Log in

No account? Create an account
Jan. 29th, 2009 @ 09:22 am finances and oil
Thanks for all the stock picks. Having already been killed on USO and more recently DIG, COP, and a number of others, my natural inclination (you may recall I'm a gambler at heart) is to double up on everything. That would really stick my neck out, but hey, retirement is overrated. Here's an article "Oil Rises, Oil Falls" supporting that move. Someone talk me out of it.
About this Entry
Date:January 29th, 2009 06:09 pm (UTC)
(Permanent Link)
Martingale on the stock market?
[User Picture Icon]
Date:January 29th, 2009 07:08 pm (UTC)
(Permanent Link)
Exactly. Of course that's how you end up faking your death by crashing your plane into the everglades or something, but hey, that's a possibility we all think about every day.
Date:January 29th, 2009 09:07 pm (UTC)
(Permanent Link)
Have you ever stopped to figure out your real return on your investments and compared it to an appropriate passively managed benchmark? I guess you have money to burn, but I'm sure you could find a more fun and useful way to dispose of it.

The hardest investing lesson to learn, especially for intelligent and/or accomplished people, is that future prices of publicly traded instruments are not predictable. In other words, investing is not a game like poker in which skilled players have a positive EV. It's a true gambling game like roulette. The difference is that the investor is the house, so the longer you stay invested, the greater the likelihood of coming out ahead. The reason for this is simple, current prices are set by the collective action of a whole bunch of smart people. There are certainly a bunch of idiots in the collective, but they usually don't have enough money to push things very far, it's the professional players like endowment, pension and mutual fund managers really determine prices.

Note that this doesn't mean the current price is correct in any definable way, just that tomorrow's price is equally likely to be down as up (actually it's slightly more likely to be up since that's the long term market trend). Unless you have (illegal) non-publicly available information, you are thus not going to outguess the current price at a rate any better than chance. And since every attempt to outguess it costs money in terms of trading costs and possibly taxes, you end up with something well under 50/50.

If I can take this metaphor a bit further. Since you are the house, you want to do a couple of other things. Diversification across asset classes lowers your variance, just like hosting multiple types of games. Also like the house, the take is reduced by the amount you have to pay to keep the game running, so do what you can to reduce fees and expenses. (The metaphor kind of breaks down here since casinos have to spend money to attract the punters, but you don't get anything back for your costs.)

The lesson from all of this is to make your money from your job or other interests and "settle" for market returns with your investments. Do this and you'll outperform around 80% of all "investors" at a cost of a few hours per year.

BTW, this only applies to publicly traded stocks and bonds over which you will have no control of the underlying business. That's why Warren Buffet does not provide a counterexample, buying and funding entire businesses (or cornering the silver market) is a entirely different kettle of fish.

I'll leave you with a reading assignment. These are the papers from the leading researcher into how real investors perform. One of his major findings is the more someone trades, the greater his underperformance.
[User Picture Icon]
Date:January 29th, 2009 10:41 pm (UTC)
(Permanent Link)
I know that stuff -- it's what I tell people who sit around trading all day. I've also made substantial fortunes by not paying much attention to it. I mean, maybe AAPL was worth 2% or so of what it is now back when I bought a ton of it, but I applied some publicly available knowledge. Maybe it was equally likely to go up or down. Maybe. I'm going to need a lot more evidence before I conclude that I can't beat the wheel.
(Deleted comment)
Date:January 30th, 2009 08:52 am (UTC)
(Permanent Link)
I've actually flipped a couple of my positions recently. I used to be short on SLX, UGA, GM and F.

I've since gone long on SLX, X, F, TM, OIL and GE.

Granted, all those positions still add up to a fairly small portion of my portfolio, but I just enjoy making some of my own decisions, rather than trusting it all to the efficient market hypothesis.
[User Picture Icon]
Date:January 30th, 2009 04:05 am (UTC)
(Permanent Link)
I recently went long on oil for what is a fairly significant (for me) position. So I definitely agree. Especially since I don't think OPEC is going to let the price slide much from where it is.
[User Picture Icon]
Date:January 30th, 2009 07:04 pm (UTC)
(Permanent Link)
I can certain imagine oil going lower in the near term, but it's hard to imagine it not going very high again within 5-10 years, unless one of two things happens:

1. This depression really gets as bad as/worse than the 30s and we get negative worldwide economic growth for more than a few years.

2. some new fuel or conservation tech development that covers a substantial portion of oil's current market appears within that time frame.

We are at peak oil now. Unlike the alarmists, I don't think that means we need to start learning how to subsistence farm. But it does mean that the price won't be going down long term unless demand goes down long term.

I rate the chances of 1 as around 15-20%, and the chances of 2, conditional on ~1 as somewhere around 10-15% (pretty close to zero otherwise). Might want to sterilize those numbers before using them for anything too sensitive, but that leaves me thinking that long oil is a good idea, to the extent that long anything is a good idea.

But then, if nothing long turns out to be a good idea, I'm not so sure being short will make a lot of difference in my end-state utility. Your greater wealth may change that calculus, but my future economic utility is pretty well dominated by things like having a functional modern economy to work/buy/sell in.
Date:February 2nd, 2009 10:46 pm (UTC)
(Permanent Link)
I am Bullish on the following asset classes:

Mid cap equities
Angel investing

I also recommend a NNTaleb like strategy of buying out of the money puts on a number of companies across a number of industries (It is a little more complicated than that.)
Date:February 2nd, 2009 10:54 pm (UTC)
(Permanent Link)
Regarding Oil, I'd like to hear more arguments for why the price will stay low. It seems like we need a technological advance that can be retrofit to our existing infrastructure. Still, I can see prices staying low for a while. I think once prices start to rise >20% they may continue to go up as this will prompt more companies to take more aggresive hedging strategies against the price, which they may not be doing now. "Speculators" and other persons may start piling money in as well. But, I think the price may also peak around 60-80 (who knows how long from now) and stay there for a while (who knows how long)
Date:February 4th, 2009 10:39 pm (UTC)
(Permanent Link)
I have a hard time reading articles like that with a straight face after reading Taleb -- at least, the parts that suggest that historical narratives bear on the oil pricing analysis (prices go up a lot in years after they go down, suggesting that the future will behave the same way) going forward. This is very likely in the category of observations that you've known for a long, long time.

