How Investments Get All Wet


Since Earth Day this week, it’s a good time to take a look at investments in natural resources, like water.  This is a resource that is becoming increasingly more valuable.  Investing in water is a no brainer.  Right?

Such was my thinking when I first started writing about the Singapore water purification company, Hyflux, in 2004.   I invested myself.  The chart below shows how the share has performed since 2004.

tradestops

Hyflux shares did really well… for a while.

A reader sent this note:  “I know you’ve been investing in water companies for several years now, so I wanted to pass along this email update where I receive weekly roundups.  Today’s message addresses the growing need for potable water.

When time permits, please scroll down and read the article entitled  “More Precious Than Gold: Why You Should Invest in Water Now”.

The article featured shares in Hyflux, a water company, that just inked a long term deal with the Kingdom of Saudi Arabia to provide their citizens with water.

I replied that Hyflux may indeed be a good investment long term, (or not) but its share price failure over the past decade helped me shift totally to ETFs (except the sandalwood speculation I have).  I invested in Hyflux when it signed a similar deal with Libya before Gaddafi was removed.  The shares tanked.  A deal with Saudi Arabia may sound good, but the Middle East is a pretty volatile place.

I first wrote about Hyflux in 2004 when shares were in the .90 cent per share range.  The fundamentals were so good… the need for more water and Hyflux had a lot going on.  The price  shot to nearly $3.00 per share.  Wow, did I think I was smart! But, though the fundamentals for investing in water just keep getting better, here we are over a decade later with the Hyflux share price in the .40 cent range.

Only those who had a good stop loss in 2005 jumped out with a great profit.  But look at what happened next.  Even those investors who used a good stop loss had a hard time.  The pattern of the share price, the rapid rise, the fast decent and sideways motion from 2016 to 2012 was one that was mostly likely to create a Performance Gap.  Investors who were following this share reinvested in 2008 and were wiped out in 2009.  Then they reinvested in 2010 and were wiped out again in 2011.  This is the type of share movement where every type of investor (except those manipulating a market) lose.  This idea (investing in water) is right.  However, this specific share is an investor’s nightmare.

The current analysis at Tradestops.com  (1) shows that this share is in the SSI red zone (trending down) and it has a huge VQ of 39.6%.  This means that the share can rise and fall 39.6% without creating a trend.   This makes most stop losses meaningless.   These shares should only be viewed in the most highly speculative manner.

tradestops

tradestops

A recent article  in the Wall Street Journal “Indexes Beat Stock Pickers Even Over 15 Years” (1) backs up my decision to make life simple and invest in ETFs instead of specific shares.  The article reveals new data showing that 82% of all U.S. funds trailed their respective benchmarks over 15 years

It says, “Over the 15 years ended in December 2016, 82% of all U.S. funds trailed their respective benchmarks, according to the latest S&P Indices Versus Active funds scorecard. This was the first year that the analysis included 15 years of data, helping smooth out periods of volatility that can affect the performance of active managers.

“Among more than a dozen categories tracked, 95.4% of U.S. mid-cap funds, 93.2% of U.S. small-cap funds and 92.2% of U.S. large-cap funds trailed their respective benchmarks, according to the data.”

tradestops

The article pointed out how even the top performing managers were unreliable and gave the Sequoia Fund as an example.   This was the top performing large-cap growth mutual fund tracked by Morningstar for 15 years.  Then in 2015 the fund was badly burned by a heavy position in Valeant Pharmaceuticals International Inc. Valeant’s stock price has plunged 96% from its peak in August 2015.

This is why our course, Purposeful investment, focuses on the math nowadays rather than the fundamental ideas.

I still love the idea of investing in water, but if I were to do so, I would pick an ETF that tracks a water index.

For example, here is the five year share price chart for the Claymore Guggenheim S&P Global Water ETF (CGW) at www.finance.yahoo.com

water shares

Compare that performance to that of the Hyflux share chart at www.finance.yahoo.com

water shares

In addition the Claymore Guggenheim water ETF is in the green zone (trending up) and has a really low volatility quotient of  10.93% compared to the very high VQ 39.6% for Hyflux which is in the red zone (trending down).

tradestops

tradestops

One of our mantras is to invest in what we have a passion for.  Investing in water makes sense… if, water shares as a sector offer good value (and more so) if one has good diversification in the sector.

An ETF like this Guggenheim ETF provides the diversification, but its dividend in the last year was 1.52%.

Compared to the 3.27% dividend yield of the Keppler Asset Management Developed Market Top Value Portfolio we  track at our Purposeful investing Course shows that the value must be suspect.

keppler

Investing in water companies may not be much of a good value investment at this time.   This may be an idea with appeal that could leave our investments all wet!

Gary

(1) www.wsj.com: Indexes beat stock pickers even over 15 years

(2) Learn more on how to use the Tradestops.com “Magical Calculator” that shows how to improve investing discipline.


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