Sunday, December 13, 2015

Drinks with the Dragon: 3,000 Ringgit in spilt milk, OPEC lifts imaginary ceiling, diversification




Spilt milk

Hey guys, welcome back to another edition of Drinks with the Dragon where I shoot the shit about random business and investing stuff. Remember in my previous article where I mentioned that I chose to take a gamble and hold on to my stake in Comstock Resources? Well, I learned that I have really shitty gambling luck. As some of you may have noticed, the price of oil, natural gas (for some strange reason) and O&G stocks have plunged after OPEC decided to lift its production ceiling. This situation has forced me to wake the fuck up to the increased actual business risks faced by Comstock Resources. I decided to be prudent and sell the position, albeit at a price significantly lower than what I would have got just 2 weeks ago. I thought it was too risky to wait for a rebound as the stock could have went a lot lower. And considering that the investment has become riskier due to falling natural gas prices, I didn’t want to stick around to find out whether or not the company gets permanently impaired. To add insult to injury, the stock rallied about 20+% the very same day I sold it. It was like the universe decided to send me a giant middle finger.

Update on the Greedy Dragon portfolio: Sold Comstock Resources and Fossil, increased my stake in Oasis Petroleum and Northern Oil & Gas. I didn’t want to sell my position in Fossil, but maintaining a healthy amount of liquidity is especially important in these challenging times. Please do your own research before making any investment decisions. I will NOT be responsible for any of your losses.

The messed up thing is that I knew that I should have sold the stock. You can read my previous article, Update on the Greedy Dragon Portfolio, where I said that I would sell my Comstock shares if I were a professional fund manager. Had I sold the stock the day I published that update, I wouldn’t have flushed around 3,000 Ringgit down the toilet. Considering that the goal of the Greedy Dragon portfolio is to prove to the world that I can be a successful fund manager, I should be more professional in my decision making instead of acting like some degenerate gambler. Just because I’m Chinese, doesn’t mean I need to gamble. Not all Chinese are gamblers (got to be a little bit PC brahs!).

OPEC’s imaginary production ceiling

So, OPEC decided to remove its production ceiling which sent the price of oil tumbling. I just have one question, though. What exactly has changed? OPEC has pumped above the ceiling they set for the past 18 months (source: Bloomberg). It’s not like they have been controlling production all this time, and will start flooding the market now that the ceiling is lifted. They have been pumping like crazy since the end of last year in an attempt to gain market share.

Now, I don’t know what the price of oil will be next week. But I think that the price of oil could experience some recovery in the medium term, maybe even sooner than people might think. A lot of oil companies have been slashing their capex budgets which could lead to a drop in production somewhere down the road. The demand for oil is still growing as people from countries like India are getting richer, and they want more of that awesome black stuff. However, investors should keep in mind that things could get worse for oil. The world could plunge into recession which could in turn cause the demand for oil to get fucking hammered. OPEC could further increase production by a significant amount, especially when sanctions are lifted on Iran. But overall I think that the price of oil is more likely to rise than fall in the medium term as I think that people are way too pessimistic when it comes to oil right now. But that’s just my opinion.

Diversification

If you have been following the O&G sector this year, you would have heard the term ‘high-grading’ come up a lot this year. Well, I did my own version of high-grading when I used the proceeds from the sale of my Comstock Resources shares to increase my positions in Oasis Petroleum and Northern Oil & Gas. I think that these 2 O&G companies are in a significantly better position to survive this crisis than Comstock Resources. However, these investments have increased the Greedy Dragon portfolio’s exposure to the natural resource sector, and that got me thinking about diversification.

A lot of really rich people tend to focus on 1 company or 1 industry. One of the Original Gangstas of value investing, Warren Buffett once said “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” When I first started investing in the natural resource space, I did try to take small positions and not get overexposed to the sector. I know it’s pretty stupid, but I’m the kind of guy who just charges in and take small positions after learning what I think are the important stuff about a certain industry. I expect that some of my earlier investments will have a lower chance of working out, but will nevertheless help me learn more about the sector. I don’t regret that some of my early picks did end up failing so much as I regretted doubling down on some of those positions when I apparently didn’t know my shit. Anyway, I significantly increased my exposure to the natural resource sector after I developed my knowledge to the point where I was confident I could tell whether or not something was dog shit. Whether or not I’ve really attained enough knowledge to make some “fuck everybody” money in the O&G and coal industries remains to be seen. For all I know, I could just be overestimating what I know, and end up crashing and burning like a little bitch.

Concentration risk is still, and will always be, a thing when selecting my investments. But I think that it’s possible to keep concentration risk at a low level even if the portfolio has heavy exposure to a certain industry. Look, if there are 2 potential investments with more or less equal risk/reward profiles, I would invest in the company from an industry which I have less exposure to (assuming I understand both industries). But I wouldn’t forego what I believe to be better investments just for the sake of diversification. I’m a young man who’s hungry to prove myself and become a success; I’m not a wealthy old chap looking to preserve his wealth. I’ve diversified my portfolio to the extent where I won’t get wiped out, but that’s all. I will still be significantly set back if most of my natural resource investments get permanently impaired (and judging by my recent performance, that’s something that could happen). But that’s a risk I’m willing to take. I’m taking my shot mofos!


Well, I guess it’s time to wrap this article up. I hope that you at least found this “drinking session” fun if not informative. Thank you for reading. Take care and stay rational.

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