Category: Behavioral Finance

As I’ve written previously, one of the main drivers of the current Oil Rally(TM) is Saudi Arabia’s desire for an $80+ per barrel price ahead of their Aramco IPO. Isn’t it so convenient that the oil glut that was suppressing the price of oil has magically just disappeared? Isn’t it convenient that, in 2014 when the Middle East was in danger from ISIS the Oil Price WENT DOWN, but now everything has returned to business as usual in the causationshpere, so when the Middle East is in danger from Trump, the Oil Price GOES UP. That’s fundamentals for you.

Anyway, the latest news on the Aramco front, which looks to be a massively fixed race (which is probably why you should get in, if you can get in), is that “anonymous insiders” (dun dun duh!) have revealed the best news possible for the IPO, Aramco apparently makes more money than Apple $AAPL. That basically clues in the stock price for Aramco to be an early $174+ per share minimum.

While conveniently there was no actually pertinent info, like Saudi Reserve numbers (because those could negatively affect the market), “anonymous insiders” (dun dun duh!) were very chatty about cash flows ($52.1 Billion, $14.7 CAPEX, $13 Billion dividend – more than twice that of $XOM).

Another revelation, almost no debt. “anonymous insiders” (dun dun duh!) revealed that Aramco’s debt was something like $1.3 Billion, insignifcant when compared to $XOM which sports a whopping $37.9 Billion. According to some analysts (what-wha), Aramco spends about $4 per barrel extraced, as opposed to $XOM and $RDS-A which spend around $20.

Basically Aramco is run by magical Unicorns that shit lemon meringue and fart Patchouli and Sandalwood.

The take home is that the fix is in. The Saudi’s and OPEC want a slam dunk here, and they are doing everything in their power to make sure it happens. Barring an act of God (which is a possibility), Aramco’s IPO will be the biggest financial event of the century. A lot of people are gearing up to make a lot of money. Don’t be surprised if you see a “curse-your-sudden-but-inevitable-betrayal” when the Saudi’s end up selling a chunk to China, or Russia.

Before the open of trading, I’ve decided to collect up my thoughts on the sectors I’m investing in. Since I am currently heavily interested in the Energy/Oil sector, the topic today will be the Price of Oil and Oil related stocks.

The Summer of Driving

As you know, the summer time and vacations are upon us. People all over the US will be driving to Disney World, boating around the keys, and generally consuming more gas than normal. This is added on to the fact that jobless claims are lower than they’ve been in ages. People with jobs do something conspicuous at least 5 days per week: They drive to work. More people driving to work means more gas consumption.

The one thing that worries me is that Truck Driver’s as a demographic have shrunk a bit lately.

Nevertheless, it seems that with the summer months coming round the corner, a spike in Western consumption is likely.

My general strategy so far has been to invest in secondary industries. So if I think Oil will do very well, then I will always look for companies that support Oil extraction, transportation or sales. That doesn’t mean I won’t head into a direct producer/explorer, just that I tend to look at companies who’s future is looking up BECAUSE of a positive move in a sector. I guess you could call this “Directional Trading.”

My main stocks of interest are $BP, $HP, $PBT.

Helmerich & Payne, Inc $HP

I like $HP because it is a solid and essential business. I like “needful things” companies, that is companies that supply essential materials and equipment to support a sector. $HP has been a solid company for decades, it shows dividend growth, which tends to attract the ever increasing numbers of retirees. Remember, more and more people are retiring each year, and while there is a demographic collapse in the west, there is also a retirement crisis. Retirees today are hungry for income producing investments, making them an almost captive market of equity consumers.

It helps that $HP has a solid business, good leadership, and a steady increase in earnings (2016 1.62 Billion, 2017 1.80 Billion), and as Oil Prices rise, $HP’s earnings climb, because they produce Rigs and provide service and upgrades to existing rigs. This makes their business model particularly profitable within the oil industry.

