Platinum – Why Large Margin of Safety Saved My Ass

English Wikipedia, original upload 6 April 2005 by Mb1000

All Time Sleeping Average: (Target) 7h30m / day (Actual) 7h30m / day (133 night average)

3 Day Sleeping Average: (Target) 7+h / day (Actual) 8h00m / day (5h55m, 8h10m, 9h55m)

In “Imaginary Stock Portfolio – Oct 1 2015” I made an unconventional investment in platinum as compared to my usual equity investments. I did the same in my actual personal portfolio.

The premise was simple – platinum’s price was 42% below its average cost of production back in Oct 2nd. There was no way in hell platinum’s price wouldn’t revert back above average cost of production due to simple economic supply and demand dynamics.

The only question was how long it will take to revert. Based on my experience, markets are extremely efficient if not 100% efficient as proposed by Eugene Fama’s Efficient Market Hypothesis, so it’s very likely for the price to revert within 2-3 years as Joel Greenblatt has observed.

The only problem was… the margin of safety was less than I thought.

I made the investment decision within literally 10 minutes of reading “Unconventional Investments“ from Base Hit Investing and after doing a simple Google search on price of platinum versus cost of producing platinum.

But I’ve made further research into platinum fundamentals, and I realized that average cost of producing platinum was not uniform across many sources, and I discovered the cost of production figure I used was in the middle of the curve.

This made me uncomfortable. Every time I make an investment, I always choose the most conservative figure available. There’s simply too many unknown and unknowable variables that can ruin my returns, which is why I demand such large margin of safety.

Thankfully, the initially large 42% margin of safety saved my ass. Even after I used the most conservative cost of production figure I could find, I still had 16.13% margin of safety (as of Oct 18th).

Since I’m a strong believer in Seth Klarman’s philosophy of never waiting until full value realization to reap profits and re-invest in positions with larger margin of safety, I’ll be extremely open to the idea of selling my position in platinum to invest in other potential investments (it has produced 7.98% return on my cost basis so far for my personal portfolio).

The problem of course is that I’m having a hard time finding new attractive investment opportunities to soak up such funds. In the meantime I’ll just hold onto platinum until it does fully realize in value.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

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