According to Warren Buffett, the best way to become rich is to “close the doors. Be fearful when others are greedy. Be greedy when others are fearful”. Since dry bulk investors seem to be having a fearful fit of nerves at the moment, maybe it’s a good time to start getting greedy. But what exactly does that mean for shipping?
Two Tier Strategies
Actually this pithy advice bundles up two investment strategies. One is not to let your judgement be swayed by sentiment, especially when the market is at an extreme high or low. The other is to be contrarian. This is good advice for shipping, but it leaves investors with the problem of deciding what constitutes “being greedy”.
Bulkers Back To Basics
Recent secondhand price data provides a neat illustration of the issues. The Bulkcarrier Secondhand Price Index, based at 100 in January 2000, has recently dipped and is now almost back to where it was 15 years ago. In the meantime prices have been through a heroic cycle. After staying at around 100 points for the first three years, the price index took off, climbing to 500 points in 2008, before collapsing in 2009. After a brief recovery in 2010 the index is now back around 100. So investors who were not greedy and sold in 2007-08 have a nice warm feeling. But was selling really the right strategy? Let’s dig a bit deeper.
Patience Is Golden
Take a new Panamax bulker delivered in 2000 as an example. The inset table shows how things worked out for “non-sellers”. The ship cost $25.5m, and at 15 years old was worth $9m in March 2015, so the ship depreciated by $16.5m. But in 2000-15, assuming the ship trades 330 days a year, it would have made around $96m trading spot (boosted by strong earnings in 2007-08). Deducting depreciation and rough operating expenses ($32m at around $5-6,500/day) leaves net earnings of around $48m, generated over 15.25 years. That is $3.2m a year. On an original investment of $25.5m that is roughly a return of 12% per annum.
Safe As Ships?
That’s not exactly a top-end equity return, and punters might wonder if all that volatility is only worth 12%? But the net cash flow (revenue less OPEX) shows that in this example, if the ship was funded with equity and well insured, there was fairly low risk. There were a few months when earnings could probably not cover costs, but a modest working capital would cover these (although for some longer periods, net cash flow was tight). And of course it’s a very different story if the ship was funded with debt (another sort of greed?).
The Right Perspective
So there you have it. The shipping market looks unbelievably volatile and exciting. But if you “close the door”, focusing only on the numbers, for “greed” you could read “leverage”. With great patience; decent management; and lots of equity, shipping is a business where you can, if the timing is right, get a fair commercial return and an even better night’s sleep. Or you can get greedy, it’s your choice. Have a nice day.