April 24, 2016 Doves Cry

Risk/Reward Vo. 304

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

“I said let's go crazy (Go crazy)
Let's go, let's go
Let's go”---lyrics from “Let’s Go Crazy” sung by Prince

Touch if you will my stomach
Feel how it trembles inside
You've got the butterflies all tied up
Don't make me chase you
Even doves have pride”---lyrics from “When Doves Cry” sung by Prince

“Little Red Corvette
Honey, you got to slow down
(Got to slow down)
Little Red Corvette”---lyrics from “Little Red Corvette” sung by Prince

Two weeks ago, when last I corresponded, I reported that I had sold my holdings thereby capturing an acceptable level of profit. I was awaiting the results of the oil ministers’ meeting in Doha (April 17th) and the Federal Reserve’s meeting scheduled for April 26-27th before deciding whether to re-enter the market. The meeting in Doha ended without Saudi Arabia or any other major oil exporting country (e.g. Iran or Russia) agreeing to limit production. But instead of this news causing oil prices to decline, they have risen---and risen quite sharply---8% this week alone. What? Has the oil world “Gone crazy”? Given what has also happened, probably not. Domestic production continues to fall with US daily output now below 9million bbls/day. In addition, oil workers are on strike in Kuwait and flows from Iraq and Nigeria have also been disrupted. These latter events have reduced the daily worldwide supply by 3%. Will these disruptions continue? Who knows, but those who remained in the oil patch these past two weeks have been richly rewarded.

And boy don’t I know it. Had I remained in the oil stocks that I sold two weeks ago I would have doubled my profits in that sector. Yes doubled! And with the rest of the market continuing to trade in correlation to the price of oil, the other stocks that I sold did well also. “Touch if you will my stomach/Feel how it trembles inside/Losing those profits has got the butterflies all tied up/Even doves have pride.” But I am not kicking myself. I have rethought my decision to sell several times these past few days, and I believe that my judgment was sound. You can’t always get it right. I find solace in two quotes from the legendary investor Bernard Baruch: 1) “Being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong “ ; and 2) “I made my money by selling too soon.”

One difference between now and a few years ago is my ability to resist chasing profits. In times past, when a sector sky rocketed like oil did this past week, I would have been back in as fast as “a Red Corvette.” And invariably, I would have bought just in time to see the rocket fall back from space. Nowadays, “honey, I just slow down.” Another opportunity to profit will come along. One need only be patient. Indeed, my eyes are now on the Federal Reserve meeting scheduled for next week. No one expects a rate increase this time around, but look closely at the press release following the meeting. Given the steady increase in job numbers and continued positive domestic economic news, the Fed may signal a rate increase in June. Such a “hawkish” signal would widen the divergence between the Fed and both the Bank of Japan and the European Central Bank. Each has signaled a willingness to lower rates even further into the negative and to otherwise be more “dovish.” In times past, any widening of this divergence has resulted in a stronger dollar which in turn has lowered oil prices and by correlation, the US stock market in general. A similar result next week could present a buying opportunity.

And so my education continues. I missed out on some great profits these past two weeks, but I am not second guessing myself. If investing were easy, everyone would be rich. The nice thing about Mr. Market is that he presents us with money making (and money losing) opportunities time and again. Unlike Prince, we “are not out of time.” There is no reason to party (or to invest) like its “1999”.