Selling oil, waiting for abundance

Executive Summary

A quick (and simplified) overview of the oil price development, including Iran ramping its production, Saudi-Arabia refusing to cut production, overflowing storage and the risk of rogue contango.

What I’m doing about it, i.e., my personal investments – tactical and strategical.

And some ducks… (and doomsday scenarios). And DIKs

walks talks looks like a duck

Readability: Including the summary, and this, it’s a fairly quick and easy read at 2068 words.


Oil

The table below shows my (simplified) view of the oil situation. I assume you are a grown up that understands it’s not the complete picture. I also assume you understand I’m not recommending anything. It’s all just entertainment. Disclaimer here.

Anyway,

To the left are variables supporting higher oil prices

To the right are variables that could cause significantly lower prices again; possibly new lows

Broken oil producer budgets Iran ramping production
Storage situation exaggerated Saudi-Arabia wants shale out
Price momentum Marginal storage left for futures arbitrage
Potential production cut Recession is coming, lower demand*
Capex cuts Dead cat short squeeze bounce ending
Strategic bombing = prod cuts (renewables – long term)
I’m selling oil :)  Bust shale assets bought cheaply

*incl China


It’s all Bernanke’s fault, just as everything else

The story so far: low interest rates and QE drove higher oil prices as well as heavy (mal-)investments* in shale production. (*investments that only made sense in ZIRP La-La land).

Once enough new capacity was in place (it took a few years to complete the malinvestment projects), sub-par economic growth (and thus lower demand) contributed to storage all but overflowing and consequently a sharp drop in oil price.

 

They key is OPEC and shale budgets

Saudi-Arabia, Kuwait and UAE have exacerbated the situation by increasing production in an attempt to fix their broken budgets (they need to sell more at lower prices) while crushing the shale industry at the same time.

 

Oil prices have jumped on hopes alone

Very recently, the oil price has bounced by more than 40%, due to short covering and speculation amid hopes of an OPEC production cut. Several countries, including Russia and Nigeria happily fuel such speculation (to mitigate their budget deficits).

 

Productions cuts are highly unlikely

In the real world, however, Iran is looking to ramp its production back to “normal”. Before that is accomplished, there is very little chance of any production cuts anywhere. This will take some time.

My guess is that oil speculators will be sorely disappointed when production cuts meetings are postponed or cancelled, while storage inches closer and closer to full capacity.

 

The storage crisis haven’t even begun

Nota Bene that storage isn’t full yet; that the storage crisis haven’t even begun. Also note that Iran is just starting to ramp, they aren’t actually producing more yet… It will probably take several more months to reach absolute full capacity in storage facilities, and several quarters or more for Iran to reach normal production levels.

 

Without arbitrage, exploding contango could obliterate ETFs

When there is no more room for front end/next month futures contract arbitrage, through temporary storage (when back yard containers of barrels are full, as well as tankers and ordinary storage), there could and should be a devastating price plunge in the front end contract. The resulting massive contango (Next month’s price less this month’s price; which could be repeated month after month) will erode any investment based on rolling oil futures forward, e.g., through an ETF like USO or Olja S.

 

Just knowing about it doesn’t fix it – that takes time

This situation could go on for several quarters, maybe a year… or more, while Iran is increasing its production and OPEC is falling short of promises of production cuts again and again, perhaps most notably at the supposed meeting on March 20.

 

I’m selling

Due to the reasons stated above, I have sold my Brent ETF (Olja S) as well as the oil junior ShaMaran (which is still waiting for its “first oil” and has some cash flow problems, but trades at what might turn out to be just 1x P/E a few years hence).

I’ve also sold some but not all of my DNO shares. DNO could be a strong Buy for the coming 3 years, but there is a definite risk of a deep downturn before that, even if the company doesn’t have the same financial problems as ShaMaran.

DNO is probably a much better bet already at current prices than any oil futures ETF or derivative.

 

Don’t short what should eventually double

I won’t go short though. And I’m actually not that confident in cancelling my longs either. The reason is that a sustainable oil price probably is somewhere between 60-100 USD per barrel for the coming few years (rather than the current $40), once the current storage crisis is sorted out. In between however, the front end contract could easily fall back to 30 and even below 20 USD/barrel. 

