Tuesday, April 25, 2006

Update on IBA

On April 5 I suggested that IBA might be a risky holding at the moment, since its price will probably plummet when H5N1 flu eventually hits Mexico, or even the United States, either in birds or in humans. Had you followed my sage hints and sold then, you would have missed out on the 17%-or-so price appreciation since then, which seems to have been caused by good earnings, a feeling that chicken stocks in general are oversold, and an article about this last in The Wall Street Journal. (I haven't seen the actual article, since the WSJ is only available by subscription where I live, so I don't know if the article mentions Bachoco by name.)

So I was wrong. Or was I? It's not easy to tell. That's usually the way things are when ordinary common sense points in one direction, but the possibility of a rare and catastrophic event points in the opposite direction - in this case, the ordinary rules would say that IBA is a good buy, but what if it does nosedive terribly when bird flu hits North America?

It may be possible to quantify the risk/benefit relationship when one starts out with good hard numbers, but with very rare events, or events which have never occurred previously at all, one never does. If my vague memories are still worth something, the philosophers of mathematics don't like calling this one much more than I do.

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