A client asks "How do you research an investment?"

The internet allows faster, deeper research than at any other time in history, as well as constant contact with a network of other experienced money managers.   This torrent of information means one can work uncounted hours locating, analyzing and acting upon opportunities.   Here is a recent example:

25 Jaunary 2008 I read this article about gold mines shut down in South Africa due to power outages. The usual US investors' stock investments for gold mining, Barrick and Newmont, have such diversified interests worldwide that a South African power outage wouldn't affect their share price.   After some further work, I determined the mines affected which one could trade on US exchanges were Harmony and Gold Fields.   Because of the power crisis, their share prices dropped at the end of January and through early February. Mines in South Africa work 24-hour / 7 day shifts to keep up with Chinese and Indian demand for gold, so these power outages put them at disadvantage, cost them millions, and endangered lives, particularly because the power utility announced the outages with short notice. South Africa's gold mines are the world's deepest and among the most dangerous. With electricity for pumping, ventilation and elevators so unpredictable, they had to shut down to protect miners.

The name of the power company in South Africa -- Eskom -- came to mind from years ago in London investing in their bonds.   Eskom bonds yielded 18% in US dollars back then, an excellent investment with no currency risk.   Anyway, Eskom power plants run on coal, and though coal is mined in the country, some comes in by ship through picturesque Richard's Bay, and is then taken by train to Eskom's electricity generating plants. You can see the railcars by clicking on the photo, then mousing around the satellite photo. Eskom announced abrupt shutdowns, or as they call them down there "load shedding", because they were running out of coal.   Jacob Maroga, Eskom's new chief, had the economic fate of his country in his hands.

Here's what the mines had to deal with in the past few weeks:

  25 January:     All mining activities suspended due to power cuts.
  28 January:     Eskom informs that 80% of power will be restored tonight.
  31 January:     Eskom temporarily wthdraws power to protect further system instability.
  01 February:   Eskom last night reinstated authorization for mines to use power.


So much money was at stake, I felt the powerful mining interests would fix this, and knew from long experience that the stock price move would precede the public news.   So, at the first sign of buying on 19 February, I bought Harmony and Gold Fields. Their price move was enhanced as bullion prices also moved up out of a technical chart "flag" that same day, and continued the next day to an all-time high of $949.

Sure enough, after the price move, the news came out that mines had put pressure on the government to lend/give/invest enough money to Eskom so they could buy plenty of coal.

After their big move up, Harmony and Gold Fields closed in a bearish chart formation on 21 February, so I sold both, for a +7% gain in a few days.   Not bad, considering during these same few days the general market dropped another -0.5%, and gold bullion only went up +2%.   I am monitoring both closely for a re-entry point, in case the trend up reasserts itself.

So, a nose for news, finding the logical place to make a profit therefrom, experience to understand the business dynamics and players involved, not waiting until all other investors have also figured out the situation, perseverance to manage the trade, reading the price and volume charts to spot the moment to act, risk control, and knowing when to cash in.   This is the sort of research I put into action each day for our mutual benefit.