There are 5,280 feet in one mile. That is a fact.
However, ask if Donald Trump is a good president, and you will receive loads of opinions. Whether politics or investing, everyone has an opinion. But having an opinion doesn’t make you right.
Investing has factful aspects. However, successful investing requires analyzing facts and interpreting opinion and judgment.
As a Texan, my God given right is to have an opinion on the energy sector. That translates into many conversations about investing in oil and gas.
Furthermore, many of our clients work in the energy sector and offer opinions.
Knowing this, the energy markets offer much to contemplate. From December 2017 to October 2018 a barrel of oil jumped 43% in price. Good times! And then oil fell 34% from October 2018 through November 2018. Ouch!
Immediately, this provides questions about energy investments. With oil down, there must be easy money to be made investing in black gold. Instead of trading the commodity, investors will hire great managers and funnel investments to a company like Exxon. If there is a deal to be had, surely the energy goliath can exploit it.
Exxon’s strength is obvious. The company is worth $330 billion in the open market with proven reserves of 21 billion barrels of oil. However, at $50 a barrel, Exxon’s proven reserves, should be worth $1 trillion. But, the market price implies that proven reserves are only valued at $16 per barrel. Obviously, a guaranteed bargain!
Unfortunately, it’s not that easy. Yes, Exxon and the major energy producers have lots of resources.
But somewhere between “proven reserves” and “net profits” something significant is lost. As such, I need discipline to recognize the imprecision from the oil patch to consistently generate increasing profits.
Exxon’s net profit is half what it was ten years ago and trades for less than in 2007. Its return on invested capital is often single digits. Those are facts. Â
Opinion and judgment are more critical.
Do the professionals in the energy sector have good technical knowledge. Certainly.
What is world demand for oil next year? I’m not sure.
What will be the price of oil in one, five or ten years? I don’t know.
Will the Eagleford have another resurgence? Not sure.
What will OPEC do? I have no idea.
What will Russia or the Trump Administration do relative to oil? I’m clueless.
When I run this list on energy investing, I realize that after 25 years as an investment manager I’m less comfortable today than ever before when it comes to energy. Judgment and wisdom often come with age and maturity.
There are lessons to be learned from this.
Investing in commodities is tough. The brand name of a commodity offers no value added. Unless you can accurately assess the supply and demand for a commodity, avoid it.
The more variables to consider, the greater the odds of being wrong. Consider this: if you circumnavigate the globe, but your measurements are off by one degree, you’ll miss your destination by 435 miles.
My investing friends are generally quite smart. Smart people like complicated puzzles. The intellectual challenge is so tempting to assess the variables and draw a steadfast conclusion of what will happen. That might work academically, but rarely in the real world. Simplicity trumps complexity.
Know what you don’t know. Being able to say “I don’t know…and I don’t have to know” is incredibly liberating.
Not all people should invest like me and I should not invest like others. I have seen many investors with specific knowledge successfully do things which make me scratch my head. Just because they are successful at something does not mean I am similarly skilled.
Are you investing or gambling? With oil down, there is probably a trade to make. However, trading is too close to gambling and I am not good at it.
Consider opportunity cost. If allocating funds in the energy sector, you are affirmatively saying this is the best way to allocate dollars.
If gambling, we think people are better off going to Vegas to enjoy a show before giving away their money. Gambling rarely pays off.
Lastly, some investments fall in the “too hard” category. For me, the oil patch is simply too hard.