Should I Invest in Oil? | Erik Averill, Brandon Averill | AWM Insights #7

 
 

Episode Notes

After another week of wild financial markets, we saw another historic first yesterday where the price of oil actually went negative. Does this mean you should run out to your local gas station and have them pay you to store gas? Well, no - but it does drive home an important point:

You can't predict the future.

At the end of the day, trying to outguess the public markets is a great sales pitch but in reality is just not in the best interest of clients.

So should this new development in oil markets make you change up your overall investment strategy? Listen to this week's episode for Erik and Brandon's commentary on this event and their thoughts on the following questions that we've received over the last few days:

  • What impact does this oil price dip have on me as an investor?

  • Is now the time to invest in oil?

  • Is there a way to time public markets like oil to capitalize on dips like the one we're seeing now?

  • What are some approaches to consider when making a concentrated risk?

  • Why making informed decisions in the private markets might be your best bet

+ Read the Transcript

Erik Averill (00:00):
Hey everyone. Welcome back to another episode of AWM insights. I'm your host Erik Averill, and joined by my brother and cohost co founder of AWM, Brandon Averill. Brandon, welcome back to the podcast. Looking forward to it. So Brandon, uh, every week we tape these, you know, you start to think maybe markets will normalize and of course, uh, we're wrong at predicting the future as usual as yesterday we saw just a completely wild thing in the markets in the, uh, the oil and the gas industry for the first time ever, we saw the price of oil actually drop into this negative territory. And on face value, it's, it's literally you start to shake your head and go, wait a second, am I going to, am I going to go fill up gas and they're going to pay me to take it? And obviously that's not going to happen, but, but completely wild times. Uh, what, what is your initial reaction when you saw that yesterday? Obviously we received some text messages from clients and, and just people in general asking our opinions. What are your thoughts? Uh, just, uh, first reaction.

Brandon Averill (01:05):
I think my first reaction is that the information is certainly the available information starting to be priced in. So I think, you know, we had a lot of clickbait, a lot of articles out there that were highlighting the issues in the oil markets. And while there certainly are issues, uh, from a longterm perspective or even short term, you know, a lot of it had to do with the immediate contracts that were coming due and a lot of sophisticated investors understand kind of what was happening there. But as you go further out on the curve for those option contracts, it was a little bit more normalized, still taking a big hit. And we're seeing a bigger hit today as well. But you know, my thought also comes to the text messages that we started to receive a couple of calls, Hey, is now the time to get into oil. And I just chuckled because you know, our belief very much is supported by the evidence that prices are baked in or taken into account. Uh, all the available information as mentioned before. And you know, it just goes through that reiteration, that re-education process to make sure everybody stays focused on the longterm and don't get kind of bought into this trap of trying to grab something that quote unquote is certainly going to come back. So those were the initial thoughts that came to my head

Erik Averill (02:24):
stats too, right? I think it's natural for us to, to reflect back on what we've known as our normal historically that, Hey, you know, we heard this a few weeks ago. Certainly the airlines can't stay down this much, right? Delta looks like a good buyer, uh, yesterday, you know, oil th th there's no way that oil doesn't go back up. And here's the thing is if you're having that thought, you're probably not the only one. Yesterday, uh, USO, which is the, the United States oil ETF, it's down 72% for the year. Here's the fascinating thing that, uh, yesterday it was down 18% in pre-market trading goes down 10%, yet a half a billion dollars of new cash flowed into that position yesterday. So as that position is falling, literally a half a billion dollars was invested into it. And so I think it's this interesting dynamic of where people try to believe like this is going to be this crazy upside that the markets are completely wrong, that this is irrational. Can you talk a little bit about where is the right way to look about making a concentrated risk bat? Or you know, why you shouldn't try and play these positions?

Brandon Averill (03:38):
Yeah, certainly I think the, you know, certainly our belief is that markets are efficient. All that available information is being priced in. So to have the, I guess the gumption or the, the ego to be controversial, to think, Hey, I'm smart enough that I'm going to be better than everybody else. You know, that's just not something that we're willing to take about with our clients on. I think this is one of those situations where we need to kind of humble ourselves, go back to the data, take a look at things and say, Hey, where is a reasonable place to, to take a shot at some outsized performance? And that's not the public markets, that, that's not the place where we believe that you can find some information that nobody else has. Uh, and if you can, that's probably a material nonpublic information. You're probably gonna go to jail for insider trading.

Brandon Averill (04:28):
But let's, you know, there are places that you can invest in get outsized returns where information advantage certainly exists. Uh, one of those are in the private markets. So whether it's private real estate, you know, local or even on a bigger level and or venture capital, private equity, you know, these are markets where that's the entire game is having some information advantage, whether about the company or the industry. These obviously carry quite a bit more risk as well and are not suitable. These markets are not suitable for, for everybody. So, you know, I think it's a consultation you have to have with your advisor to go through, but trying to outguess the public markets, we know from all the, all the data and the evidence, it's a great sales pitch. We would love at times to sell it because we could sell a lot of it. But in reality, it's just not in the best interest of clients.

Erik Averill (05:18):
And what I would really encourage our listeners to dig into, and this is something that we'll spend a lot more time on in the, in the future episodes of AWM insights is this is really a conversation of risk. It's a paradox, right? As a lot of times we'll talk to investors and they want to have a balanced portfolio. They want to capture the market upside but don't enjoy the rides down, right? The short term volatility, um, and so they're very conservative by nature would be their own self description. Yet they go out and buy a lottery ticket that the probabilities is, they're absolutely going to lose. But there's this allure of, of making the quick buck. And I think this is the exact same example, is a lot times the same investor who, um, doesn't like the volatility of a globally diversified portfolio. Now sees this as this, can I, can I make a quick dollar?

Erik Averill (06:07):
But not really? Thinking through the lens of this is actually a very risky bet with the probability that I'm going to lose the majority, if not all of my money. And so where we really encourage you is, is connect with your certified private wealth advisor. Take the time to understand everything really through the risk of, uh, through the lens of risk because your return in your risk are absolutely tied together. And so we appreciate your guys's attention. Um, I know these are fascinating times going into the markets. We are, uh, obviously paying attention every single day. Uh, but what it comes back to us is, is we trust the data. We trust the plan that we've put in place. We have clarity, we have patients, and we have discipline. And so until next time, stay humble, stay hungry, and be a pro.

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