Blackmores is now an LSD deal

Robert Ringer wrote a book in the 1970s titled Looking out for Number One. The book was unintentionally hilarious in certain parts, but certainly enjoyable, and one thing I do remember was his description of “LSD deals”. This is a business deal that only someone who was taking the mind altering drug LSD would find attractive.

Which brings me to Blackmores (BKL.AX). I have long been a fan of this company, I was buying the shares at around $13.85 back in 2009, you can see the post I wrote at the time here: http://thestockscribe.blogspot.com.au/2009/01/blackmores-and-campbell-brothers-why-i.html

Last Thursday (29 October), Blackmores briefly traded at over $200 per share. Roughly 14 times the average price that I had bought at.

Human psychology is always interesting when it comes to trading markets. Most people are wired to lose money because they simply can’t stop themselves from doing stupid things. They listen to the media, they listen to no-nothing “experts”, they jump on popular fads and they follow the herd. Over time, you are almost guaranteed to lose money doing this.

I’ll put it to you as a long-time Blackmores shareholder (who is now completely out of the company), that most of the smart money has exited the company at current prices. How could they not? How often have you made 11-14 times on your money in the space of 6 years? In all probability, it’s now the real dumb money that is buying the shares. What a wise person does in the beginning, a fool does in the end. Just my opinion.

And it doesn’t matter if Blackmores goes up even further from here, the point is, anyone buying the shares now is playing a very dangerous game because the stock is priced for absolute perfection, one misstep and that share price will plummet like a lead balloon.

When I was buying my Blackmores shares back in 2009, no one wanted to know the company, it was about as popular as dog turd. And that was great, because that is how I make large amounts of money. Now, they can’t get enough of it at insane price levels (may be they are all on LSD, I don’t know).

It’s true that the devaluation of the Australian dollar and the insatiable Chinese buying of their products (mostly by Chinese in Australia, not Chinese in China) has turned things around for Blackmores in a big way. However, the company is now demonstrating a classic reflexive process.

Reflexivity was a concept discussed by George Soros in his iconic book: The Alchemy of Finance. I will quote from this book:

There is bound to be a flaw in the participants’ perception of the fundamentals. The flaw may not be apparent in the early stages but it is likely to manifest itself later on. When it does, it sets the stage for the reversal of the prevailing bias. If the change in bias reverses the underlying trend a self-reinforcing process is set in motion in the opposite direction. What the flaw is and how and when it is likely to manifest itself are the keys to understanding boom/bust sequences.

A couple of years ago, Blackmores’ sales declined dramatically (something completely forgotton now), but make no mistake, at some point it can happen again. But that is the manifestation of the flaw that George Soros refers to in the above quote.