Wednesday, March 25, 2015

On Predictions

from Tom Gayner in the Markel annual report:

"A second example of how markets periodically become unhinged from long-term reality can be seen in the current action of the oil market. Arguably, oil is the most liquid, important and globally traded commodity on the face of the earth. Hundreds if not thousands of companies participate in the energy business. Hundreds of thousands if not millions of people work in, and study this field. The fact that oil could sell for over $100 per barrel, and for less than half that price within a few short months, should be about all of the evidence you need to dismiss those who believe in efficient markets, or forecasting just about anything.

Our investment record has not and will not be based on our ability to forecast the future of geopolitical changes, interest rates, currency moves, technological change or any other factor that occupies the minds and hours of countless investment professionals. We simply accept that all of those things will continue to fluctuate and change, and that our four part process does the best job we know of finding the people and financial circumstances who will make the best of whatever happens."

Here is my version. Four years ago, Kraft split apart into two companies. The high flying, international, big name brands went with the CEO and became a new company - Mondelez. The boring US-only, low/no growth businesses like Mac and Cheese, Oscar Mayer, and Planters became their own company still called Kraft. Naturally I liked the latter one, which had an excellent dividend policy. I liked it as a 10-20 year hold with a chance to slowly compound over a long time horizon. Needless to say I liked the company's long term prospects, but never thought it would go up 33% in a single day.

If I made a list of stocks that I would wake up and see a hockey stick on, Kraft would be very close to the end of the list. Which begs the question, if we cannot reliably predict the Mac and Cheese and Ketchup market, what chance do we have on oil and energy? As Howard Marks says, "we can't predict, but we can prepare."

1 comment:

  1. I think you're right. Predictions are nigh on impossible for most things in investing. Oil even less so. It is a wonder we try!

    The Kraft deal has rather surprised me!

    (As a completely useless aside. Judging from the last purchase of ketchup I made Heinz Ketchup was selling for £476 per barrel (i.e. 159 litres). That's about $700 per barrel. I'd say it costs more to extract the oil than make the ketchup. I wonder if it will drop below $100 a barrel anytime soon! Just a pointless thought for you...!)