How I made $39,790.93 in thirty days without breaking a sweatPosted: October 6, 2012
As the oldest son in a family of 15, or so, children, my father, as a teenager, in the years after World War II, dug roadside ditches ten hours a day, six days a week — using nothing but his own shovel and a supplied wheel-barrow — and receiving a ridiculously low hourly pay.
He eventually moved on to felling and sectioning forest trees eight hours a day, seven weeks a day in Sweden, using axes and hand saws only. After a stint in Greenland when he was a manual laborer on construction sites, he established a scaffolding company in Denmark, and for the rest of his life he carried heavy-duty scaffolding tubes and boards up and down multi-story buildings eight hours a day, five days a week. My father was truly a hardcore manual laborer, and he accepted no excuses when it came to pulling your weight.
My father’s work ethics aside, it is when I am digging in my garden, mowing the lawn, climbing on my roof, trimming my trees, operating the 278 pound lawn aerator, and digging trenches and breaking up heavy boulders using only my spade and sledge-hammer that I truly appreciate how hard manual labor is, and, when I consider that the Federal minimum wage rate is $7.25 per hour and the going Craig’s List rate for manual labor is something like $10 per hour, I am surprised that manual labor gets done at all.
The labor rates comes most strongly into perspective when I make money from investments, and, frankly, sometimes I find myself ashamed of the money I make when I reflect on the money made by genuinely hard-working manual laborers.
In Search of Garage-sales Finds
In a recent posting about MIND CTI I have written about my basic approach to investment and the associated problems, and I have been working on a general investment philosophy posting for a while now. Stay tuned for more on this!
As I stated in the MIND CTI posting, I find it puzzling that most investors chase in-vogue equities from high-performance, high-growth, high-risk companies when there are ample equities for low risk, revenue and earnings stable micro-caps that have the potential to handily out-compete these in-vogue equities even on a revenue-neutral basis for the underlying companies and, additionally, have significant upside if the underlying companies can demonstrate some revenue growth — a category of equities that I refer to as garage-sales finds and is characterized by representing companies that — for whatever reason — have fallen out of favor in spite of strong consistent operations and — importantly — are outside the focus of institutional investors and traders because of trading volume, timing , or per-share price limitations.
Balancing Risk, Time, and Return — Why indefinite time is on a retail investor’s side
This class of equities balances a three-way equation of risk, time, and return. With garage-sales finds you may know with reasonable certainty that there is an excellent balance of limited risk and significant return, but your exit is dependent on an event entirely outside your control — the return of the horde that previously rejected the garage-sales finds as junk.
Risk and return may be completely understood, but timing is entirely unknown and uncontrollable. This, however, is exactly why one can make a living with this sort of investment! While institutional investors are not — in my opinion — risk averse and not, ultimately, unable to dig through regulatory filings and press-releases (although they appear to — frankly — be too lazy to do so in most cases,) they generally abhor investing in ventures with indefinite, indeterminate, and possibly infinite timings. Moreover, since institutional traders cannot make significant earnings from trading in this type of equity, since the trading volume is insufficient, the garage sales investment paradigm places us in an environment where we do not have to concern ourselves with the problems of competiting with players who have an inherently unfair advantage.
Generally, the investment paradigm involves targeting cash-flow positive companies with strong balance sheets, and we place limited or no emphasis on a consistent history of strong revenue and earnings growth. Sometimes, however, these garage-sale finds surprise us, undergoing some event that significantly increases and accelerates our return. In 2010 Omni Energy Services and its equity, OMNI, a classic garages-sales find, surprised us in this manner.
Omni Energy Services
In late 2009, I started seaching for an energy related company and associated equity that exhibited garage-sale find characteristics and found Omni Energy Services, an integrated oilfield services company with operations throughout the United States onshore and offshore oil and gas regions and an emphasis on environmental services and fluid handling, wellsite maintenance services, exploration support services and accommodations.
