C. Describe a time whenyou took a great risk.What was the outcome?
The DecisionIn November 2007, I decided to invest all mysavings and convinced my parents to investa portion of their wealth in Ecopetrol’s Initialpublic offering on the Colombian StockExchange.
The RisksI had just graduated from college and I only had 5 months ofworking experience when I decided to make a big bet on thelocal stock market. My family and I had never invested in thestock market but I knew it was a good opportunity to buy lowand then sell high. I started to do some research in order tobe better informed and make a more “educated” bet. I didsome studies about the company’s projections and analyzedthe performance of the past IPOs in the local market. Iremembered that my risk management professor always saidthat there is no “free lunch” therefore the higher the risk, thegreater the potential reward. I knew that I was risking all mysavings in the stock market where I had no control over thesystematic risk.
The CompanyEcopetrol is the main petroleumcompany in Colombia and the largestcompany in the country. Ecopetrolparticipates in activities related to theexploration, production, refining,storage, and distribution of petroleumand its by-products.
The Research - Pros(2007 FORECAST) 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%. Source:
The Research - Pros IPO Price Amount 1 Day 1 Week 1 Month Issue Date Demand (COP) (COP MM) Return Return 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 theaverage monthly return was 32% and that all of themexcept for the BVC IPO were profitable after the firstmonth in the market.
The Research – Cons Daily 1 Year Rolling Returns Volatility 20% 50% 15% 45% 10% 40% 5% 35% 0% 30% -5% 25% -10% 20% -15% 15% -20% 10% nov-02 nov-03 nov-04 nov-05 nov-06 nov-07Generally, the petroleum company stocks were positivelycorrelated to the crude oil prices, so I expected thatEcopetrol’s share might also have a volatility measurementaround 35%; this high volatility implied a risky investment.
The Research – ConsUSD/BBL USD/BBL100 180 96 USD/BBL Profit 160 14075 120 10050 80 6025 40 Risk ene-07 mar-07 jul-07 sep-07 ene-08 mar-08 jul-08 sep-08 may-07 may-08 nov-06 nov-07 nov-08 nov-03 nov-06 nov-02 nov-04 nov-05 nov-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.
3,000 2,800 The Outcome Sold 2,720 2,600 2,400 2,200 2,000 1,800 After a year and a half I decided to sell Ecopetrol’s 1,600 stocks and the return on the investment was ofBought 94%. My parents told me that part of their profit 1,400 was going to be used to pay for my graduate studies. In the end, this was a good bet because I 1,200 almost doubled my savings and I leveraged part of the money to pay for the MBA program at IE. 1,000 Nov-2007 Nov-2008 Nov-2009 Jan-2008 May-2008 Sep-2008 Jan-2009 May-2009 Sep-2009 Jan-2010 Feb-2008 Apr-2008 Jun-2008 Jul-2008 Feb-2009 Apr-2009 Jun-2009 Jul-2009 Feb-2010 Mar-2008 Aug-2008 Mar-2009 Aug-2009 Mar-2010 Oct-2008 Oct-2009 Dec-2007 Dec-2008 Dec-2009