Everything about bubbles...

Mad Manias, Bubbles, and Speculation

By Andrew Gordon

Dear Reader,

What’s more important to you - being right or making money?

I’m not talking about capital punishment, religion, or which political party is better for the country. I’m talking about the market.

Case in point - the rising price of oil. There are lots of reasons not to like it. It slows down our economy. It increases our utility bills. It inflates the price of gasoline. It gives oil companies “windfall” profits.

And there are lots of reasons to think the price is BS. Inventories are far from scraping bottom. Fear of a Turkish incursion into Iraq won’t affect supply a whole lot. Demand is in a traditional slow period between the summer driving season and the freezing temperatures of winter.
Meanwhile, investors are getting out of stocks and into future oil contracts in record numbers. These big-money speculators who are betting on rising prices have driven oil prices to more than $90 a barrel.

I don’t blame you if you think there’s a dirty rotten conspiracy between Big Oil and Big Money speculators to skim off huge gains on the back of the consumer. Maybe you think that that supply and demand aren’t so misaligned, after all. And maybe you’re right.
But does being right matter?

Listen, I’m completely unimpressed with what Big Oil is doing these days. Big Oil is thinking small. They’re getting squeezed by the slippery sheiks of the Middle East and the wayward warlords of North Africa, who are demanding and getting a bigger piece of the profit pie, a smaller piece of the risk, and a large dollop of the latest exploration and production technology.

Imagine if There Were Only 6 Numbers to Choose from When Buying a Lottery Ticket!
Wouldn’t that be great?! Of course, the less the number of choices, the more likely your chance of success, right? How many choices are there when buying and selling shares? Errmm… a LOT!
Hundreds…One of the reasons I enjoy such consistent success from trading, is because I only have 6 options to choose from! Except this is even better in a way, because the lottery is pure luck…

Big Oil is also getting pushed around by the ex-Communists of Russia and the fanatic socialists of Venezuela. And its response to a world turning increasingly unfriendly and greedy? They’re keeping more of their profits. Their investment opportunities stink, and they know it.
But as long as Big Money speculators push oil prices higher, Big Oil isn’t complaining. They’re sitting fat and sassy on top of the money mountain.

They don’t deserve your money. But are you willing to short them? Are you willing to bet against the Big Money speculators who are pushing oil prices to new heights?

I wouldn’t if I were you. And if you can’t beat them, what’s so bad about joining them?
Mad manias, bubbles, and speculation make the market go as much as growing margins and profits. It stands to reason that getting on the right side of a mania is just as important as identifying companies with big competitive edges. You can ride both to outsized profits, right?

So again, let me ask the question: Is it really important that one is built on a house of cards and the other is built on solid fundamentals?

I say no. Besides, being right doesn’t have to get in the way of playing manias or making money.
You can have your cake and eat it too. Just take a stupid sector driven by speculators – like oil – and pick out the company that has figured out how to stand up to the sheiks or get around them. They may not grow on trees, but they’re out there (I like the one from South Africa).

Or just take a stupid sector driven by something like merger mania – my prediction for the airline sector – and select the company that has avoided union problems and huge fixed costs and is riding an unprecedented surge in customer demand (I’m an admirer of the Panamanian company).

Bubbles can be very profitable and very unpredictable. But they’re not all rags to riches followed by riches to rags stories. For an example closer to home, let’s look at, well, your home. Let’s say the housing bubble increased the value of your home from $100,000 to $400,000 in the last seven years. Now that this overheated market is cooling off, it’s worth $300,000. That’s still better than a healthy and steady rise to $200,000 without any retreat.

It doesn’t matter if that bubble is in the housing market or stock market. Buying right … buying smart … buying quality are still very important, even when you’re buying into a bubble.
So go for it. Embrace mania madness. Go where the mad money leads you. Just don’t leave your brains at the door. You’ll need to think fast and move faster. At least buying right can get you started on the right path.

Happy Investing!