I attributed this quote to the economist John Maynard Keynes in my last Weekly Comment in August (“As per John Maynard Keynes, change your mind – portfolio positioning – when the facts change. But not before”).
There is some disagreement on the origin of this quote, but apparently the comment should have been attributed to Paul Samuelson in 1970. Amusingly, Samuelson is also quoted as saying “If Parliament asked six economists for an opinion on any subject, they always got seven answers. Two from John Maynard Keynes.”
As usual, the oil market has provided much of the recent market action and many of the quotable quotes over the last week. It has gone from bull market to bear market in the blink of an eye, having risen 23% in six weeks from mid-August then fallen 25% in six weeks from early October. While the conventional definition of a bear market is a price fall of 20% over 2 months, this nonetheless looks and feels like a bear market already. This current ‘bear market’ has prompted some dissention in the ranks of OPEC+.
OPEC+ fiscal breakevents
Source: IMF Regional Outlook 2018, Nedbank CIB
The expanded cartel produced a ‘Declaration of Cooperation’ and ‘rationed’ (reduced) global oil supply during 2016–2017 in an effort to ‘re-balance’ supply & demand in the oil market (‘re-balancing’ simply being a euphemism for manipulating the price closer to their fiscal break-even levels as per the chart above). This ‘re-balancing’ successfully lifted the Brent oil price from a low of $27 in January 2016 to a high of $86 in October 2018, over 300%.
The price of Brent Oil from July 2018 – November 2018
Unfortunately for OPEC+ it seems that the greatest beneficiary of this rising oil price has been the USA, whose oil production has more than doubled in the last five years. It truly has been one of the marvels of the USA economy in terms of technological improvements, employment, financial agility and human energy. This growth in USA oil production is visible in the chart below which displays the USA oil production in grey and the number of active oil rigs in orange. In addition, this new generation of oil men are the most active hedgers in the oil market, and will be the least vulnerable to this current downturn in the oil price.
What is quite apparent from this chart is that the USA oil industry actively ‘re-balances’ the number of active oil rigs in response to changes in the oil price and oil demand.
So, what is the investment lesson from this ‘changing of facts’ and ‘changing of minds’ by the oil producers? It is that investment portfolios also need to be ‘re-balanced’.
USA oil production vs active oil rigs
In spite of our egos all needing to have an opinion on the markets, it is important to be able to objectively recognise and acknowledge facts when they change, and to change our minds when the facts change. This is one of the hardest things to do as it involves having to admit to ourselves and to our clients that ‘I was wrong’. Or rather, that my opinion of what the market was going to do was wrong. What is never wrong is to acknowledge that the market is right, and to ‘re-balance’ portfolios to reflect that new reality. This includes both selling existing holdings that may be falling or buying assets that were not held but which are rising.
What is also true is that it is not about how much you make when you are right. It is about how little you lose when you are wrong. We will probably all be wrong more often that we are right, in both the markets and in life. The first thing to do when we are wrong is to have the strength of character and the discipline to objectively acknowledge the error, to stop digging ourselves deeper into that metaphorical hole, and then to take corrective action. If our intellects are greater than our egos, then we – and our portfolios – will survive our inevitable errors of judgement.