Investment Research Group
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That is to do exactly the opposite of the consensus view. This is not the same as merely doing the opposite of what some or a lot of other people are doing. The importance of a consensus is that the minority have been persuaded, or more often browbeaten, into accepting the majority view.
In an investment sense, that means popular assets are very expensive because everyone thinks they will continue to appreciate in value. Conversely, unpopular assets are priced to be virtually given away because nobody wants to buy them.
With this in mind, it has occurred to me in recent weeks that virtually nobody expects oil to go down in value. This is despite the rate of price rises in recent months to be at almost an exponential rate.
I am a believer that markets are self-correcting. When prices get too high, supply tends to go up (sometimes with a decent time lag since production facilities take time to build) and once-ignored alternatives become more appealing.
As a result, we have reduced our clients’ exposure to oil. We didn't sell out entirely, just enough to soften the pain if prices do come down in the short term as I expect. If I turn out to be wrong and prices keep going up, clients still have a decent exposure.
Knowing when to sell is always hard but I am mindful of the quote from Lord Rothschild who, when asked for the secret of his incredible wealth, said: "I never bought at the bottom and I always sold too soon."
It pays to remember that it was only a decade or so ago when oil was trading at US$10 a barrel (against a recent record high of US$135) and the consensus was that it could only go lower.
I remember when the Saudi oil minister was widely quoted as saying he thought the price of oil would fall to $5 a barrel. This week my gut feel that oil has topped out - at least for a while - has been backed up by comments from billionaire investor George Soros.
He told a US senate committee on energy that record oil prices are the result of a 'bubble' caused by speculation from index funds and a tight balance between supply and demand. Soros laid some of the blame on recent oil price rises on commodity index funds, which only buy oil contracts, helping to push prices higher.
'Commodity indexes are not a legitimate asset class,' he said. He added that raising margin requirements would not affect index trading but could function to limit speculation.
This raises the interest topic of whether index funds follow a market or actually influence it. The amount of money that has gone into commodity index funds in the US in the past five years has risen from US$30 billion to US$260 billion and this figure is likely to rise as investors jump on the commodities bandwagon.
I am not picking commodity prices to peak and decline for some years, but I am convinced that inevitably that is exactly what will happen.