In any case, I’m expecting a quite prolonged storage crisis, up until Iran is content, shale is dead, and Saudi-Arabia, Kuwait and UAE can agree on the necessary cuts. I plan to buy more DNO, ShaMaran and USO long before that of course, but only when Iran has ramped significantly or we’ve hit new lows for oil, oil companies and the stock market in general. This might happen already this April,or as late as April 2017.

We’ll see. I’m not sticking around for the downturn, except maybe with a marginal position in DNO.


 

Ducks

If it walks like a duck, talks like a duck and looks like a duck, it probably is a duck. 

Oil prices pass the duck test of a recovery: unsustainably low prices, rising, breaking key levels, talks of production cuts…

On the other hand, so do storage problems (which pointy in the opposite direction): almost full, meaning the real problems haven’t even started, Iran not backing off, neither is Russia or Saudi-Arabia. Shale still lingers as the walking dead.

Another walking, talking, living, sitting duck is the economy. Most pundits talk of low risk of recession. However, a select few, very mart people, point to a combination of factors: duck tail, duck beak, duck feet, duck feathers, duck calling sound etc., all clearly pointing toward there being a recession duck swimming around in plain sight.

I’m squarely in the “dead cat bounce” camp regarding the oil price and stock market, and in the “given these variables, including the stock market there is almost invariably a recession” group of people.

One caveat though: In 2009-2012 I used to say “this won’t be too bad if we normalized rates to 4% and some other things“. Now I’m leaning more and more toward “we are beyond thinking about investments, and more about defending civilized life as we know it“. I’m sure many more make the same assessment, including policy makers.

 

There is no turning back from full retard central bank policies

That means the powers that be truly will do “whatever it takes” (as Draghi’s Full Retard Threat went back in 2012) for as long as they can, thus making the final crash even worse.

As time passes and policy makers venture further and further into retarded measures, I’m becoming less and less certain of my forecast of a “pretty bad but not catastrophical outcome quite soon“. Instead I see increasing risk of a blowout on the upside followed by something on the downside we haven’t seen since the 1920’s crisis in Germany and the Great Depression in the U.S. in the 1930’s. 

The best long term outcome would be a normalization of stock markets, interest rates and debt burdens as soon as possible. There actually are some promising signs in that direction. But then again, there is Draghi (ECB), Ingves (Sweden) and Kuroda (Japan) trying to get into the history books with a particularly toxic variation to the Rio Spread Theme*. Maybe war is the only “solution” after all.

*The Rio Spread means taking a huge bet in the market and going to Rio for unlimited celebration. If it works out, it works out. If not, you stay there. The DIKs (to which Mark Carney of the BOE is very close to being added) will either miraculously save the economy, or (much more likely) ruin it completely. Either way, they will get their place in the history books.

I think the ECB reaction was quite expected (except the rebound afterward). The Fed is more important though. My guess is we’ll get the exact same reaction after the FOMC meeting (except the rebound) as after ECB, i.e., reflexive buying followed by heavy selling.

 

How an economy grows

I listened to a typical economist today (on the Swedish podcast Fondpodden), and she said the same stupid interventionist and illogical things about deflation and growth that most academics do (except that she didn’t defend negative interest rates). I just want to set the record straight as an antidote to the brain poison she helps spreading:

Saving enables investments which lead to better tools and infrastructure and thus increased productivity and falling production costs and selling prices.

Falling prices typically lead to increased consumption, but if it doesn’t, it means more room for even higher savings and investments and higher growth


 

Somehow many economists have misunderstood this completely and think that lower prices (like spring sale, summer sale, Christmas sale etc.*) mean less consumption. And even if it does, what’s bad with that? Nothing! people will buy what they want and need, no matter the direction of prices. And if they were to limit their purchases somewhat that only means more saving and room for investments and even higher growth.

So, saving=>investment=>low prices and high growth=>both increased consumption and investment and thus even higher growth in a virtuous cycle.

Most economists want higher prices, which lead to less room for consumption and investments and thus both lower supply and demand => lower growth, less wealth, even less room for saving and investment, and so on and on in a death spiral.

*Actually, they claim there is a difference between sales and declining prices. They think lowered prices increase consumption while falling prices decrease consumption. Eh? Somehow, falling prices on TVs. cell phones and computers increase consumption, while falling food prices lead to people eating less… Eh*2?!


