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Time to buy oil: Fighting Bulls & Catching Knives

Summary: I'm thinking of buying oil

That's about it for this time: The oil price is down to multi year lows, and below marginal cost of production (debatable), and thus I feel like buying some.

The rest of this 15-minute article is an introspection into my own functional Asperger syndrome (a bit like Michael 'Big Short' Burry who made a fortune in the housing crash of 2008), my contrarian inclination, and why crowd independence can be a significant predictor of success in the stock markets.

Do you have similar personality traits and have you learned to benefit from them?

crude oil 1yr

 

WTI Crude below 44

 

 

Dyed-in-the-wool contrarian

Oil is crashing - I'd better buy soon! (That's what I did earlier this year, then sold when the bounce turned into an upward trend. Now I feel like buying again, just as people start panicking with WTI crude below 44 [I'll buy Brent, though])

Gold is crashing - How soon can I get my hands on some (more)? (That's what I thought about a year ago, and now again as gold is falling even deeper. I'm thinking more and more of getting physical)

The above trades went pretty well, but as a natural contrarian, I am usually wrong, or at least way too early (which amounts to the same thing). I also just never get to enjoy riding a trend for very long.

asperger 3

That's how I'm wired; I don't get caught up in crowd events like concerts or sports, and I instinctively distrust trends.

Growing up, I was often the odd one out. Or just plain odd. It took at least 30 more years before I realized why...

On the other hand, I assimilate facts at face value and I'm patient, really patient. In the long run*, I usually win (on the market) against the socialized lemmings that eventually fall off the cliff. They, however, typically feel better** most of the time.

* (unfortunately, that might be when we're all dead - my current big market short might fall in that category)

** feeling at all counts as 'better' ; )

 

Being asocial made independent views natural

I hate people - or so I thought about a decade ago (N.B. I was 33 by then, so hardly a spring chicken). Then gradually I realized I just liked to be alone, reading, learning, thinking and solving problems (which was impossible with people around - imagine trying to concentrate sitting alone in a dark room, knowing there is a large venomous spider, snake or similar there with you).

In my late 30's I eventually understood that I actually liked people; in the right doses, and in non-learning and non-performance contexts, and when I presented my conclusions from my alone-time. I never labelled myself with Asperger syndrome though - until just the last few years, when I was 35-40.

I've never been accused of jumping to conclusions. On the contrary, rather being a bit retarded ;)

Five-six year ago, I felt a kind of kinship with the Asperger-diagnosed investor Michael Burry, when he was portrayed in The Greatest Trade Ever (2009) and The Big Short (2010). At the time, however, I thought it was just wishful thinking that we shared any deeper similarities. "I'm a bit like Steve Jobs, I like Apple products too".

I actually had read the (amazing) book "The curious incident of the dog in the night-time" by Mark Haddon 5 years earlier, in September 2005. It is written from a person with autism's perspective. I did see some vague similarities, but mostly I got upset when the boy couldn't control himself better... (sic), and it never struck me I could be diagnosed with a anything remotely similar to what Christopher had.

 

Discovering autism spectrum disorder

My closest friends and girlfriends (and their parents, not to mention mine) knew about my condition long before I did (I just learned yesterday that as early as 2002 or 2003, my girlfriend and her father discussed my potential autism due to my folding my underwear. Other close friends diagnosed me the first time we met, or so long ago that the exact timing is irrelevant).

Many immediately sensed I was different, but didn't get a specific term for it until much later. Asperger wasn't standardized as a diagnosis until the 1990s (and by then I had already gone to college to study finance and thus escaped the system)

They never said anything to me, which was probably for the best*.

*I sometimes wonder if I performed better not truly understanding my particular condition. Had I known, I might have tried to second guess myself, with unpredictable and unstable results. Trying to be contrarian is not a sustainable path; you'll soon lose track of what is your true stance.

asperger 2 asperger

 

 

Advantage Asperger

Peter Thiel has quipped that entrepreneurs with functional autism spectrum disorder ("Aspergers") have an (unfair) advantage in Silicon Valley. Among other things, they can benefit from having a more singular focus, less or no trouble with rejection or going against the grain, and sometimes even special skills.

Hedge fund managers often profit from the same characteristics*: being naturally contrarian, independent of herd behavior**, weighing wins and losses equally, being cool under pressure, unemotional, and generally thinking in absolutes and facts, rather than relativistically and fads. A big drawback, however, is the inability to ride trends* to their conclusion (bubble peaks, and depression troughs).

* Not all of course; far from it

** which brings back memories of when I thanked "the long only crowd for creating opportunities to go short which led to my fund's win" (read more in my free eBook)

I've never felt comfortable in crowds. It's not that I'm actively uncomfortable; I can stand by myself for hours just observing, but I have trouble following and participating in several conversations at once, in particular in noisy environments. And, more importantly, I hardly see any upside from being in a crowd, unless you hope to meet somebody new, or if you are normal and social and can appreciate the crowd vibe, that I never even perceive (alcohol helps though).