In the years leading up to 2009 Omni Energy Services had hit a rough patch, over-extending itself in a classic way and in 2010 it was well on the road to operational recovery, but was the object of virtually no interest on the the equity side. The details are now, two and a half year later, a bit hazy, but involved the elimination of silly assets and liabilities and focusing on operations rather than risky and distracting M&A activities.
In early March of 2010 I finished reviewing and parsing the financial data and regulatory filings for Omni Energy Services and OMNI, and had formed a comprehensive picture of the company’s situation. From March 30th, 2010, through April 7th, 2010, I acquired approximately 30,000 shares at a total cost of $56,029.97, and then I settled in and waited.
My general expectation was that — over time — either OMNI would appreciate gradually, reflecting the operational improvements, or explosively if the management team, which, in my view, was rather impatient and distrespectful of its investors, would attempt to sell Omni Energy Services or, in some other way, leverage it out, driving the per share price up in the process. Either way I was prepared for a long haul.
Enter Stage Right — Deepwater Horizon
Then on April 20th, 2010, at 9:45 p.m., CDT, lightening struck. Deepwater Horizon, a 9-year-old semi-submersible mobile offshore drilling unit — basically a massive floating drilling rig — exploded when high-pressure methane gas from a well expanded into the well’s drilling riser and was released onto the rig, where it ignited.
The ensuing fire was catastrophic and Deepwater Horizon sunk after burning for 36 hours. More importantly, however, an significant oil leak was discovered on the afternoon of April 22nd, 2010, ultimately releasing 4.9 million barrels of oil in the Gulf of Mexico.
It was clear from my research that, although headquartered in Lafayette in Lousianna, Omni Energy Services, because of its particular offerings and focus, would have little or no involvement in any containment and cleaning operation related to the spill. However, in the days after April 22nd, 2010, the market — known for its kneejerk reactions, not for its reading and research skill — threw its full weight behind OMNI, lifting the per share price more than 60% — in spite off an explicit statement from the company that, outside providing a couple of general purpose barges, the company had no expectation of providing any services to BP or the government in relation to the spill or otherwise reaping any revenues from the disaster.
On April 30th, 2012, to the day 30 days after I took my first position in OMNI, and anticipating a per share price drop once it became clear to the market that Omni Energy Services would not benefit from the disaster (a drop that did, in fact, come,) I liquidated my position for a price of $95,820.90, and with gains of $39,790.93 or 71%.
There are several things that strike me about this:
- That you can profit $39,790.93 in one calendar month, equal to 5,488 hours or 137 hour weeks of back-breaking labor at a Federal minimum wage rate of $7.25 per hour, is — put in one word — astonishing. Even when I include research hours, cost of capital and risk (of which I really don’t think there was much,) development of an investment paradigm (which is what made the gain possible in the first place,) and general educational background (which, of course, is significant,) it seems bizare that the economic equivalent of 137 weeks of 40 hour weeks of manual labor can be achieved in four weeks without leaving the comfort of your office.
- The key to the realized gain is the investment paradigm that I have developed and follow. Although the timing in this case was dictated by force majeure and, lest we forget, helped along by an ignorant market, clearly the approach underlying the paradigm works, and can yield rapid and dramatic gains.
- My investment paradigm dictates a wait-and-see attitude once the investment is made, but it also mandates the pulling of the rip-cord once a reasonable per share price growth is achieved, regardless of how much more potential growth may be available. In the case of OMNI, the immediate growth was temporary and based on an error by the market, and, so, selling immediately after the first pop in per share price allowed me to lock in the gains.
- The market’s fallibility is amazing. First the market failed by abandoning a fundamentally sound equity in spite of clear evidence that the underlying company was healthy, then it failed by crowding the equity in spite of clear indications that an external event would not positively affect the equity, and, finally, it failed by, yet again, abandoning the fundamentally sound equity.
Sharing the wealth….
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