 

Invest responsibly. Remember that investing is 80% psychology. The other half is patience.


Summary – selling oil, waiting for abundance

In short, I’m selling oil due to the storage situation, that will only get worse until Iran has reached full production and OPEC cuts can be seriously considered.

I don’t dare shorting though. Quite the opposite; I’ll look for (oil company) stock bargains in the expected carnage (blood in the streets).

I’ve gradually had to “refine” my general outlook from “bad” to “binary”. I’m staying short the stock market but even that feels less and less palatable these days. Gold and silver are the only things that feel OK. I’m even leaning closer to getting some physical gold to complement my paper gold. So far, however, I haven’t, and I just don’t want to be that pessimistic.

I mean, the 2020’s promise to be the best era ever (so far) for humanity, with widespread abundance provided by AI (did you see AlphaGo’s victory?), nanotech, biotech, robotics etc. Billions of people coming online, sharing knowledge and using ever accelerating technological tools to create more and better solutions to everything than at any time in human history. And then we haven’t even mentioned the 2030’s!!

We just have to pass this little “bump” provided courtesy of Draghi, Ingves, Carney, Kuroda etc. (including Yellen of course, but she’s no DI…)

What goes bump in the night?

Mario-Draghi-laughing

Ingves negative interest rates are FUN

Carney

kuroda

Janet Yellen

 

I want to put my wisdom in you

I may have gone overboard with that Will Ferrell-inspired book cover I tweeted the other day (the Tweet, viewer discretion is advised).

The message is the same though. I’m not blogging, podcasting and writing for financial gain, I just want more people to become aware:

Aware of themselves, aware of the world, aware of their career possibilities, of their investment opportunities, of the fantastically bright future that awaits.

So, please share this article, bookmark this site, subscribe to my newsletter and download and read my first e-book about the investment guidelines I picked up during a decade and a half as partner, managing director and portfolio manager at Futuris – The European Hedge Fund Of The Decade.

If you have already downloaded the book but never opened it, try just the first page summarizing my ten most important investment rules. Please.

 

Oil opportunities and the slippery slope of contango extraordinaire

Retarded Redux

Once, a friend from business school wrote in his capacity as a business journalist “It’s fascinating how retarded Syding is. He still hasn’t realized that…“. That was 20 years ago.

Well, here I go again, I just realized* there is this thing called contango…, and consequently I’ve had to update my view on oil.

*not really, see more below


 

Oil update – to keep or not to keep

This is a quick update on my thoughts on (brent) oil

It’s not a recommendation to buy or sell anything (see disclaimer page), it’s simply my thoughts on the issue of low oil prices potentially going (much) lower before exploding higher, and what that means for investments in oil futures and oil stocks.


 

Oil and Asperger’s

Back in August last year I wrote this article on brent oil and Asperger’s – about how I had profited from having both.

Today I’m long oil again, both a brent certificate/ETF (a Swedish instrument: Olja S)and two oil exploration companies (DNO and ShaMaran).

The case for oil is pretty easy and straight forward: the world is growing and we have reached peak cheap oil production. It will only become more and more difficult and expensive to find and extract oil, while the easily accessible oil reserves become depleted and go off-line one after the other. 

The case against oil relies mainly on solar energy and more effective use of energy, including storage (batteries). Well, that and the coming super recession.

I’m pretty sure renewables won’t be able to fill the oil supply/demand gap within the next five to ten years – at least not unless oil prices sky rocket again, thus making non-subsidized alternatives attractive enough. I also think a recession has been more than priced in. I consequently think oil prices will be much higher than today 18 months from now, and yet much higher 18 months after that.

10$ oil

In the short term however, there are a few snags, including 10$ oil:

  1. Easy money has fueled malinvestments in north American shale oil/gas production capacity. Nobody wants to be the first to fold, but some need to fold though in order to rebalance the oil market and support higher prices. The latter is taking longer than expected. Crashing oil junk bonds is, however, a good sign things are moving in the right direction.
  2. Crashing oil prices have forced Opec to pump even more oil than usual on order to keep their countries afloat. Russia, Saudiarabia, Kuwait, UAE and Iran simply refuse to agree on the needed production cuts. Instead they seem hell bent to keep at this chicken race at least long enough to crush the north American shale industry.
  3. Oversupply. The combined production of a pumped up Opec, Iran coming online and massive investments in shale production capacity have created a shortage of storage capacity. Once the industry runs out of storage (including in tankers and refined products) excess oil can and will be sold at just about any price.
    1. Yes, 10$ per barrel is conceivable (for a very short time) – if that is what’s needed to make anybody find use or (build) temporary storage for it, not to mention paying the cost to move the product.

