Friday, June 3, 2011

The Absolute Return Letter - June 2011: Five Misconceptions Squashed

“There’s nothing more risky than a widespread belief that there’s no risk.” -Howard Marks, Oaktree

Last month’s letter created precisely the stir I anticipated. You may recall that I came out in defence of human ingenuity and predicted that the oil era will end over the next decade – at least in terms of being the primary fuel for transportation. Not surprisingly, some of my readers scolded me for neglecting the demand side of the equation (i.e. strong growth in demand from emerging markets), whereas others agreed with my conclusions but thought my timing was horribly wrong. Quite a few seem to think that my version of events is a story for the 2030s and not the next decade as I predicted.

Having said that, I had a fair amount of support as well. A number of readers forwarded information about other exciting energy projects in the pipeline, which has only served to reinforce my view that we are at the doorstep of a paradigm shift. In defence of my theory, I suspect many of my critics underestimate the difference between $50 and $100 oil prices. Several of the projects I mentioned in last month’s letter make little economic sense at $50. At $100 they suddenly become viable. Were oil prices to go to $200 (not entirely impossible), the development of alternatives to oil would only gain further momentum.

Enough said about that. Let’s shift gear to this month’s topic, where I challenge some of the most widely accepted investment doctrines. Let’s start with a real shocker to get the adrenaline going.