$HP has another amazing quality that is essential for investment: Volatility. During heavy trading it is not unusual for $HP to range $1-$2 dollars in price, that’s an amazing opportunity to make (or lose) money.

BP Plc: British Petroleum $BP

British Petroleum has had a bad run of thing, between the crash in oil prices and the Deep Horizon’s oil spill, they’ve had a particularly bad image. Since I’m a fan of Behavioral Economics, I know that public opinion can drive a stock price more than fundamentals. But the bad is mostly behind them, and the “catastrophic” world ending oil spill, which didn’t really end the world, is now a distant memory.

As the price of Oil picks up, $BP has just entered a partnership with PetroBras $PBR for oil exploration. That means “emerging markets.” Emerging markets are a buzzword these days in investing, and if you have “emerging markets” your value goes up. A lot of the “emerging markets” buzz is actually legit. So there’s nothing like buzz with a basic fundamental core to it.

On the topic of $PBR, Goldman has apparently upgraded them from Sell to Neutral. $PBR is a stock I’ve been looking at since late 2017, though I haven’t decided yet whether or not I want in on that stock. I don’t know enough about the Brasilian industry or situation. One thing I really like about South America is there is tons of potential and tons of instability. Trouble creates opportunity. The one thing I dislike about South America is the general public outlook of social entitlement and Marxist revolutionary nonsense.

Regardless of the latest news for $PBR, it was trading 0.21 down yesterday from it’s daily range. That indicates to me a lot of people were taking profit from the meteoric rise starting April 10th where it opened in the 13.50s.

Permian Basin Royalty Trust $PBT

I was invested in $PBT for awhile last year, I like the stability of the stock, it pays good monthly dividends. Right now it’s trading up from the 10th but has mostly flat lined. There’s a bit of worry that with the rise in the price of oil the Permina Basin is getting crowded (which is good for $HP by the way), however there’s a slight bottleneck in the Permian, and it has to do with transit capacity of the pipeline. Remember, Oil production doesn’t always equal oil distribution, and a spike in Oil production might negatively impact the price of oil, but positively impact the price of pipe and the stock price of any transit companies who need to step up and service new production demands.

Another problem with the rise of prices are things like sand shortages (yes, that is actually a current problem in the Permian Basin). Permian Express 3, a new pipeline that aims to be up by the end of 2018 is intended to address this capacity problem. If the price of oil spikes anymore, this makes the Permian Future look a little brighter.

Right now, people’s forecasts for “adequate” or “growing” supply to meet demands might not be taking into consideration things like the Permian Bottleneck (infrastructure).

This is the same kind of problem that Canada has been facing, as April 9th saw Kinder Morgan throwing in the towel on the Trans Mountain Expansion pipeline (this is added onto the Keystone XL decade of debacles). Alberta has oil, it just can’t move the oil to market. While this is crushing to the local economy in Alberta, it’s good news for the Oil Price, less oil means more cost.

Saudi Arabia, ARAMCO and $80 Oil Price

Now that ISIS is no longer a significant actor in the middle east, and therefore suppressing the price of oil is no longer necessary, the Saudi’s (probably in conjunction with the Russians) want to bring oil back up to pre-2014 crash levels, that means around $80-$82 per barrel. If you remember, right around the crash, Russia indicated that its national budget was predicated on a $82 per barrel lowest price for Oil. Big moves from ISIS in Syria shot that plan to shit, but I doubt Russia can survive much longer unless oil prices get a bit higher.

Saudi has repeated, and conspicuously, said it is targeting an $80 Oil Price for 2018-2019, with a suggestion that ARAMCO is ready to IPO, but that they are waiting for a higher oil price. The sounds to me like a suspicious pump-and-dump for the IPO. If you can get in, get in early. Saudi Arabia, which is so cripplingly socialist is boggles my mind, is probably rather desperate for funds. It might not look like it, but nobody likes Saudi Arabia, and countries like Russia and China are heavily investing in Iran. So while the US is pretending like more sanctions, or withdrawing from the JPOA are going to “do something” about Iran, the rest of the world is picking it’s ME champion, and it looks like the Saudi’s days are numbered.

