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OPINION

Quite contrary

Quite contrary
July 28, 2016
Quite contrary

Such was the depth of gloom surrounding the extraction industries – and not least the hydrocarbon industry as the oil price sank to $20 a barrel – that we took the decision to avoid resource stocks altogether when selecting our 2016 Tips of the Year. It’s a safety first approach that, in relative terms, hasn’t worked out especially well, but I suspect few would have done otherwise at the time.

Should we have been braver – as we have since – and gone with our instinct that we were at, as Tips Editor Algy Hall put it at the time, “the point of maximum revulsion”? We certainly expected oil to bounce back, although were less sure when this might happen, given the persistent weakness of global growth – a situation that has hardly improved since. Even now, the oil price is wobbling once more as talk of a coming glut bubbles to the surface once again.

Few would have predicted the latest gold boom, either, given widely held expectations of an imminent hike in US interest rates – the gold price is, after all, inversely correlated with US dollar strength, which would have been further reinforced should the Federal Reserve have raised rates. It has yet to pull the trigger, of course, and consensus suggests that even the recent strong economic news from the US won’t be enough to prompt action.

That would be good news for gold miners who have had an even better run than the underlying commodity. Similarly, junior oil and gas explorers have enjoyed something of a renaissance in 2016; many cut costs during the downturn and have taken advantage of improved sentiment to raise money and refinance drilling programmes. We’ve taken a look at some of the most interesting prospects in this week’s cover feature, and are optimistic over the longer-term outlook for the oil price given the growth in demand we are likely to see from emerging markets.

The lesson to learn is that breaking from consensus can be a very profitable approach – in fact, logic dictates that you will not outperform the market unless you do so. But this market timing approach is easier said than done, especially against a noisy – and quite likely misleading – backdrop of short-term economic data. As Warren Buffett once put it: “the stock market is a device for transferring money from the impatient to the patient”. Indeed, just as changing lanes in a traffic jam won’t get you to your destination any faster, so jumping around the market is less likely to make you rich than buying quality assets when they’re cheap and holding onto them for the long term.