Saturday, October 1, 2016

Contrarian investing in yourself


Did you know that studies such as ‘The Millionaire Next Door’ found that most millionaires are not from old money but are self-made small business owners?  These millionaires invested in their own companies first and after a decade or two they owned a million dollar plus business and then some.  Investing in stocks is a tough game and your competing with big institutions that use the most sophisticated computer applications and employ often the brightest in the financial business.  So are you ever going to win BIG?  The average investor’s results are dismal – even a lot less than average market return!
So, outperforming the market is a pretty tough thing to do and, to make matters worse, many invest in market index ETFs.  But what when the going gets tough do then the tough really get going?  If those ‘though’ are the pundits and active investment managers then you may be disappointed when you find out that they are the bulk of the market crowd and that they DO PANIC and ‘Sell, sell, sell’.  Even worse when you own a market index ETF – everybody tends to panic during a crash and so they redeem their ETFs which basically means they selling the whole index regardless of price thus creating a self-propelling death-spiral. The ETFs are redeemed by the ETF manager through the selling of shares – they typically don’t have any cash reserves and thus when investors ‘redeem’ their ETF the market likely goes into free-fall.  Basically, you ETF buy-and-hold owner will feel the full, and probably the exaggerated, value destruction in the market.  You likely never outperform the market but during a crisis you’ll be at the center of the storm without even a shred of protection. So in uncertain times, consider holding less ETFs and more cash.
It is during such down turns that you may also lose your job and are forced to become an entrepreneur – during the worst of times but also, as many contrarian investors will tell you, the best of times to put your cash to work. This is why I, during this oil price down-turn started up my geological consulting company. It is a bit upsetting my stomach; but then wouldn’t this be the time that the Warren Buffetts of this world start putting their cash to work?  Now you may bet your money on some public company that is ‘cheap’ during the downturn – but do you have really have that little confidence in your own skills that you don’t dare to invest in yourself? Whom better to invest in than yourself?  Who has your best interest at heart, some CEO with a multi-million-dollar compensation and who doesn’t know you from a hole in the ground or you, the owner of your own start-up venture? 

Starting your business during a downturn makes sense. You can buy assets and ‘hire’ staff at bargain basement prices. You have time to position your new venture for the good times which are surely to come. But never forget that it may take longer than you expect for the full recovery to become reality. Just make sure the funds are there to survive. You may not feel comfortable in such a contrarian position but this is the time when you set yourself up for truly big gains. Just keep your head cool (which is easier said than done). Invest in yourself; “Choose yourself” as James Altucher writes and be prepared to become the next Millionaire-Next-Door. 

OPEC and Oil prices

Then there was the OPEC announcement of freezing and maybe even cutting back production starting November. Then there were all those skeptical pundits quoted by our ‘reader-scaring news media’, stating that they don’t believe that the agreement is real and that OPEC members will cheat probably from the first moment the agreement is implemented – or possibly even before that.  They are all missing the point. 
The real point is that OPEC members including Saudi are hurting. They have blinked in their price war, which as was said here some time ago, at best would result in a pyrrhic victory. In other words, cutting your nose of to spite your enemy. The real issue is that Saudi has admitted that they cannot keep this price war going forever.  So, if this price war started because there was a miniscule (2 million barrels or 2% oversupply) then wouldn’t pricing go through the roof with a 2 or 3% of supply short fall? Not necessarily so – after all there are probably many derivative owners for each barrel produced; just like with other commodities such as gold.  So, prices will only change when the market psychology changes. That may not happen right away. The combatants have shown their vulnerability – no wonder with OPEC countries like Venezuela being on the edge of social collapse. Even the Saudis are feeling the threat.
Yes, Aramco may produce oil for as little of $2 or $10 dollars – but the profits are spoken for. The profits are committed to Saudi Arabia’s social programs and their military commitments. Probably, the oil price needed for the Saudi Royal Family to stay in power is closer to $50 to $70.  Sprott’s Rick Rule claims the average all-in cost to produce a barrel of oil is $60 while it is sold for $40 to $50 dollars.  So how long do you think this can go on?  Say Saudi Arabia pays the consumer $20 per produced barrel. That means, 10 million barrels x 20 is a loss of $200 million per DAY!

OPEC and possibly even Canada has the power to unleash a price war but halting it may be more difficult. In the end that doesn’t matter. What matters us that OPEC has blinked; that the North American oil revolution has affected the entire world and that we one step closer to an oil price recovery. For me, the most important events of this oil turn-around are: Oil bottomed at 26% which equaled the inflation corrected bottom of $10 per barrel in 1986; Oil recovered to just over $50 and currently is consolidating its doubled price; and Now ‘OPEC Blinked’.  The rest is noise and, as stated earlier, we may be closer to a supply short-fall than many believe.