Contango extraordinaire in the face of a storage crisis

The reason I am considering taking my oil profits to the sideline for a while is solely based on the risk of a storage crisis which could spark a panic sell off that in a single month can create a truly massive contango, wiping out 20%, 30%, 50% of the value of an oil ETF or certificate.

I have based my investments on Opec doing what they can to crush the shale industry.

I have been ready to sit through a bottom in oil prices caused by both a supply war and a simultaneous recession.

I have been quite calm, faced with a contango of  1-2% per month for the rest of the year, and a total of 20% until the end of 2017. No problemo.

oil futures

What I hadn’t really considered, until I listened to the MacroVoices podcast the other day, was the risk of literally overflowing oil storage facilities (check out some of the statistics here), and thus nobody willing to take delivery of oil at just about any price, while next month’s futures still trade at more or less reasonable prices. Even if current contango is limited to 1% per month, temporary spikes can kick that up to tens of per cent per month.

oil storage

picture from Art Berman via MacroVoices

I previously thought it would be quite easy to find alternative uses, or to build temporary storage facilities if you stood to make a dollar or two per barrel per month in arbitrage, but it seems it just isn’t that easy.

Hence, if a long oil ETF trade as of today is to become profitable, the current oversupply of 2 million barrels per day pretty soon has to come down to zero. It only takes a few per cent production cuts by, Russia, Saudiarabia, Kuwait and UAE to accomplish that. However, they just won’t, if Iran is increasing its supply at the same time, and definitely not if it means the US shale industry will survive.

If the cuts or shut-downs, shut-ins, don’t come soon enough, any product relying on rolling oil futures contracts over from month to month, could be more or less wiped out, and not recover sufficiently in the ensuing rally, due to too low a starting point.

Veering

So, it’s a chicken race, and I’m not entirely sure I want to be part of it anymore. The risk of suddenly losing even ‘just’ 10% in a single month’s contango simply is too much of a gamble for me.

I will keep my oil stocks, but I just might sell my oil certificates as early as this Monday.

If I were you, I would think long and hard about what kind of oil exposure I had and why.

With that I leave you, and encourage you to spread this article far and wide, to help others in their quest for making a quick buck in oil.

P.S. If you haven’t subscribed to my newsletter or read my eBook already, don’t hesitate to sign up. It’s free, spam free, easy to unsubscribe, and I hear it’s pretty entertaining as well as useful (sometimes)

How to join the 4% that can successfully manage money, before it’s too late

You know nothing* Jon Snow

I have friends and acquaintances opening new funds all the time, it seems. This post is an open letter to them. This is my advice to you, P/S, who are thinking about going live managing money right now.

To be perfectly clear though, everybody who recently started investing or is thinking about it should read this article carefully. Not only because of the negative start to the year for most, but because the bigger picture is so much…bigger than a January loss.

*about managing money

cv interview job finance application

Well, ehm, first we bought GoPro…

If you haven’t managed money before, you really know nothing about the craft (luckily, both of you actually have)

That’s okay, it’s not that hard, really, it’s “just” multifaceted and complex (and actually inherently non-understandable… -or was it just me?). On the other hand, most things worth pursuing are.

 

A watch is complicated,

the three body problem is complex


 

Quite understandably though, I constantly have to field questions about investing. The main problem is that I typically don’t adhere to the same underlying basic strategy, thus rendering most detailed tactical inquiries moot.

So, grab a container of your favorite hot beverage and make yourself comfortable. Turn off all notifications, e-mail etc. and get ready to concentrate for a good 25 minutes (shamelessly plugging my podcast in Swedish: “25 minuter”)


This article is in a way part of a series of articles about managing your own money (or possibly client money). Check out my archives for all my articles on finance in one place.

 

Hence, you should refer back to the linked material, whenever you feel anything is unclear.


