The guest commentary below was written by Jesse Felder of The Felder Report. This piece does not necessarily reflect the opinion of Hedgeye.
A few months ago I wrote Master The Art Of Doing Nothing, in which I argued that, while it may be the most difficult thing for an investor to do, the vast majority of the time an investor should simply do nothing at all.
Truly wonderful opportunities don’t come around very often but having the patience to wait for them is what separates the best investors on the planet from the rest.
However, it’s not only the waiting that is critical to success; it is also the courage to act when the time arises. Aside from being too active, another major mistake investors make is simply being too timid, or becoming too comfortable with doing nothing at all and this can be just as costly if not even more so. As Warren Buffett has said, mistakes of omission, or failing to act, have cost him far more than mistakes of commission, or acting when he shouldn’t have.
As I wrote in Master The Art Of Doing Nothing, “When it comes time to actually do something, to put money to work, you will know by the fact that it is such an attractive opportunity you would be foolish not to take advantage of it,” and I have done my level best to describe the situation in energy and commodities as just such an opportunity.
Most investors, however, are either oblivious or are in some stage of disbelief. “When a truly terrific opportunity arises they are paralyzed by the fear of going it alone, without the comfort of the company of others, ala stocks in 2009, real estate in 2012 or gold in 2015. Or they just aren’t paying attention,” is how I described it in that earlier piece. Before energy’s recent rally, I suspect most were too fearful. Now they either believe they missed it or that it’s just another false dawn.
But this is exactly what it feels like at the beginning of a major bull market. Skepticism towards a rally is the healthiest sign you’ll find and the skepticism towards the rally in energy is so thick you could cut it with a knife.
The trick is learning to feel FOMO when you should feel it, when it feels like nobody else in the world could imagine feeling it, rather than allowing yourself to feel FOMO at a time when everyone else is actually feeling it.
To that latter point, everywhere you look there are signs of FOMO towards the broad stock market like we have never seen before. As Jeremy Grantham told the Financial Times, “There is as much craziness now as there was in late 1999 or 1929. It is bewildering, impressive and for financial historians like me, exciting. This is the real thing… It looked like we were in a bubble mode this summer, but the real craziness has come out in the last few months.”
Meanwhile, the energy sector is still priced as if it’s going out of business even though, as Steven Bregman recently put it, “the imminent danger is not the collapse of fossil fuel use; the imminent danger is an oil supply shortage and oil price shock.” The bullish disconnect is one of the largest I’ve seen in my career. Similarly, the bearish disconnect between prices and fundamentals for the broad stock market, largely driven by tech, is also unquestionably one of the largest I’ve ever seen.
However, there is no opportunity without these sort of disconnects so you might otherwise phrase it as these are two of the greatest opportunities I’ve seen in my career. I would never claim that either one would be suitable for the faint of heart.
In fact, the greater the disconnect, the greater the courage required to take advantage of it. But for those with the courage (and expertise) to do so, the rewards could be spectacular.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor piece written by Jesse Felder and reposted from The Felder Report blog. Felder has been managing money for over 20 years. He began his professional career at Bear, Stearns & Co. and later co-founded a multi-billion-dollar hedge fund firm headquartered in Santa Monica, California. Today he lives in Bend, Oregon and publishes The Felder Report. This piece does not necessarily reflect the opinion of Hedgeye.