I think a big part of my hedge fund's success was our independent thinking, our unbiased view of going long and short respectively, and not being connected with the European and UK hedge fund "clubs". In as much, I am grateful for the personality traits I have, be they clinical ASD or not, even if they make me slightly handicapped socially.

 

Suspense and surprise

The inspiration for this article actually came from a recent Freakonomics podcast about movie and book plots (and news shows).

When the hosts and the guest proudly described how popular TV shows, movies and books often use a formulaic approach - with three major twists and a certain technique for maximizing the uncertainty (suspense) about the next step, as well as the eventual surprise - I almost felt physically sick.

That's why I tend to not like ordinary books or TV shows. I want facts, or a story line that progresses from point A to point B, preferably with a message. If the facts are surprising, all the better, but please, please, hold the manufactured artificial suspense - in particular if you have no facts or bigger story to convey.

I guess that formula works for people who are interested in people

Some TV series exhibit a really good first season, where everything is thought through from the pilot to the season finale. Unfortunately right at the beginning of season two most fall back on a formula of single or double episode tasks and excursions, spiced with mostly annoying flash backs.

I guess that formula works for people who are interested in people, and who like the feelings that suspense and surprise provide. I just keep wondering, when will the real story materialize?! OK, back to business:

 

Oil, investing and Asperger

My style of research and analysis, as well as portfolio management was (and still is) pretty straight forward:

I checked the available facts. I made plausible assumptions about the future regarding the variables themselves, the operations and management of the companies and the stock market environment (including risk tolerance and valuation paradigm).

Then I recommended/bought whatever was really "cheap" (a very complex situation-dependent notion), sold whatever was really, really expensive (twice the margin of safety needed), and didn't give a damn about the usually more than 90% of the market in between. The latter means I let my Excel models rest until something triggered (don't ask) my interest in those companies again.

Then I waited. And waited. And waited... (well, I of course kept digging and looking for better opportunities, or reasons my investment was or had turned wrong. I also traded a bit on top of the basic investment - adjusting perhaps a fourth up or down depending on weekly and monthly fluctuations)

...Which leads us to oil. I made my first investments in oil early this winter/spring, 21 years after getting my first job in the finance industry. The same goes for gold, although I bought and sold my first batches of gold a year or two earlier. Pound Sterling and USD... Same story, with my first transactions in 2013-14.

The good thing with my particular point in the ASD spectrum is that as long as the facts don't change, I am infinitely patient.

The drawback is that I get hamstrung regarding speculating, riding trends, joining fads. I can of course, I not sealed off from the real world, it's just that it feels so uncomfortable I can only do it for very short periods of time if the variables are wrong.

-Unless I'm dealing with inherently worthless factors, such as fiat currencies and gold :). Then I can speculate with ease of mind.

 

Fighting Bulls & Catching Knives

So, oil, gold, what have you, drops sharply and suddenly my spider sense tells me to buy (I'm not talking about perma-bulls buying every little 10% dip. I'm talking about -40% at least), right when most people just want to get rid of their assets at any price.

Often, I short too early, fighting every bull I see, and then hang on to those shorts like a pit bull, all the way to the peak and down again.

Then I buy 40% down (if that's enough to normalize the price or make the asset cheap), catching knives with both hands, and keep buying at -50%, -60%, -70% and so on, and hopefully make a decent return when fortunes turn - right before selling way too early again.

As long as I keep a sizable margin of safety and my sense of intrinsic value is well honed, I make good returns over the cycle. But in between, sometimes... (so be careful in trying to follow my lead; perhaps you are better off just buying and holding)

Oil, however, actually is quite a different story than gold or currencies (FX). Oil has a production cost, and a business value. And now the price has not only more than halved in short order, it is also way below assessments of marginal production cost (65 USD for Brent), even if we are going into a super recession in 2016-19 (before the Age of Machines and Solar start in the 2020s).

In the very short term, oil of course can, and probably will, fall even lower than right now, due to Saudi Arabia's need of money, Saudi Arabia's will to destroy the shale industry, the coming global recession and China slowdown and shadow banking implosion, general oil price trend etc.

On the other hand money will keep being printed, and the global economy will at worst stand still nominally before expanding again. Hence, my best guess is that the oil price will bounce back to at least the marginal cost of production (for a volume at least on par with demand today) within two years.

 

autism

 

I'm tempted to buy oil now, but maybe you shouldn't be

That's why I'm suddenly (starting Friday August 7) tempted to get some exposure to the (brent) oil price again. That, and my inherent contrarian disposition (I hate people and crowds ; )

Do you know yourself well enough to be trusted with your own money on the financial markets?

If you're not completely sure, subscribe to my newsletter for future updates, and read my free eBook to get a sense of the psychological prerequisites for investing. Feel free to share this article with anybody you think might be interested.

And just a few facts to round off: A standard oil barrel contains 42 gallons or 159 litres and weighs a little more than 300 punds. The 42-gallon standard oil barrel was officially adopted by the Petroleum Producers Association in 1872 and by the U.S. Geological Survey and the U.S. Bureau of Mines in 1882, since the full-sized 84 gallon watertight barrel simply was too heavy to handle for one person.

oil barrels

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