They realize they have a war coming, of one variety or another, and they need to fund it. How better than with the price of oil. Unfortunately, their best bet is also their enemies best bet. Far from being afraid of US shale production, Saudi Arabia is counting on it. All they have to do is entangle Iran’s Oil export industry in red-tape and gotchas (like they did with Libya) and then have easy to buy Saudi and Western produced oil and she-bam: the best laid plans and all.

God Seeking Alpha is an irritating website. Well, not the site, actually that’s pretty cool, but the people who write for it. Every week it’s another doom and gloom piece (reminding us for the umpteenth time that $BPT will close in 2 years at current oil prices) about one or the other. If it’s about $CHK, it’s all about the debt, every week it’s like “remember the debt, why are you people buying!”

People are so obsessed with fundamental analysis that they can’t see the forest for the trees. And that doesn’t mean I am poopooing fundamentals, they are far more helpful than “technical analysis.”

What people fail to consider is Mr. Market. Yeah, him, the bat shit crazy ghost in the shell. The market behind the market. $BPT is valuable BECAUSE it will be gone in 2 years. All of those juicy dividends might be gone, forever. Welcome to Behavioral Economics.

The same is true for $CHK, but actually, $CHK has more to do with irony. Because it’s had such a rough time, people feel as if it’s more or less hit bottom. Anything short of actual bankruptcy, isn’t going to scare people away from it. CHK has become a kind of underdog, it’s a Rocky story waiting to happen.

That doesn’t mean there won’t be a few bumps in the road, but $CHK’s time will come. You gotta be patient. Stocks go up, stocks go down. A stock can range as much as 50% in a year. When it’s down and you own it, ignore it. Focus on other things. When it’s up, consider selling it, unless you have reason to think it will continue to go up.

The key to making money in the stock market, and this isn’t from me, this is from seriously rich people:

The Secret to Getting Rich with Stocks

Sell into the bulls and buy into the bears.

  • Dopamine highs and lows affect you more strongly when real money is on the line.
  • Your biases mess with your head, and mess with your ability to even see a bias as a bias.
  • Cut losers, not winners. This one will mess with your mind.

My first week of investing has been an emotional roller coaster. While I am on average a gregarious guy, I am not prone to extremes of passion.

Since I’ve begun investing with real money, I’ve had a first hand experience with the highs and lows, and with how chemicals like Dopamine(see here) can really mess with you. When you’re up, you can’t help but be cocky and self-assured. When you’re down, your shoulders slump, and you just don’t want to talk about it.

How my trading journey started

After my first buy in, all of my stocks were in the read, I was down a good $70 in fees and losses in price. My $BPT pick went from 20.50 to 20.05 or so faster than you could say “value trap.” At the same time, a new article came out by a clever short seller who was looking to stir up a panic against $BPT. He hadn’t come out with any specifics about the Trust I didn’t know, except a few not-so-obvious gotcha type interpretations that sent me on a reading frenzy to double check. Of course, he was projecting an absolutely worst case scenario that had a wait time of about 2 years.

In those first few moments of course, my heart dropped. Was there something I’d missed. I was down already, seeing so much red, and here was this guy telling me I’d been a complete fool to have ever bought such a shoddy security.

A bad pick goes badder

Around that time, another pick of mine, $CHK had drifted down, and another new article came out which I’ve talked about before. Finally there was a completely idiotic pick I’d made, $SBGL which was starting to fall like a stone.

