by Archie M. Richards, Jr., CFP^®
June 7, 2004

Other than Iraq, what’s been the biggest news lately?

High prices of oil and gasoline, right? As of this writing, articles on the subject have appeared on the front page of my local paper two out of the last three days. Not the business front page. The front page.

Many other stories are related to oil. When the stock market goes down, it’s supposedly because of higher oil prices. When the stock market goes up, it’s despite higher oil prices. Al Qaeda’s attack in Saudi Arabia raises fears about oil supplies. Oil, oil, oil – it’s a big deal.

Like everyone else, the media’s goal is to make money. They want to attract the maximum number of readers, listeners, and viewers by presenting stories that trigger emotions. Members of the press have their antennas out for news – usually bad news – to which people have emotional reactions.

Oil is front-page news because people fear a further rise in price. But oil has already risen from $26 to $42. Nobody cared about it at $26. Now is when emotions are flaring.

When people have strong emotional reactions about a price trend, consider the trend to be ready for reversal. Back in 1980, for example, the price of oil hit $35 a barrel. (The buying power of the dollar was greater then; $35 was a bigger worry than $42 is today.) Investors and experts alike were panicked about the price, convinced that 60-dollar oil was just around the corner.

Ha! Never mind $60, the price fell to $12. It remained at about $15 for several years, attracting little attention. I recall a Barron’s interview at the time of a fellow who was touted as Wall Street’s leading expert on oil. He predicted that the price would remain low for years – had all the facts and figures too.

Well, the facts and figures may have been right, but the prediction wasn’t. Soon after the article appeared, the oil price started increasing substantially. At important price reversals, even the experts are wrong.

Consider other examples: In 1978, the dollar was low in relation to other currencies. Fears about it continuing to fall were front-page news. The dollar then rose for 7 years.

In 1985, fears about the dollar continuing to rise became front-page news. The dollar fell for 10 years.

In 1995, fears about the dollar continuing to fall became front-page news. The dollar rose sharply.

You probably remember the bull market of 1999 and 2000. Investors could hardly wait to pile into big growth stocks like Cisco and Lucent. Whoops, their prices fell by at least 90 percent.

When investors and investment experts become emotionally committed to an expected price trend, don’t get sucked in. The crowd will be wrong.

Financial fears on the front page? Sell investments that would benefit from prices going in the direction people are afraid of. Buy investments that would benefit from prices going opposite to the direction people are afraid of.

If you attend a social gathering in which someone expresses fear about a price trend continuing, don’t contradict. Going counter to the herd makes you seem like an oddball. When your friends begin acting like sheep, set your reasoning powers apart from their fears. Observe their emotions and stay quiet about your opposing views.

Here are reasons why most investors will be wrong about the oil price continuing to rise: Russia recently increased its production of oil. Saudi Arabia, China, and Mexico are all raising their production. Large projects for crude oil are coming on line in Nigeria, Angola, Brazil, and Kazakhstan. The removal of sanctions from Libya will enable its production to rise. Eventually, Iraq’s enormous oil reserves will come on line big time. The CEO of British Petroleum has said there’s enough oil in the Gulf of Mexico to supply all of America’s needs.

The media can’t make much money from any of this. Right now, people aren’t interested in good news about oil. They’re committed to the bad.

Financial projections on the front page? Don’t be a sucker. Assume they’ll be wrong.