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C. Describe a time when you took a great risk. What was the outcome?
In November 2007, I decided to invest all my savings and convinced my parents to invest a portion of their wealth in Ecopetrol’s Initial public offering on the Colombian Stock Exchange.
The Decision
The RisksI had just graduated from college and I only had 5 months of working experience when I decided to make a big bet on the local stock market. My family and I had never invested in the stock market but I knew it was a good opportunity to buy low and then sell high. I started to do some research in order to be better informed and make a more “educated” bet. I did some studies about the company’s projections and analyzed the performance of the past IPOs in the local market. I remembered that my risk management professor always said that there is no “free lunch” therefore the higher the risk, the greater the potential reward. I knew that I was risking all my savings in the stock market where I had no control over the systematic risk.
The Risks
Ecopetrol is the main petroleum company in Colombia and the largest company in the country. Ecopetrol participates in activities related to the exploration, production, refining, storage, and distribution of petroleum and its by-products.
The Company
The Research - Pros(2007 FORECAST)
Source:
Ecopetrol’s valuation implied an EV/EBITDA Multiple of 4.5 X. This value was close to the inferior limit of the industry (4.4X). I used this information to figure out that if Ecopetrol’s was close to the industry Multiple, it could represent a potential profit of 26%.
The Research - ProsIssue Date
IPO Price (COP)
Amount (COP MM)
Demand1 Day
Return1 Week Return
1 Month Return
ISAGEN 18-Oct-07 1,130 592,089 6.1X 62% 60% 88%Bancolombia 9-Jul-07 15,205 323,976 N/A 3% 7% 12%
BVC 26-Jun-07 22 20,000 1.0X 2% -3% -2%Grupo Aval 21-Jun-07 630 202,984 1.9X -2% -1% 6%
ÉXITO 14-Mar-07 10,500 259,350 N/A 52% 70% 57%Baco de Bogotá 18-Jul-06 22,499 300,000 N/A 6% 11% 33%
Average 3.0X 21% 24% 32%St Dev. 29% 32% 35%MAX 6.1X 62% 70% 88%MIN 1.0X -2% -3% -2%
The last local IPOs’ performance indicated that the average monthly return was 32% and that all of them except for the BVC IPO were profitable after the first month in the market.
10%
15%
20%
25%
30%
35%
40%
45%
50%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
no
v-02
no
v-03
no
v-04
no
v-05
no
v-06
no
v-07
The Research – Cons
Generally, the petroleum company stocks were positively correlated to the crude oil prices, so I expected that Ecopetrol’s share might also have a volatility measurement around 35%; this high volatility implied a risky investment.
Daily Returns
1 Year Rolling Volatility
The Research – Cons
40
60
80
100
120
140
160
180
no
v-06
ene-
07
mar
-07
may
-07
jul-
07
sep
-07
no
v-07
ene-
08
mar
-08
may
-08
jul-
08
sep
-08
no
v-08
25
50
75
100
no
v-02
no
v-03
no
v-04
no
v-05
no
v-06
no
v-07
Moreover crude oil prices were at an all time high, which represented a threat: I believe that commodity prices follow a mean reversion process. At the time, I thought that the probability of crude oil prices decreasing was greater than the probability of prices remaining at their current high levels. If crude oil prices were going down, then Ecopetrol’s stock price could be affected negatively.
96 USD/BBL
USD/BBL
Profit
Risk
USD/BBL
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
3,000
Nov
-200
7
Dec
-200
7
Jan-
2008
Feb-
2008
Mar
-200
8
Apr-
2008
May
-200
8
Jun-
2008
Jul-2
008
Aug-
2008
Sep-
2008
Oct
-200
8
Nov
-200
8
Dec
-200
8
Jan-
2009
Feb-
2009
Mar
-200
9
Apr-
2009
May
-200
9
Jun-
2009
Jul-2
009
Aug-
2009
Sep-
2009
Oct
-200
9
Nov
-200
9
Dec
-200
9
Jan-
2010
Feb-
2010
Mar
-201
0
The Outcome
Bought
Sold
2,720
After a year and a half I decided to sell Ecopetrol’s stocks and the return on the investment was of 94%. My parents told me that part of their profit was going to be used to pay for my graduate studies. In the end, this was a good bet because I almost doubled my savings and I leveraged part of the money to pay for the MBA program at IE.