That said, I have a hard time imagining oil staying low in the mid-term. But that's based more on the portion of the article suggesting that capital expenditures to come up with more oil are going to start dropping if oil prices stay where they are.
Date:February 5th, 2009 12:37 am (UTC)
(Permanent Link)
Well on Taleb, It is not clear to me that he would be buying out of the money options in the current market. His argument is that the market tends to under price the occurrence of the rare event (the out of the money option). And, although I have not looked at option pricing closely in a couple of months, the market is now likely OVERPRICING risk. Even if it is not overpricing it, it is clearly less underpriced, and thus less of a value.

As to oil, it does not appear that oil use is going away anytime soon. The ipod, is more likely to become obsolete without warning than is oil (see the Sony Walkman). Until there is a solid Oil replacement, too many economies depend on it. Where it is certainly possible (although I think unlikely) that we develop an oil substitute BEFORE the economy turns thus reducing Oil's marginal demand permanently (or close to it), I have to think it is more likely that oil in 24 months is at 60 than 20 (roughly a 20 move way). In order to account for time value of money, I still think it substantially more likely that oil is at 60 than 25 (or 65 v 20).

IN other words, I have no idea if I will be correct, I just think the upside outweighs the downside by enough to justify the bet. A small bet, but a bet nonetheless.
[User Picture Icon]
Date:February 7th, 2009 03:24 am (UTC)
(Permanent Link)
I just read the article. It's well written and interesting, compared to a typical blog post. However, it is more of a "I've already chosen my viewpoint, and I'm going to present only evidence that supports it" type of article rather than an article which does not begin with a bias and presents fair evidence.

Dismissing speculators as a major reason behind the wild spikes in oil price in 2008 cannot be done so lightly; it's not just media idiots who say speculation played a big part, and being on fox news doesn't necessarily mean it's wrong. Economists such as Alan Greenspan think that speculation was a big factor. Some funds were making huge heavily leveraged bets on oil and ending up bankrupt when their timing on oil contracts and derivatives coincided with drops in oil prices.

The bit in the article about climate change is the clearest example of failing to provide unbiased data. I won't even get into the "NASA" "virtually assuring" BS, but even if his global cooling prediction were true, he completely ignores the fact that a global cooling trend will translate into lower energy use for well, cooling! Actual scientific research predicts that in climate change scenarios the overall global change in total heating plus cooling energy usage is small. The amount of oil actually used directly for heating is small and diminishing (why use increasingly expensive oil heat when electric is cheaper). I could go on but i've made my point.
[User Picture Icon]
Date:February 11th, 2009 05:54 am (UTC)
(Permanent Link)
Date:February 11th, 2009 04:52 pm (UTC)
(Permanent Link)
Or perhaps there are some interesting arbs to be done. (nice article btw)
[User Picture Icon]
Date:February 13th, 2009 03:35 pm (UTC)
(Permanent Link)
I love oil articles that point out how new oil production plummeted when it went from super high prices in the 1970s to super low prices in the 1990s. It's because we are running out of it, right? Because in any rational capitalistic market entrepeneurs would be rushing to find new oil fields as it's price plummets;)
Date:March 1st, 2009 04:17 pm (UTC)

In your situation...

(Permanent Link)
I would say cash is king. If you can make that happen for you, that's your call.

Alternatively, I once heard someone say, “Buy land. They don't make it no more....”
Date:March 3rd, 2009 09:56 pm (UTC)

1 month later

(Permanent Link)
USO, DIG and COP are off another 13% to 34%. If you did double up, I seriously hope you've been practicing bankroll management and set aside enough in cash and bonds to live reasonably comfortably whatever may happen to your speculative plays.
[User Picture Icon]
Date:March 3rd, 2009 10:39 pm (UTC)

Re: 1 month later

(Permanent Link)
I appreciate your worrying about me, but it's really not necessary. Also, living comfortably is overrated.
Date:April 13th, 2009 06:24 pm (UTC)

Final thoughts on oil

(Permanent Link)
1. I assume that (the price of) oil is tied up with the global macro economy, so to a large extent, a bet on oil is a bet on the global macro economy.

2. I assume it will be at least 2-3 years before we possibly experience any meaningful recovery.

3. I assume that consumer behavior + increasing (but still nominal) fuel efficiency gains will mostly offset increases in oil demand in the U.S. and other rich/developed countries, (for the next several years.)

4. I assume the price of oil will rise on average 10-15% per year.

(I am completely discounting major technological breakthroughs, which are unpredictable but not unlikely)

Given these assumptions I don't believe oil is a good bet. If we consider inflation + opportunity cost + high futures premiums, betting on oil seems like a poor use of our money. Sure, it might be marginally +EV, but even if the price rises to 200 over the next 10 years, I don't see sufficient opportunity to warrant an investment.

(I concede that the funds Paul is invested in seek to capitalize on short term spikes in the price of oil, which may happen from time to time, but for these to be worthwhile I think we need more volatility that I expect.)

Flame away clingy oil lovers.