 

This particular post outlines a few general points you need to consider before commencing managing your or clients’ money. I don’t provide any answers per se, only suggestions and a smorgasbord of choices.

Beware. After all, this is treacherous ground. Managing money is both difficult, complex and dangerous, albeit not very complicated (i.e. not too many moving parts, but as Newton knew, three is plenty).

That said, it isn’t for everybody, maybe not for you. How would you feel, e.g., about losing 50%?


 

Suggested reading

Among the relevant articles in this context, my post about books and other reading material for budding investors stands out.

At the very least you should be familiar with the free pdf outlining 30 big ideas from Seth Klarman’s book “Margin Of Safety”.

I also think you should browse through at least one weekly comment from John Hussman. Just one single weekly, free, comment from Dr Hussman contains more market wisdom than most people acquire in a lifetime.

If you have the time (which you should), try reading a “memo from the chairman” (Howard Marks) or a quarterly letter from Jeremy Grantham at GMO.

There are many more useful (and timeless) links in this post from July 2015.

Last, I’d like to refer to my own eBook, The Retarded Hedge Fund Manager. Subscribe, download the book and at least take a look at the summary (10 bullet points) on pages 3 and 4:

Retarded advice summary


How to manage a fund

It’s pretty straight forward. Anybody could do it.

Just open an account and start buying things (stocks, bonds, commodities, derivatives, whatever you fancy). Once your cash runs out, you simply sell something whenever you want to buy something else, or borrow and use leverage.

There.

You’re managing

ape face

(probably poorly though)

However, if you want some (professional) structure to it, listed below are the basic building blocks. Most of all they help you avoid common mistakes, as well as keep losses to a minimum (given your chosen strategy).

 

Avoiding mistakes is much more important than hitting homeruns when it comes to serious long-term professional investing

 

Decide on a strategy

This is probably the most common mistake of all. Investing is like air to us or water to fish. Most take it for granted and never take a closer look at what it really entails. Thus…,

Decide explicitly what your overall investment strategy will be:

  • International or domestic (hint: international)
  • Which asset classes (stocks, bonds, commodities, currencies, derivatives, precious metals, etc. – yup, investing is not about stocks only)
  • Long only (remember I thanked the “long-only herd” when receiving the 2008 Hedge Fund Of The Year award)
    • index independent
    • index hugging 
      • which index (Whaddya mean, which index; are there other than S&P500? It’s never easy, is it?)
  • Market neutral (Good luck Chuck! Sounds good, but alpha is often elusive and you end up doing an involuntary epic split between two different trucks)
  • Market timer (if there ever were a losing strategy…)

The fund I managed, Futuris (Brummer) – the European Hedge Fund Of The Decade (Nota Bene), invested in stocks only and we were to some extent market timers, in as much as we deliberately controlled the overall net exposure of the fund. We invested internationally, albeit with a focus on northern Europe. We were completely index independent and non-biased in every way.

 

Tactical considerations

-How will you decide what individual positions to take?

  • Fundamental analysis (FA, valuation)
    • Key ratios (I don’t like P/E:s, but this cash flow yield approach is a nice shortcut sometimes)
      • Btw, do you think of fair multiples in terms of what others (“the market”) is likely to pay, or in terms of true intrinsic value from your own point of view – i.e., a kind of yield calculation shortcut?
    • DCF analysis (“true” valuation, but rather impractical and deceptive sometimes. Numbers in a spreadsheet are no truer than lines in a chart)
    • Operations momentum (are fundamentals accelerating or surprising?)
    • Should you heed broker recommendations?
    • How do you plan to use analysts?
      • In-house
      • broker firms
        • For information only
        • Implement their alpha recommendations
  • Technical analysis (TA)
    • Momentum
      • Manual (intuitive, ocular)
      • Computer driven, data mining
      • Simple regressions (work until they don’t)
      • Complex (e.g., Lorenz’ strange attractor analysis for style gliding and trend change detection/prediction)
    • Patterns
      • General, commonly acknowledged, patterns (see “Reminiscences of a stock operator” for some background on the psychological underpinnings)
      • Stock specific patterns with statistical backtracking
  • Combination of FA and TA
  • Cross asset signals
    • What do commodities, bonds, precious metals, high-yield fixed income instruments etc. say about risk tolerance and growth, and consequently about the potential for stocks?
  • Macroeconomics
    • Investments, productivity, inventories, sales, employment, policy rates and economic growth, and their effects on profits and valuations

Futuris was mainly based on fundamental, bottom-up,  analysis, with a focus on unrecognized operations momentum and DCF analysis. Key ratios did play an important part as well.

