What Investors Can Learn from the Oil Bust and Charlie Munger

The Wall Street Journal offers some broad lessons from the oil bust. “If oil stocks have burned you, use that as motivation to rethink how you form your expectations of the future,” author Jason Zweig suggests. Citing Ipreo data, he notes that between the end of 2007 and the end of 2014, oil and gas companies raised $255.7 billion in IPOs and other offerings. Further, almost 100 Energy-specialized funds brought in $64 billion from the investing public during the same period. He notes: “almost no one foresaw oil below $40,” analogizing the situation in oil to the 2008-09 drop in real estate prices. Why? Zweig suggests that “analysts’ view of the future was consistently anchored to the present.” When oil shot up in summer 2008, analysts ramped up their year-end predictions; when it dropped by January 2009, they ramped down their year-end 2009 predictions.

This type of anchoring tendency is supported by the findings of Werner De Bondt, a behavioral economist, who has found that for every 1% rise in the Dow over the previous week, people became 1.3% more likely to be bullish in predicting the subsequent six months.

Charlie Munger of Berkshire Hathaway urges investors to “invert, always invert,” which is to say that one should consider what happens if predictions are wrong. Mr. Munger put millions into Wells Fargo when many others predicted collapse of the financial system. He says that success in investing requires “the crazy combination of gumption and patience, and then being ready to pounce when the opportunity presents itself. Zweig summarizes: “the best way to raise your yield is not to buy what’s popular, but wait until other investors are extrapolating misery – and then buy.” Some areas where this approach may work at the current time, according to Zweig: energy, high-yield bonds, and emerging markets.