Black Box Investing

October 31, 2000. Singapore Airlines Flight 006 was on a scheduled stopover in Taipei, Taiwan. Between Singapore and Los Angeles.

At 23:17 local time, it attempted to take off from the wrong runway. It crashed into construction equipment, killing 81 of the 179 occupants on board.

The ‘black box’ or flight recorder later revealed why.

Due to Typhoon Xangsane’s imminent arrival, the pilots lost situational awareness. They were focused on the weather conditions. Being cautious over company take-off limits and visibility. So much so, they failed to follow instructions to turn into the correct runway!

To make matters worse, the runway under construction was lighted when it should have been in darkness.

The last words recorded by the black box were: ‘Shit, something there’.

Black box flight recorders have probably saved more lives in aviation than almost any other factor. They allow safety inspectors and regulators to understand why crashes occurred. And put in place measures so they don’t happen again.

As investors, we should run our own ‘black boxes’.

Some years back, I bought shares in a British satellite telecoms company — Inmarsat [LSE:ISAT].

Based on many analyst reports, the company seemed poised to grow revenue and value. It provides satellite internet services to ships, planes and remote locations all over the world.

Touted as a growth area is provision of internet to planes.

Yet, this wasn’t a business I could easily understand. To provide the services, ISAT must invest heavily in new satellites. These are very costly and funded by debt. This year, debt looks to be about 17 times the company’s after-tax profits.

Because the business is so capital intensive and the customer base is narrow, the return on equity appears to be not much higher than the cost of debt.

Suffice to say, I lost money.

Running back the ‘black box’, there were clear warnings when I ran analysis on this company. I struggled to understand the complexities of its business model. And I got swayed by other analysts. Their enthusiasm for potential may have ignored the complicated downside.

And there’s instinct. Is Wi-Fi on long-haul planes that essential? In relation to the cost of provision? I’d prefer to fly Wi-Fi free and enjoy wine and films.

Now, let’s run a ‘black box’ over some current issues:

Banking

The other week, there was talk in the mainstream financial media about the big Aussie banks selling off their New Zealand subsidiaries.

New capital requirements from the Reserve Bank may make the units less profitable for their parent companies.

So there was glee at the prospect of some banking IPOs on the NZX — even partial listings.

But evidence from around the globe shows that small banks in small jurisdictions can be more vulnerable than larger banking groups.

Iceland — GDP around a tenth of New Zealand’s.

When Kaupthing Bank — the largest in Iceland — collapsed in 2008, it had worldwide repercussions. Attracted by higher deposit rates, many British savers had taken accounts. Plus, international savers also did so through their offshore branch in the Isle of Man.

While most were covered by British and Isle of Man government guarantee schemes to £50,000, savers with more were exposed to delays and losses.

Cyprus provides a similar warning.

In 2013, when Laiki Bank — the second-largest in Cyprus — ran into trouble, a government-approved bailout deal saw depositors with more than €100,000 experience a haircut.

Here in NZ, we’re currently the only advanced OECD nation with no guarantees on bank deposits. Under OBR (Open Banking Resolution), it’s possible that should a local bank fall under distress and after shareholders have taken losses, your deposits could next be in line for a haircut.

So large Aussie banks that are ‘too big to fail’ might be better for our wider investing interests. As would be a guarantee scheme.

Day trading

I get asked from time to time about day trading in forex and other financial instruments. Thank you for your recent comments and letters.

I’ve never done it. And don’t plan to start. But my black box recorder recalls a few friends who have. While there’ve been wins, some have lost sums of money such that their strategy gets crippled.

The odds seem stacked against you. There’s the cost of trading. The speed of the market. The extent of information you cannot possibly synthesise in short time trades. And the competition against algorithmic and large-scale traders.

Most convictions about a business or currency take time to play out. Sometimes years.

Jobs

It’s painful to see the slowdown in New Zealand. Particularly with job growth.

There are some clear black box lessons from the UK and the US — which now have lower unemployment rates than ours, despite much larger population bases.

This is what we need to do:

• Pull back on unsustainable migration to reduce labour competition.
• Focus on skill shortages.
• Support local manufacturing.
• Encourage exports.
• Lower business taxes.
• Reduce business compliance.
• Encourage investment and run a competitive stock exchange to attract listings.

But it seems we’ve been too busy contemplating the funding of our mental health.

Fortunately, in the markets, you can invest where you see growth and opportunity. Brexit is an area of interest. So, too, is resurgent America. And the coming stream of NASDAQ IPOs.

In my brand-new newsletter, Lifetime Wealth Investor, you can obtain institutional-grade recommendations on some of the currency and stock opportunities I’m targeting.

You will benefit from our ‘black box’ — combining years of investing experience.

For now, keep your black-box recording. Look back. Correct your strategy as needed. And keep on learning.

Regards,

Simon Angelo
Editor, Money Morning New Zealand