Why oil is still a long-term buy
Sometimes, says Merryn Somerset-Webb, it pays to ignore volatility in markets, especially when it comes to oil. Find out why you should ignore the noise and buy into commodities.
I've just come back from a two-week holiday during which I read no newspapers, watched no television, listened to no radio and had absolutely no conversations whatsoever about the world's financial markets. It was an absolute delight.
When I got back and turned on my computer I began to wish I'd kept in touch just a little: it was clogged with hundreds of e-mails telling me about all the things that happened while I was away.
In just a couple of weeks, the gold price had fallen back to $600; oil was down to $60 a barrel more than 20 per cent below its high back in July; all the resource stocks had dropped; and the Amaranth hedge fund had managed to lose an extraordinary $6 billion (£3.2 billion) in a week on a few bad bets in the natural-gas market.
Away from commodities, the American stock market has regained all-time highs, there's been a coup in Thailand, and in Britain Nationwide has announced that, in defiance of the interest-rate rise, and indeed of all known logic, UK house prices rose 1.3 per cent in September. What a lot, I thought as I trawled through my e-mail, I have missed.
Then I realised that I have actually missed absolutely nothing.
Oil price: only the mega-trend matters
Take the case of oil. The recent fall in crude prices is apparently due to a wide variety of things: to hopes that sanctions against Iran will now be avoided as the country's government seems to be backing off from its immediate nuclear ambitions slightly; hopes that BP will get its closed Alaskan field back on stream sooner than first thought; the fact that the shooting has stopped in Lebanon; and the end of the so-called "driving season" in the US.
None of these factors has really changed anything, though in the great scheme of things they are pretty trivial.
Iran may have delayed a bit of testing, but its government remains the same, as do its intentions. That the guns are quiet in Lebanon hardly means peace has come to the Middle East. The BP closure only affects the overall supply of oil in the short to medium term and the driving season will roll around again in a few months.
I'm not a trader (it's far too much work), I'm a long-term investor, so none of this short-term stuff should really make much difference to my portfolio.
What matters to me is the long-term mega trend in the oil market the ongoing demand from emerging Asia, from China and India in particular. Regardless of the politicking in Iran and the bother at BP, that mega trend remains intact, as does the case for my investments in the big oil companies.
Mining stocks: the commodity bull is still running
The same goes for the miners: again there is a lot of distraction in the metals markets because of worries about US growth, but the basic trend remains. The average commodity bull market lasts over 20 years, giving this one another 15-odd to go.
Commodity markets are famously volatile (20 per cent is not an unusual amount for either the oil or the gold price to move in a matter of weeks) so there will be ups and downs along the way some lasting weeks, some a few years but the odds are that those who ignore the noise and buy into the market will be pretty pleased with themselves in a decade. You can buy in either directly via exchange-traded commodities or via the big mining companies, which have cheap valuations and strong balance sheets.
It's hard to ignore detail when you are investing. We are hit with huge amounts of new information every day and we tend to think that the more we absorb the better we will invest, but this just isn't true. There is a great deal of research about (to say nothing of common sense) that suggests taking in too much information actually makes decisions harder to get right.
Behavioural finance expert James Montier points to four academic studies in his splendid paper The Seven Sins of Fund Management, all of which categorically conclude that having more information does not help us make better decisions. Instead, in many cases, the confusion it generates pushes us into making rather worse ones.
Next time I go on holiday for two weeks I'm going to stick with the rather nice idea of existing in an information vacuum while away, and on my return I am going to delete the 800 e-mails waiting for me unread.
First published in The Sunday Times 1/10/06