FA often is based on triangulation of several valuation methods, which is exactly what we did. We did apply some experience-based intuitive hedging as well; whether that should be considered FA or TA isn’t clear. On top of it all, we kept track of coross-asset signals as well as the macroeconomic trajectory and its potential impact on specific industries and stock markets.

Considering we won the “European Hedge Fund Of The Decade” award from HFR for the period 2000-2009, I’d say Futuris’ overall approach worked, even if it could have been refined and optimized further. Sometimes hubris got the better of us.

futuris awards

Futuris’ Awards, ominously quiet 2003-2007

 

What do you do when things go south?

-Plan B

You will lose money.

Yeah, yeah, I know…

No, you will lose money, more than you anticipate, and you need a plan for that (Hedgehogging by Barton Biggs, or my own eBook both tell you a lot about the particularities of finding oneself deep in the red):

  • Stop loss levels and procedures
    • How much and for how long are you (and your clients) ready to lose for something you believe in
  • Length of pause between a stop loss and restarting
  • Procedure for restarting
    • All at once, or gradually
    • Are the same (losing) positions acceptable alternatives? Under which circumstances?
  • Stop profit?
    • a somewhat unorthodox principle of investing, where “enough is enough” and you cut your cash cows when they’ve run far enough, or rather too far. That way you avoid sudden mean reversions.

Futuris had an informal, soft stop loss level of 5% losses at the portfolio level. Individual positions, however, were allowed much more leeway. There were instances of doubling up at a 50% loss, and at least one (albeit marginal) instance of going 10-fold on a -90% loser. We had no specified pause length before restarting, but we almost always eased back into the market gradually over a few weeks. I personally did apply a kind of stop-profit methodology, trimming winners on surges.

 

Implementation

Alright, so you have your strategy and some tactics in place. What about where the rubber meets the road? How do you perform the actual deals?

  • How frequent trading?
    • minutes and seconds
    • days
    • months
    • years
  • Number of instruments
    • Some advocate a maximum of 5-10 positions – to make every investment matter and count, as well as increase the depth of knowledge
    • Some take hundreds of small market neutral “spreads”, reducing single stock and market risk to a minimum
    • Perhaps, you plan to just buy and sell here and there and see how many you’ll get to over time?
  • Overall exposure range (+/-10%, 50-80%, 97-100%, 70-130%, +/- 100%)
  • Liquidity management
    • Do you plan to have any cash at all?
    • If so, where will you keep it?
  • Level of aggressivity
    • Marginal opportunistic changes within a strategic position
    • Catching both up swings and down swings, no matter the trend direction (aggressive)
  • Commission and research expenses
    • How much are you prepared to pay per trade, or per year
    • Are you buying execution services (placing power) or will you rely mainly on DMA (Direct Market Access, self-help)?
    • Will you pay for research? How much? What is an acceptable ROI on that investment? How do you plan to measure the effectiveness of third party research? 

For a fund of 1-1.5bn USD, Futuris was unusually agile. Sometimes we bought or sold the entire portfolio (100% of assets under management, AUM) in a single day. Most days, however, we typically executed less than 5 minor trades (less than 1% of AUM each). The extreme measures outlined above were reserved for stop-losses or profit taking in extreme market situations, such as 9/11 (2001), Hedge Fund Hell (August 2007), the Kerviel debacle (2008) and the Fukushima disaster (2011 tsunami and nuclear meltdown).

Futuris usually held around 40 different instruments (38 stocks, one long or short future and perhaps an index sell option), albeit more (60) the last few years.

Our overall exposure range was approximately -50% to +100% of AUM. We managed our liquidity conservatively (cash at bank or in short dated treasury notes). We were minimally aggressive regarding trading – once we had decided an instrument was going up or down we held the basic position steady with only minor trading on the margin (10-25% of the position), rather than actively calling temporary counter trends. Going both ways we left to more free-thinking spirits.

 

So, how should you manage your money?

