February 5, 2016

No oil stocks - despite high returns

Dr. Stern's friend Anders Bally runs sentifi.com, a data mining company for investors. His team in Vietnam scans gigabytes of social data each day to identify what people think about investments. He believes that this will put him ahead of the curve. That might be true. For this reason, Dr. Stern paid special attention to a recent research finding where sentifi.com said that most people believe in an oil crash of the economy in 2016.

Now, Warren Buffet is known to say: "Get greedy when others get fearful." With this in mind, now may be a good time to invest in oil! I think it very well could be. It's hard to imagine more bad news for an industry. If you believe in the wisdom of Buffet, you should invest in oil now because bad news means low prices. In this video, Dr. Stern searched for attractively valued oil stocks in Europe. He found Repsol, BP and Total - all with attractive valuations.

Did he invest? No. he didn't invest because he doesn't like to be invested in oil. It's a personal decision. He doesn’t get excited about combustion engines - not even if they power a speedboat which is something he thoroughly enjoys.

Will his abstinence from oil wind up costing him? Being absent from an industry shouldn't mean that you make less money, just like being IN an industry doesn't mean that you make more money. Ben Graham already realized decades ago that sexy industries don't have sexy returns. This means that unsexy industries shouldn't have unsexy returns, either. Which means - unless you know better – you can expect similar returns from any industry.

If this wasn’t true, then many investors wouldn't have done a very good job. It is possible that investors are wrong for an entire industry. Does it matter? Only if you want to invest an enormous amount of time researching all the industries. Otherwise, it’s impossible to identify the better industries anyway. Many have tried to do that - who knows if anyone succeeded. If you want to save time, your solution must be to stay diversified.

In other words, Dr. Stern's personal decision not to buy oil stocks doesn’t put him at a disadvantage. It may turn out to be a good idea or it may turn out to be a bad idea - in terms of returns. We can't know today. Since we can't know, we might just as well ignore the oil stocks. Will we do worse than the index? We will do worse than indexes that hold lots of oil stocks (like the FTSE100) IF the oil stocks will do well, and we will do better than those indexes if the oil stocks perform badly. We will do about the same as indexes that don't contain oil stocks in the first place (like the DAX30, or the SMI without Transocean).

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