My recent posts have not been particularly focused on my investing activities, partly because they’ve been fewer and mostly focused on very boring stuff like monthly purchase plans that I don’t have to pay much attention to because they’re set up once and then continue to execute in the background.
However, I’ll give some updates to certain holdings to show how the real world events affect your portfolio, how I think about some aspects of the businesses I’m invested in, and how important it is to define your time horizon and understand the reasons for making an investment.
I’ll start with my current worst performer, direct crude oil futures set to execute in December 2017. I argued last December that oil will bounce back, counting on reduced output from OPEC to stabilize demand, and a crash of shale production from a combination of cut backs due to prices falling below cost of production for many shale plays and a lot of the more levered companies shutting down. And based on that argument, I bought long oil futures. Boy, that was spectacularly wrong and only goes to show you that the future is really really hard to predict. Just two years ago, when I worked for one of the oil majors, I was directly involved in future planning where we tried to model what the economics and realities of the industry would look like in fifty years (It’s normal for oil companies to plan that far out because prospecting for reserves and profiting from them happens over decades long cycles of booms and busts, unlike typical companies where cycles are quarter to quarter or year to year). Based on the available technology at that time, $60 was the absolute break even price for over 70% of plays. The Dakotas were remarkable for having plays that were profitable at $45-50 at that time. Since then, technology has vastly improved and now, it’s estimated that shale break evens are around $40, and getting increasingly lower. At the same time, the reaction from OPEC has been the complete opposite of how it usually would act. Production is up to almost 30 million barrels per day, led by Saudi Arabia ramping up it’s production by over 3mbd, choosing to take the losses from lower prices and burn some of the huge cash reserves it’s accumulated over the years. Together, this means the supply side has been completely sloshed with oil in a way that is reminiscent of where the US natural gas market was between 2004-2009 (and where it has frankly remained since.)
On the demand side, cratering growth in China, Brazil, most of Latin America, lingering growth issues in Europe and Japan and a Canada that just tipped into an official recession means that there is less demand for crude oil than before. Only the US is roaring along, and they have more than enough production to meet their needs.
When you check all of this, it’s easy to see that this downturn in oil prices is here for a while. The only reason I’m still in those futures is that December 2017 is a long time (I deliberately chose that far out), so there should be lots of opportunity to pare my losses. Moreover, since I bought at $62, things might yet look up. Or just as likely, get worse. Who knows? I’ve considered going long on near term futures (they’ve slumped below $40 which I think is too low by all accounts), and use the gains to make up for my losses in the longer term bet, but it’s my first time dabbling in futures and the loss has made me skittish.
Never the less, I’ve been building positions in ExxonMobil, Chevron and Marathon oil. They’re relatively small stakes, but they’re ongoing and I expect to keep buying shares in those companies for a very long time (I’m talking 30, maybe 40 year horizons, maybe even longer so I can pass it on to my kids.) Since the amount I invest into each a month is fixed, and I reinvest all dividends, I’m actually happy to see their prices decline since that means both my cash purchases and my reinvested dividends are getting me more units of ownership over time which should turn out to boost my return once the tides turn. I have studied the returns in this sector over time, and in my estimation, more than half the returns made investing in the big name integrated majors comes from buying them during the downturns when their dividend yields go up, and their per-share prices are low, and subsequently holding them while they inch along day by day, decade by decade. It’s not easy watching your stocks go nowhere fast, but if you have the patience and the long horizon, you’re almost guaranteed to outperform the markets. While I’m essentially dollar cost averaging into the stock regardless of market conditions, I’m watching to see them decline substantially more, to where their dividend yield goes above 6% (currently they’re yielding 3.96% vs the broader market yield of 2.14%.) I want to believe it will happen, I’m waiting for the Fed to raise rates so stocks decline further. I’ll buy a block of Exxon once that happens, provided I have the cash on hand, which I plan to. I’ve looked at their balance sheets. These guys have huge refining units, downstream gas stations, chemical plants, natural gas holdings, growing reserves even in this downturn, and still enough cash to cover 3x their current dividends, which is a huge component of their total return. A few even have shipping subsidiaries. There is no imaginable future where they’re not making substantial amounts of money from every corner of the global economy. So even though locking money into them may be stressful as I watch them experience declines and all, I’m not very bothered. The results of that decision won’t show up immediately but over the long term, I’ll be glad I did. It’s what the facts say.
Some of my other holdings have fared somewhat better, but overall, I’m still being outperformed by the broader market. I was doing well until the last correction few weeks ago, and I’m hoping before the end of the year that I’ve come back on top, but it doesn’t bother me that much.
Some days you win, others you lose. It’s the nature of the beast.
S&P 500 2015 Return: -4.01%
My Portfolio 2015 Return: -5.3%