As we approach year end and cap off the dramatic investing environment that followed all throughout 2018, let us review a bit. In the last sixty to ninety days, we saw decreasing oil prices due to a variety of factors, many geopolitical, such as several fed rate hikes and the trade war with China. We have witnessed quite a bit of volatility in the stock markets as a result, especially in recent days. There has been a great deal of media speculation about the end of the bull market. Indeed, the markets frequently show signs of what they typically do in normal cycles, which is to correct themselves. Let us talk a bit about the opportunity that underlies this type of market.
What Would Warren Buffett Do?
What are investors supposed to think at this time, when looking at their 2018 investments at the end of the year? Well, during volatile times like this, especially, we should defer to professionals and see what they have to say. Business Advisor recently quoted Warren Buffett who famously offered some wise words in his letter to stockholders a year ago that still apply today (maybe even more than they did then). He said, “investors should do two things when stocks are falling: stay in the market and buy at a bargain.” In other words, the best time to invest is all the time. The best time is now. Professional investors know to keep investing often – and consistently – to make the most of their money and to be there for the opportunities to buy when the deals are out there.
Opportunities Happen During Dips
Some of the most significant opportunities present themselves during the most volatile of markets. Here is a bit of recent history that you may find useful from the last big oil glut that drove crude prices down to the peak low of $26/barrel in early February of 2016. When oil started dropping below $40 a barrel, many operators with high lifting costs (the costs of extracting oil from the ground), found themselves over-leveraged and struggling to turn profits. Stretched to their limits to meet bank obligations, they were forced to sell assets, often at below market rates, to keep afloat. Tens of thousands of talented oil industry workers were laid off. However, some in the U.S. shale play used new technology and methods to become more efficient at getting oil out of the ground at lower cost. I have talked about this before; U.S. shale operators became nimble and, indeed, found ways to maintain operations and profitability even when oil prices dip down even as low as $15-$20/ barrel.
Here is a great article from back in November of 2016, which illustrates the story of how a number of U.S. shale companies thrived even during the big oil price dip: “Leaner and meaner: U.S. shale greater threat to OPEC after oil price war.” It underscores the point of how having the cash reserves to act and pick up assets in a down market offers tremendous opportunity. Maintaining a low lifting cost for oil helped companies in the shale play continue to operate, pay debt coupons to investors, and distribute equity disbursements, despite challenging market conditions. It created a new recipe for success that has proliferated: 2018 marks the year that U.S. crude oil production surpassed that of Saudi Arabia for the first time in more than two decades, in large part due to the Permian Basin, according to the Short-Term Energy Outlook from the EIA.
Look for the Opportunities
Smart investors understand that there are opportunities in every market, and we seek to take advantage of both bull and bear markets, but in a controlled and thoughtful manner. Who knows what 2019 will bring, but be assured that in many instances, a down market is just as attractive, if not more so when building an asset base for investors, particularly when you look at the over-leveraging that has taken place in recent years (for example, in the commercial real estate sector.) As smart investors, seek out the wisdom from a professional advisor and find those gems that can thrive in a down market. They are out there.
At the risk of sounding like a favorite song on repeat – this post should not be construed as specific investing advice. You should talk to your own financial advisor or investment professionals to get advice specific for you. Do it today, so you can find those gems.
I wish you all a safe, happy, and prosperous 2019!
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