Investments

Time for my annual blog on the investment year in view.

Last year’s investments were pretty mixed. I gave three stock tips: PHRM are down 76%, HYR are down 34% and CCT are up 127%. Gold rallied throughout the year and is now 1370 from 1100 – oil trod water for the first half of the year but rallied strongly into the close – it is now at $89 having been $75 when I wrote last year.

It was a funny year for the Euro with several of the constituent countries of the Eurozone getting into serious trouble, not helped by the fact that they had signed up to the Euro in the first place. I’ve never really understood how the Euro can work in the long term – it feels like a solid enough proposition in the good times but as constituent economies and their fiscal policies diverge it starts looking like an unholy mess. It really isn’t so different to the ERM – one significant difference is that speculators like George Soros can’t move in and bring the house down by bullying the exchange rates, but all Soros did then was to accelerate an inevitable collapse.

I don’t think the Euro has any right to survive as a currency as I don’t think it is built on strong enough foundations, but it can ride it’s luck if no pressure is brought to bear. China could come in and help to patch the leaky boat, which would be an interesting development. One way or another I think the Euro and Eurozone will limp through 2011 in tact, but there will be a cost.

I’m still bullish on gold – I’ve actually bought some physical gold this year at www.bullionvault.com. I think that buying may come from some of the big emerging economies this year – China, Russia, India and the like. We’ve seen huge changes in the distribution of wealth in the countries with the creation of a lot of very wealthy individuals – rich people tend to buy gold. We have the sort of global economic situation that makes investors look for safe havens. We may see a strengthening of some of these emerging currencies. Gold has had a good run, but may have a lot of catching up to do as it has been quiet for many years.

Oil I am less clear on – it’s a very complex picture and there are people far more able than me looking to analyse it. If I had to call it I’d say it will have a relatively quiet year, building a base at this higher level.

So onto the equity market, and I have a big quoted investment to talk about this year that I didn’t have last year…

Betfair floated in October, and I stood down from the company at that time. It was a ten year spell and a huge piece of my life – I’ll be surprised if I’m ever involved with a business as exhilirating and successful again. It wasn’t easy to walk away, but having had some time to reflect I’m sure it was the right decision.

We nearly floated the company in 2005 with a different CEO and Chairman. We had a meeting in October 2005 to decide whether to go ahead and we decided against it. I was very much the leader of the opposition at the time – I didn’t consider that the company had the right senior management. The board might have voted against me but for the fact that the numbers had taken a sudden lurch downwards for no obvious reason – I’d never been happier to see us missing our budgets. After the CEO left the numbers bounced right back.

Betfair was criticised after the float for missing it’s numbers – not a big miss but psychologically damning in some analysts eyes and some of the language in the papers suggested naivety or worse on the part of the board (including me) – the share price was knocked from £15 to £9 where it is now. I had no idea that the numbers would turn down, but if we weren’t quoted I would hardly turn a hair – I’ve lived through years of seeing our numbers hop around for no clear reason in the short term, and I’m past the point where I even think about it. The stuff that matters plays out over a longer period and is perhaps less directly financial and more qualititive.

2010 was a World Cup year, and that was a huge momentum break for punters. Everything stops for the World Cup, and maybe a lot of Betfair punters didn’t go back to some sports afterwards bacause they weren’t interesting enough. There was a small hole in the back end of the flat season this year – it probably just wasn’t inspiring enough fare for a lot of people, but I’m guessing here – I have no access to the Betfair numbers any more and Stephen Morana (and others) rightly tell me nothing about current trading.

The big questions in my mind are about international expansion, with particular interest in the US which might be liberalising a little now. There is a lot of international opportunity for Betfair – there’s also plenty of risk to existing international business. It’s a very complex picture and there should be plenty of news flow in 2011 – bring it on.

I’ve had a small holding in Hydrodec for a long time now, but since the IPO I’ve ramped that up to a point where I own over 5% of the company. I really believe in HYR – I’ve spent a long time getting my head around the story and I’m comfortable that I understand all aspects of this business now. I’ve tipped it up for the last two years and each year they have let me down – I am sticking with them as a tip for 2011.

To recap from last year – they clean and refresh transformer oil, often taking out toxic substances called PCBs. They have a plant in Australia and one in the US – they are building one in a JV in Japan. They are quoted in the UK and they have to pay interest (in sterling) on a convertible bond that they issued to raise money for the US plant. They have a patent on their process – no-one else does what they do.

Governments around the world are becoming more eco in their thinking and requirements, and the tolerance levels for PCBs within transformer oil may be gradually changing. The higher price of oil is good for the company as the price of new transformer oil will go up. They have Aussie revenues, and this has been a strong currency in recent times against sterling where they have costs. The Japan opportunity looks substantial. As far as I can see there is a lot of stuff on the plus side and not a lot on the minus side. Perhaps the biggest plus point is the rather obvious fact that their share price is less than 20% of what it was a few years back with the fundamentals broadly the same (although there has been a lot of dilution at the lower levels).

My final pick is a company that I haven’t spent too long looking at but just feels right to me. We’ve been using Ocado for a long time now, and I don’t see any reason why I would ever use any other service for my groceries. If they put their prices right up I would still happily pay the extra – ok I may not be as price sensitive as the average customer but it’s not about money, it’s about time. There are so many ways that this company can push forward – it’s easy to knock the share price as being expensive but this is a company built on exceptionally solid foundations. I think they will have a good 2011.