Your Antidote to the Investor’s ‘Failure of Imagination’

Howard Marks is one of the best investors in the world today.

Howard is the chairman of giant fund manager Oaktree Capital. You may remember Oaktree as the investor who bought and sold Nine Entertainment Co Holdings Ltd [ASX:NEC] and made millions along the way. We can safely say Howard understands what drives the Aussie economy and its share market.

Oaktree specialises in distressed debt — but that doesn’t stop its chairman from regularly speaking out on a range of topics surrounding wealth creation.

Howard’s latest broadside is instructive stuff. In a world where oil prices plunge ever lower, and where the stock market price action might tempt you to head for the hills — we guarantee you’ll find his views valuable…

Here’s the key quote from the note Howard sent to his clients just before Christmas:

What “everyone knows” is usually unhelpful at best and wrong at worst.’

In one line, Howard has distilled what we’ve been saying for months about how to make money in these markets.

Howard wrote that line referring to the consensus view on interest rates. But it’s a handy mantra if you seek to call yourself a contrarian investor. You should know that the vast majority of mainstream financial market news and pundit opinion is dangerous guff.

But back to interest rates. Since mid-2013, practically everyone has been forecasting rising interest rates in the US…but over that period, 10-year Treasury yields have fallen from around 3% to 2.2%.

As Howard writes, ‘not only did the investing herd have the outlook for rates wrong, but it was uniformly inquiring about the wrong thing’.

So if not interest rates, what should investors have inquired about?

Well, it’s a lot easier to say this in hindsight…but how about the prospect of a 50% drop in the more on the oil price from Money Morning?

Practically nobody — not even Howard — saw the oil markets breaking down like this. That’s because most investors suffer from what Howard calls a ‘failure of imagination’.

As he puts it: ‘Forecasters usually stick too closely to the current level, and on those rare occasions when they call for change, they often underestimate the potential magnitude.’

If you don’t understand why that’s the way of the world, then you don’t understand the notion of ‘career risk’. The vast bulk of pinstriped investment analysts from Wall Street to Collins Street don’t make bold predictions. They produce timid targets — changes in asset price levels of around 10% per year — that are ‘sensible’ enough not to raise their bosses’ eyebrows. Their incentive is to remain employed, not to make you money.

Some people like to bash organisations like Port Phillip Publishing, which produces Money Morning. They think our analysts’ forecasts are unreasonable. But in a market where the price of the world’s most important commodity can halve in six months, we think it pays to think adventurously.

Old habits die hard

So where might the price of oil head next?

The big investment banks aren’t straying too far from current levels. Bloomberg reported this morning that Goldman Sachs Group Inc [NYSE:GS] has just updated its oil price forecasts. Goldman now expects US$39 per barrel of West Texas Intermediate (WTI), the US benchmark, for the middle of 2015.

That puts Goldman’s forecast 15% below the US$46.35 that WTI crude fell to yesterday. They probably think they’re being aggressive. Old habits die hard, we guess.

We shouldn’t pick on Goldman Sachs too much. As Howard pointed out in his Christmas letter, ‘it’s hard to analytically put a price on an asset that doesn’t produce income.’

But if the last few months of price action are any guide, the best advice at this point might be to expect the unexpected.

That means you need to factor in the possibility that oil prices could rebound faster than anybody predicts right now. And thanks to the falling price of oil, you have a fleeting opportunity to invest in energy firms at a super cheap price.

That’s why we’re so excited about the discovery that our resources analyst, Jason Stevenson, has made. He’s identified a firm that’s located a gigantic, untapped oil deposit off the coast of Morocco.

Go here to see why a discovery of this size is so rare and so valuable. Jason says the firm who taps the oil is practically guaranteed hundreds of millions of dollars. And one tiny Aussie firm is claiming every last drop…

Tim Dohrmann
for Markets and Money

Editor’s Note: Tim’s article originally appeared in Money Morning, Australia’s best read financial newsletter.

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