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Heaven and Hell: Testing a Chinese proverb

April 19, 2009

Peter Shearlock

It is one of those old clichés: when it comes to investing, timing is everything. In the past month I have discovered that good or bad timing can come down to a matter of minutes.

I have made one disposal and one purchase since my last update. On the disposal side, I decided to take advantage of the sudden run-up in cyclical shares to sell my holding in Kingfisher, the owner of DIY chain B&Q, at 174p. It had been showing me a loss from the moment I invested in October 2007 at 191p a share.

I debated whether to hold on in the hope of getting my money back but recalled the Chinese proverb: “A man who waits for a roast duck to fly into his mouth waits a very long time.” Better the bird in the hand. The shares have since shed some of their gains and my sale price looks good — though it cemented a loss of 13% after costs.

With the same phone call I bought some shares in oil giant Royal Dutch Shell. For some time I have been looking for either a bond or a high-yielding share where I can park some money rather than leave it in the bank at some stunted rate of interest. Shell B shares seemed to fit the bill.

They were trading at £15.35, at a yield of 7.4%. Mindful of another Chinese proverb — “When you want to test the depth of the water, don’t use both feet” — I bought modestly, leaving some firepower for later.

But within minutes the shares were in freefall. I later discovered that Merrill Lynch had that morning advised their clients to sell. Although the billions Merrill lost last year would have been enough to put a sub-prime salesman on Mars, it seems their clients still listen to them. Within two days Shell shares fell £1 and over a week they fell by £1.50.

Undaunted, I picked up as many shares again some days later at just under £14.28. That means my average purchase price is around £14.81. At that level, I should be getting a gross income equivalent to nearly 7.7% this year, though the precise level will depend on the sterling/ dollar exchange rate since Shell reports its profits, and pays its dividends, in dollars.

Have I made a big mistake? Time will tell, but I don’t think so. Unlike BP, which recently capped its dividend for the next two years, Shell has promised to lift its first-quarter 2009 payment by 5%. Jeroen van der Veer, the chief executive, said in February that the company’s strategy was “to pay competitive and progressive dividends”.

After a collapse in oil prices from about $140 a barrel last summer to a recent low of $40, Shell’s profits will inevitably be a lot lower this year. But the oil price has lately traded at over $50 a barrel and the long-term supply picture supports a continuing recovery as the world emerges from its slump.

The company looks very highly geared to the oil price. About a third of its oil and gas resources are buried in tar sands in western Canada. Extraction is not only an unpleasant business — it turns virgin land into a sea of sludge — but very expensive. Shell reportedly needs an oil price of at least $38 a barrel to break even here, so every little uptick in the oil price is crucially important.

There has been little movement among the smallcap shares that make up the Hell side of the portfolio, though my decision last month to top up my holding in Spice, which supplies support services to water, gas and electricity companies, at 43.7p is working out well.

Perhaps the big news is the move by Goldplat, the little gold recovery and mining operation, to buy back some of its shares. It has not made a lot of difference to the share price yet, but it should. As the Chinese put it: “Everything has its beauty but not everyone sees it.” Which is the story of my investing career.

TIMES ARTICLE

royaldutchshellplc.com and its also non-profit sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

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