On the $SBGL front, what had happened was the very day I had bought the stock when things looked acceptable for a long term investment, the wise managers from South Africa had decided they would forgo a dividend this time, in order to pay down the debt they had accumulated from their Stillwater acquisition (as well as a lawsuit payout). I missed this news, it got buried, and I didn’t find it until I noticed $SBGL had fallen %9 and I started going back over the fundamentals of the company to see if I had made a huge mistake, or this was just par for the course. Then it was down %10, then %11 percent around the time I’d found the news about the dividend cut.

My first instinct was to stay in, to at least hope to break even. But I knew that could just be my mind’s biases playing tricks on me. I started to enumerate why I was in my $SBGL position. I had thought it was a discount buy, and it still was, but I had also liked it because it was Gold/Palladium, and I know I have a bias towards Gold that I should be keeping under control. I had also bought it because it offered a dividend, and I added a bit of value to the stock as I considered this a good sign that management was committed to offering incentives to shareholders. But now that they’d cut the dividend out of the picture, I wasn’t so sure I liked the rocky road ahead.

At this point my other picks were doing well. I’d also taken a position in $HP, Helmerich & Payne, one of my earliest picks based on an evaluation of their business, but also the recent Hurricane Harvey, which I knew would cause a stoppage in oil production, minor damage to some rigs and so on. I figured $HP would be a solid bet, and that turned out to be correct in spades.

I dug into $HP a bit more, I wanted to revalidate my impression of the fundamentals. Since buying they had given a presentation on their business which had alot of optimistic data to chew on. $HP was looking even better, and if Oil Prices went up, things would only improve. My macro-view at the time was bullish on crude, so I had a simple choice to make. Cut my losses in $SBGL and apply that cash to my other positions, specifically $HP which wasn’t nearly as big as I wanted it to be.

The turmoil that wracked me. I wasn’t sure what to do. Was this the time to wait it out? Was I violating the rules of Value Investing?

Going medieval on a loser stock

Then I remembered the golden rule of poker. Always look for a reason to fold. Sir John Templeton, a personal hero of mine, was supposedly a great poker player, and I am rather fond of the game myself. My $SBGL hand was rags to begin with, and the flop had produced nothing – it was time to fold.

Instantaneously my anxiety went away, I was merciless. I dropped my $SBGL position and piled money onto my $HP position. Within a day I had recouped all of my $SBGL loses, including the extra fee for trading out, and was suddenly in the green.

It didn’t hurt that my $CHK position was positive and just at breaking even after fees. My $BPT position was also on the rise, and my faith had been restored in it.

I’d also taken a position in $VVUS, a pharma company that was trading so low it was only a few $100 for a good little speculative position. Good news had just arrived for $VVUS as well and it was showing a profit.

As much as I hated being in the red, being unsure, I loved being in the green 10 times more. Hah, I’m so fucking smart. Hell, this is so easy. I must be some kind of a genius.

Fooled by randomness

It was an hour or two before I started to really notice the change in my behavior. Why did I all of the sudden feel like I was godlike in my ability to call the market. I didn’t make it go up, it could have just as easily gone down. While it may have been a good decision at the time to cut $SBGL, maybe tomorrow it’ll shoot up 20% and I’ll hate myself again.

I have precisely 0 evidence to suggest that my current situation was due to me being smart, and every bit of evidence to suggest that I had just lucked out (possibly, time will tell) by entering the market at a “good time.” for Oil prices to be trending upwards.

I had been, in a sense, fooled by randomness, or at least fooled by dopamine. In the abstract I’m glad that my dopamine hit came after cutting a loss, because that might serve at least to reinforce decisive loss cutting behavior.

When you feel bad, all you notice is how bad you feel. You focus on your environment, the mistakes you may have made. When I felt low, I was hitting the web, looking for missed news, looking for additional financial data, going back over the balance sheets and cash flow statements.

But when I felt great, when I felt like I was the smartest person in the world, I had zero inclination to verify it. With that realization, I had to force myself to go back and look over balance sheets, to check my best performers, to really think about my positions.