I can’t tell you that, and I can’t recommend you follow my example either. I only want to make sure you understand the universe you’re about to enter.

Anyway, I think most investors should apply some sort of passive Buy and Hold stock strategy or a semi-passive Quattro Staggione strategy (stocks, gov bonds, gold, corp bonds). Going deeper is just a waste of time and a source of frustration for most.

I, however, am not most people (so I’ve heard).

I am currently heavily net short the stock market. Yes, that’s right; I haven’t just reduced my quattro stock slice from 25% to 20% or 15% or 0% for that matter. I’m way down at -100%!

It’s served me well recently, and even if I’m still basically 100% short, it’s less short than just a week ago. Hence, I’m actually ready for a temporary market bounce right now.

I know it sounds strange to some, but I have decided on a negative stock market exposure for the mid term, and will thus only trade around that position marginally – for fun and to stay tuned to the market.

I will not go tactically long on a gut feeling and risk being caught in an air pocket. It’s a bear market and they famously make everybody look stupid before they’re over.

Apart from (negative) stocks, I own quite a bit of gold (GLD) and gold mines (GDX), and I keep buying oil (Brent, and the oil exploration stocks DNO and Shamaran, which are both highly speculative punts on the KRG actually paying for the oil. That in turn probably means the oil price must rise above a certain threshold within a certain time lest they all go bankrupt, including the Kurdistan Regional Government).

portfolio Syding Current 22 jan 2016

This is not responsible. Do not follow my lead.

NB that I don’t really manage my money in the true sense of the word. I’m betting on a downturn, after which I will start managing again. I’m doing it in part for fun, in part because I think I’m right.

Usually, and for most, it’s not a good idea to try to time the market. It only brings unnecessary frustration and consumes a lot of time.

Once it’s time to get professional again, I need to buy a much more diverse set of international companies. Depending on how far down the market goes, I just might go 100% long stocks, or more, for some time, while possibly using leverage in order to hold some gold as well. My oil investments are not for the long run, but how can you resist the world’s most important commodity when it’s down by 80%?

Yes, I know all about the Saudis needing the money, Iran coming online again, the promise of Shale, not to mention the expansion of solar power, carbon taxes etc. Please note that most oil people knew all about that already 2 years ago, with oil 300% higher than today (i.e. at 4x today’s price). This is not the place to discuss peak oil or its inversion, today the topic is overarching principles for managing a fund.

 

Summary

OK… so what’s in it for me, you think. I don’t get it, should I invest or not? What stocks should I buy? Or should I sell the ones I own?

No, no, no!

What you should do is just think through the following before starting to manage a fund or your own money:

  • Should you at all manage your own money? Check out the pitfalls here. Is it worth it? Read the pitfall article and then decide whether active investing is something for you. It really isn’t for everybody.
    • Is there some other alternative you could pursue, that would be more predictable, worthwhile (and fulfilling)
  • What asset classes and regions?
    • Doing everything and everybody is seldom a good strategy unless you have plenty of experience or a large staff ;)
    • Jumping haphazardly from one thing to another just means more time spent learning and losing. You could trade just one single stock or currency profitably for your entire life.
  • What overarching strategy in terms of net exposure (long only or market neutral, e.g.)
  • Fundamental or Technical – on what basis will you select, rotate and replace your investments? How will you know if your M.O. is sound and workable? Are you a trader or an investor?
  • How frequently should you trade? How much time (and money) are you going to spend on investing and monitoring?
  • Plan B?
  • Most of all, do you think it will make you a happier person, experiencing a fuller life, considering not least the loss of time, and the gain (sic.) in frustration?

Check out my eBook for more useful information on investing, not least my ten most important lessons for any investor, private or professional, including the most important one:

Wait

There is never any hurry to invest

Opportunities always cycle back

 

And if you are at all toying with the idea of going fundamental, first check out this article about the only two steps you need as a fundamental analyst or investor. Warning, it’s actually 50…

Final note: This post doesn’t tell you anything about how to choose your actual investments, the actual stocks or instruments. That’s up to you. I’m ‘just’ telling you to be explicit about the framework within which to operate, and under which circumstances to abort.

Please share this article with your social network in order to help at least one person avoid financial ruin due to some simple error of omission.

The headline? Sorry about that… Pure clickbait