Where is the Oil Price Heading?

Executive Summary

This article provides an overview of Preston and Stig’s discussion of the current market condition with their mastermind group.
This article and podcast answers the following questions:

  • What is a Mastermind Group?
  • Why is the stock market moving up when GDP is going down?
  • Where is the oil price heading?

What is a Mastermind Group?

After reading Napoleon Hill’s classic book Think and Grow Rich, Preston and Stig decided to follow his guidance and create their own mastermind group. But what is that? A mastermind group typically consists of 4-6 people with the same values and goals, but with very different skillsets. They meet regularly and help each other with whatever they are struggling with. Preston and Stig’s mastermind group is no different. It has 5 members who have the same goal of maximizing their returns on their investments, yet each member has very different approaches. Aside from Preston and Stig the members are:

  • Calin Yablonski: SEO and Internet Marketing Expert, and owner of Inbound Interactive
  • Hari Ramachandra: Executive at LinkedIn, and owner of the popular investing blog BitsBusiness
  • Tobias Carlisle: Lawyer, and principal owner at Eyquem Investment Management LLC.

Why is the stock market moving up when GDP is going down?

One of the things that Preston had observed was that the market seemed to only be moving upward when there was bad news. That might appear very contradictory, but the rationale might be that when there is bad news the FED will not increase the interest rate as the economy is not performing.

Toby is skeptical when he is looking at the relationship between GDP and the stock market. He says that in the long run, valuation is the main driver, but in the short run it’s a combination of valuation and trend that determines how the stock market moves. This might be what we are seeing right now, and in the US in particular where most people perceive the stock market as at least moderately overvalued, only a handful of people justify the current valuation by the low interest rates. According to Toby’s research, there is not even a slight negative relationship between GDP and the stock market even for long periods of time. For instance, China has had a tremendous growth over the last decades but the domestic stock market has done poorly, while the opposite can be said for England. It’s really the same thing you can observe with a hot stock where it soars without looking at the intrinsic valuation, but merely the psychology behind that. The argument goes back to valuation where one has been undervalued and is expensive.

Where is the oil price heading?

A very hot topic right now is the price of oil. While the mastermind group has no idea where the price might go in the near term, the discussion for the long term performance of oil can always heat up the debate. One thing that Preston had thought about is that Warren Buffett had sold off his $3.7B stake in Exxon Mobile, which even for Buffett is a significant shift in his portfolio. The reason Preston is hesitant to buy into the oil industry is because it requires an enormous amount of capital expenditures to remain competitive. With an expectation for fiat currencies around the globe to continue to de-value their currencies, Preston has a concern about the cost of sustaining the tangible assets on the oil companies’ balance sheets. Hari had been to the annual shareholder meeting at Berkshire Hathaway and remembered a question that was specifically asked about the reduced position in Exxon Mobile. Vice-Chairman Charlie Munger didn’t seem too excited about the original purchase but stated that it was better than holding cash. Hari’s take on the action to exit the position was that the cash could be put to better use with a new deal with the business partner 3G. So in short, the decision was based on opertunity cost.

Stig’s personal take on oil was bull. Looking back in history and even today, he has observed a steady increase in the demand of oil. As in all other markets, the demand drives the price in the long run, but it can be severely distorted by the fluctuating supply, especially in the short run. A barrel of oil is a very homogenous product and the barrier to entry today is quite small to supply that amount of energy. The implication is that from time to time, you’ll see way too much supply that will drive down the price. This is what is happening right now, but you’ll also see that marginal players will eventually leave the industry. As this happens, the cost structure of the remaining players will change and they will adapt to the current oil price, which will slowly drive up the price as the competition is now less fierce. As with all other commodities, it’s simply a cycle that repeats itself.

Hari points out that the oil business is characterized by a negative feedback loop where supply can always meet the demand at that given price. If the demand and price is low, only the lowest cost producers can deliver at a profit. For instance, in Saudi Arabia where the marginal cost is typically around $30. As the price of oil increases, other oil fields like isolated areas with deep water drilling might start arousing the interest of suppliers when the oil price cost is closer to $100.

Books and resources mentioned in this episode

Hari’s Blog: BitsBusiness.com

Calin’s SEO Company: Inbound Interactive

Tobias’ Investing Site: The Aquirers Multiple

Tobias’ Blog: GreenBackd.com

Tobias’ book, Deep Value – Read reviews of this book.

Tobias’ book, Quantitative Value – Read reviews of this book.

James O’Shaughnessy’s book, What Works on Wall Street – Read reviews of this book.

Morgan Downey’s book, Oil 101 – Read reviews of this book.

Where Preston and Stig find information about the economy: dshort.com

Videos that Support this Podcast

What is a Mastermind Group

Download Preston and Stig's Free Checklist

Download Preston & Stig's free stock investing checklist. Their checklist was developed after spending countless hours studying billionaires like, Warren Buffett, Carl Icahn, and Ray Dalio. With their checklist, you can find safe picks that protect and grow your principal. Additionally, Preston & Stig read a lot of books and write executive summaries for each book they finish. If you download their checklist, you will be added to their monthly e-mail list where they send their book summaries. There are never any advertisements...ever. Here's an example of one of their executive summaries, based on the book written by Billionaire Charlies Koch.