The devil you know, the devil you don’t

About an hour ago, for the first time my account made money. I was up 1.64%. Then one of those biases came creeping up: “Wow, you dodged a bullet there. Maybe you should cut your losses. You made some money, you proved you could do it. Might want to quit now, while you’re ahead.”

Just 30 hours ago I was battling with the opposite demon, the one that tries to convince you to wait it out, to try to break even. The one that doesn’t want you to cut your losses. Now I had his fraternal twin on my other shoulder, whispering poison in my ear, trying to convince me to cut my winners too early.

The past 14 days of trading has been a constant battle. A constant battle with myself. A battle to do research, to read, and to think about things before buying them. A battle against fear and insecurity, against crippling doubts and second guesses. Pulling the trigger on some of my larger positions was no mean feat. I knew I wanted to buy $BPT at 19.6x or so. But I still waited until it had risen to $20.50 before I forced myself to pull the trigger. My first buy into $HP was hard as well, luckily when I was going over the stock it didn’t move around too much, but it was my most expensive stock per share.

I’ve never in my life spent so much money in such a short period of time. The fruits of my labors, a significant chunk of my savings. Maybe it will turn out to be the worst mistake I’ve ever made. But in the previous 14 days – I’ve learned a lot.

I’ve learned that what the really experienced traders warn you about, about how you’re the enemy, you’re the biggest problem, is all true. I’ve learned that all of these easy money yahoos probably don’t even trade. They barely even discuss this internal battle, they don’t talk about the biases and angels and demons that pop up on your shoulder throughout the day. They don’t talk about how addictive trading and investing can be. About how, no matter what you’ve read or heard, you’re never prepared for when that dopamine high hits you. You’re not prepared for those crippling doubts and uncertainties.

How every uptick makes you feel like a boss, and every downtick makes your heart fall into your stomach.

  • Absolutely a must read for anyone into trading/investing
  • Can go on a bit and has quite a lot of fluff
  • Easy on the eyes and mind, with the occasional, huh, never thought of that…

I have a love/hate relationship with books written for the lay public. On the one hand they usually have at least a few quotable gems, on the other hand they are always puffed up with unnecessary verbiage. Nassim Nicholas Taleb’s “Fooled by randomness” doesn’t fail to disappoint. As much as I love both the topic, and the writer, I can’t help but feel like there’s a bit too much ego between me and the information.

The book is highly recommended, don’t get me wrong, but a review by me is always going to give you the straight dope. Just because a book is worth reading, doesn’t mean you’ll get much out of it. The best part of the book is that it gets you to stop and think about randomness and bias, but don’t expect for Taleb to go too deeply into the topic. This book is for mass consumption, which means it is dangerous. You’ll learn just enough to think you know something, but not enough for you to actually know something.

Taleb, like his interviews, is all over the place. He tries to tell a story, and he’s just not that great at it. His characters are cardboard non-entities, and he frequently abandons them to adopt his normal authorial voice which is what he should be using all of the time. I know it’s all the rage with puff books these days to keep the kiddies interested, but I imagine it’s one of those editor enforced formulas that are more superstition than anything.

If you are interested in markets, trading and investing, the book is a must read. It will give you some food for thought and an opportunity to learn more through other resources. You don’t have to know much about statistics to understand the topic, everything is explained with clear and entertaining analogies. The book is in some ways better than his speeches because it’s been edited and refined. A lot of his spoken humor falls a bit flat, but when written (which seems to be his forte as a medium) it’s downright hilarious.

Taleb is a writer who is earnestly seeking to manage the impression you have of him. He wants you to see him as an intellectual, but a black sheep at the same time. He is very smart, so he pulls it off, but sometimes one gets the feeling he’s putting on airs, and selecting words and phrases specifically to demonstrate vocabulary as a cheap path to coming off as a bona fide intellectual.

I have to say I am sympathetic to that, I do it myself sometimes, and we both share a love of history, especially Roman and Greek.