Private Investor: When all others lose their heads, it's time to buy
Saturday 28 October 2006
Lots of people have made lots of money over the years by buying into "oversold" situations. Me included. Well, not lots of money but a little anyway. It's usually fairly easy to spot one of these.
Such episodes, or spasms, come about when the market as a whole, a sector or just one company endures some sort of scare and the market then panics, dumping the stock for whatever it can get. That is when it demonstrates a more than usual degree of irrationality, and that is the time to buy.
It may be less so than in the past, but terror attacks still presage a general firesale where bargains can be snapped up before the world returns to its senses and decides that, yes, commercial life does still go on, people will still fly even after atrocities such as 9/11 and not every airline is about to go belly-up.
So I've watched the recent collapse of the online gambling companies with interest. Was this another example of the markets over-reacting to what was, after all, pretty much unalloyed bad news? Did they go just a little bit too far? After all, these businesses (unlike so many of the dotcom companies for the1997-2000 period) actually made real profits.
Even after the United States government passed legislation that, in effect, shut out most of the gambling websites of by far their biggest market, they still had customers elsewhere around the world. Things were and are undoubtedly grim for the industry, but just how grim really? And as a variation on this bottom-fishing theme, is this the time to look to buy into the sector in the hope of "consolidation"?
Just as I've been mulling the options, I see one of the smaller players has given up the ghost. Betcorp is the first company to cease operations after the change in the American rules.
For once my prevarication has actually paid off, removing the risk that I was to surpass my previous personal best for putting money into a company just before it went belly-up (that, in case you're wondering, was Railtrack, where I bought in a few weeks before it went into special liquidation, although in that case I got most of my stake back).
So some of the sector is simply evaporating rather than consolidating. I also wonder whether these firms can indeed manage to prosper on just their non-American interests. In those markets they are competing in a highly competitive field with many more established names. The reason the likes of PartyGaming and Sportingbet were able to do so nicely for so long was because they were making money in entirely artificial conditions.
When existing American concerns and their major overseas rivals shied away from online betting that, of course, created a vacuum into which these new companies were sucked, chancing their arm and hoping for the best. That is how they made so much money.
Take those artificial market conditions away, as now, and the market collapses, as we have seen. In those circumstances, you might argue, falls of 80 per cent or 90 per cent in the share price are, if anything, underdone.
So I doubt the markets have actually got the price of these shares wrong and, as the demise of Betcorp illustrates, any punting that I might be tempted to indulge in is tempered by the thought that I might lose the whole of my investment that very same day - as I say, not an attractive record for me to want to break.
I just feel content that I got out of Sportingbet at something like 10 times the price it now commands (40p per share) with a reasonable profit. They were never shares for the fainthearted, but I wouldn't recommend them to even the bravest heart.
More encouragingly, the markets have taken the collapse of the once-burgeoning online gambling sector in their stride. Even though one made it into the FTSE 100, the rout has been but a minor glitch in a season of stock market advances. Sometimes - extending our military metaphor here - it has resembled the famously static trench-based battles of the Great War: an advance of a few points above the 6,000 mark, held for a day or two before we watched it all given up again.
Now, though, the momentum is there. Perhaps it is not too much to hope for an assault on the 7,000 barrier. I shouldn't think the struggle to see the FTSE at an all-time high will be over by Christmas though.
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