● Everyone was getting their knickers in a twist about oil prices this week. Oil cartel Opec had its worst-ever meeting, according to the Saudi oil minister.
What with its member countries being on opposite sides of the Libyan civil war, the cartel couldn’t agree on what to do with production quotas. Oil prices spiked briefly, although technically it makes no difference – everyone ignores the quotas anyway.
And as I mentioned in Money Morning this week, oil prices may not stay this high for as long as everyone seems to think. Indeed, the commodity bull market might be getting long in the tooth.
Lord Rothschild, head of RIT Capital Partners (which is one of MoneyWeek regular Tim Price‘s favourite investment trusts) said that: “After a decade of commodity leadership, a shift to a new regime is a possibility”. The trust is now turning its attention to “the attractive level of valuation of many quality companies”, which we’d take to mean the sorts of defensive big blue-chips that we’re fond of.
I’ve said this a few times now: the cries from the NeoMalthusians are getting a bit hysterical (hat tip to Sean Corrigan of Diapason for that nickname).
We’ve been believers in the commodity supercycle for a long time at MoneyWeek. We flagged up rising prices back when the mainstream press was still sneering at the idea that China would ever be a major economic power.
However, the point of rising prices is that they make it profitable for entrepreneurs to come in and fix the resources shortages by coming up with new supplies, substitute products, and more efficient ways to doing more with less.
I realise that many of you will think I’m being too blasé here. I’m not. The transition towards being more efficient and finding alternative sources of energy won’t be easy. It’ll be expensive, and there’ll be plenty of dead ends pursued along the way.
Maybe, as Hugh points out in the comments below my piece, there will be a backlash against natural gas as people object to the environmental implications of ‘fracking’. (Although tar sands and deepwater drilling are at least as bad for the environment and are still viable sources of energy).
And prices may continue to rise, particularly if the Fed decides to come off the fence and launch into quantitative easing part three.
But we’re not facing the imminent collapse of civilisation. We’ll find a way past this, and there will be plenty of opportunities for smart investors along the way. My colleague James McKeigue looks at some promising ways to bet on human ingenuity in the current issue of MoneyWeek magazine, out now. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
● MoneyWeek share tipper Paul Hill has also been looking at ways to profit from changes to our energy supplies in his Precision Guided Investments newsletter. In particular, he’s been looking at Britain.
“After years of underinvestment, Britain has been left with a decrepit electricity infrastructure. And with many of the country’s ageing nuclear reactors due to be phased out over the next few years, the grid could be left horribly vulnerable to blackouts.”
So what will plug the gap? Paul’s a fan of solar power, and has written about it both in Money Morning and in PGI in the past. But he’s also looking at ‘smart grid’ technology.
Smart grids are fascinating. They have huge potential to make our energy usage more efficient. In short, they allow households and energy providers to communicate with one another. This would enable providers to meet demand far more efficiently, and households could also sell any spare energy they produce back to the grid.
Says Paul: “According to the Electric Power Research Institute (EPRI), an upgrade to smart grid technology in America could cost between $338bn and $476bn over the next 20 years. In Europe, Pike Research predicts investment will total $80.3bn between 2010 and 2020, reaching a peak of $9.8bn in 2017.” That’s a big market for investors to tap into. Paul’s looking at how.
● As for playing a potential slowdown in commodities – I’ve been spread-betting, shorting the Aussie dollar against the US dollar.
Spread-betting, of course, is risky. You can lose more money than you stake, and you should only do it with money you can afford to lose. But I think having a dabble in spread-betting is a very useful learning experience for any investor.
My trades have been performing quite well, in that I’m up on where I started. But the main value to spread-betting is that it rapidly teaches you money management lessons that might take you rather longer to learn as a traditional stock-picker.
The main thing I’ve learned is the supreme importance of having a plan. You need a definite entry and exit point, and a point at which you cut your losses.
In my initial attempts at spread-betting (I opened an account early last year) I made some money shorting the euro against the dollar. But then I proceeded to lose it all and more, even although the euro collapsed against the dollar last year.
Why? Because I’d mistime my trades. I’d set my stops too close, I’d take my profits too early, I’d let my losses ride – and most of all, I’d end up panicking, because I didn’t have a plan.
Now, because I know what I’m expecting before I open a trade, I’m more prepared to accept the loss when it has gone wrong, and close it fast. And when a position moves into profit, I don’t feel the urge to shut it down because I have a much better idea of how much I expect to make out of it.
It’s all simple stuff, but it’s not until you put it into practice that you internalise it. Like most things in life, it’s pretty hard to learn from other people’s mistakes. You generally have to make your own.
And I have to say that much of the improvement has come about simply from reading my colleague John C Burford’s free trading email, MoneyWeek Trader [LINK]. John’s a veteran trader, with a tight focus on money management – I heartily recommend you sign up for it if you haven’t already.
● Last week my colleague Tim Bennett tackled the sticky topic of interest rate ‘swaps’ in his video tutorial. This week, he’s gone back to basics with a review of how investors can be fooled by the word ‘average’.
I also suggest you peruse Tim’s back catalogue. There’s now quite a wealth of information there, both for beginners and for those hunting for clear, straightforward explanations of various financial terms. You can access the archive here.
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Have a great weekend!
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