes a breather on the wrong button is the same for retail and professional investors alike. Correct the mistake, accept a small profit or loss, and move on.
Don’t do what I’m doing and hope markets go your way. Or, like me, try to retrofit a post-trade justification such as “I’m glad I bought too many Asian equities as they were cheaper than what I was supposed to buy. Actually a 20 per cent weighting does make more sense.”
Truth is, I wish I hadn’t spent the surplus cash at all, as I’m warming ever more towards buying an oil and gas ETF. Last week I explained that high- emitting stocks outperform, and why that might be. But I needed to review valuations first.
They are certainly more attractive than three weeks ago when Brent was approaching $95 per barrel. Since then, oil prices have fallen 15 per cent, taking most of the popular oil and gas ETFs with them.
But are they cheap? And what is the simplest way for a non-expert to value them? Like all companies, in the long run they are worth the present value of their future cashflows. What makes the resources sector unique, however, is that it generates cash by selling its fixed assets.
Most industrial firms derive revenues by continually producing current assets. By contrast, oil and gas companies deplete their reserves. This means cashflows dry up if they make no new discoveries, and exploration costs are capitalised if fruitful.
So just as normal assets are depreciated, reserve depletion hits the profit and loss account. Annoyingly, oil and gas companies sometimes do this at different rates. They also have hugely varying amounts of debt.
For both these reasons it is better to look at cashflows instead of earnings, and it is why analysts spend so much time assessing reserves as well as exploration and development costs. Production volumes and associated expenses also affect profitability.
All that before the nightmare of trying to work out the supply and demand for oil and gas worldwide. I take the view that markets have already discounted a best guess on geopolitics, macroeconomics and all the other fundamental and technical drivers. What do I know?
And the reality is that even the most diversified of energy stocks still have a 50 per cent-plus correlation to oil prices. Indeed, the latest JPMorgan sensitivity analysis shows that for Shell, say, free cashflows jump by a third if Brent rises from $80 to $100 per barrel.
The trouble is, oil is not a hundred bucks, and global valuations, while down some, aren’t as cheap as they were a year ago. But also remember that oil prices are nominal. If inflation stays high, the chances are oil will be in three figures again.
It’s a better inflation hedge than my inflation-protected bond ETF anyway, as I’ve explained in previous columns. I’m going to swap them — assuming I press the right button.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__
