Good Advice from HFI Research - April 22

[dan_s]

Notes below are from Wilson at HFI Research with my comments in blue.
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Roughly 12 years ago when I first embarked on the journey we call investing, I was naive beyond belief. I had read everything Warren Buffett had written up to that point and digested every value investing book known to man. Value investing was going to be my religion. The Intelligent Investor, that was my bible, and anyone who told me otherwise could go to hell.

Well, if you were anything like me (value-driven) for the last 12 years, you severely underperformed your growth counterparts. < Over the 21 years since EPG became my full-time job, our largest gains have been early investments in small-caps with strong management teams. Some of you may remember TransGlobe Energy (TGA) being added to the Sweet 16 at $0.33 that went to over $14.00 per share. Hemisphere Energy (HMENF) and InPlay Oil (IPOOF) are other examples of small "pink sheet" companies that have made us many times our original investment.

And as the years went on, I saw more and more "value" guys switch over to the dark side. Quality, that was the name of the game, and buying high-quality businesses at a reasonable price, that was the name of the game. And for those who did switch to the dark side, not only were their careers saved, but they mightily prospered.

But is that really the lesson I want to take away from this? Stop value investing and buy growth names? No, but there's an even more important lesson here that transcends investing, it's the realization that the long term is made up of short-term events.

I think for those of us who are in the investing business, guessing daily stock market price movements is tantamount to gambling. Unless you have a defined edge and can make money more than 50% of the time, it's not worth partaking. But just because you are invested for the long term doesn't mean you should ignore short-term events or short-term signals.

As I look back on my career, forecasting the future is hard, and forecasting the long-term future is even harder. There's a reason why Warren Buffett puts so much emphasis on buying quality names at a reasonable price and why some of the guys who switched from value investing to growth investing have prospered.

"Forecasting is hard. Especially when it is about the future." - Yogi Berra

But in the commodity business where boom and bust cycles are as frequent as the rise and fall of the sun, investors can develop an edge with signals that tell you whether or not you are on track or have deviated materially off of the long-term bull path.

Because let's be real, the multi-year oil bull market should have been here already, and despite all of the bullishness many of the bulls projected (including myself), we still need OPEC+ to reduce production (only the Saudis in this case) to keep the oil market in deficit.

So while you could believe (like me) that the oil market is headed for a multi-year bull market, you can't forget that the long term is made up of short-term events. In a commodity business where you are not buying quality businesses at a reasonable price, it becomes that much more important to understand the underlying fundamentals and the relative valuations of the companies you own. And so if you choose to ignore 1) the fundamentals or 2) the valuation and instead believe, for the sake of believing, that the multi-year oil bull market is coming, then I think that's a big mistake and one that I've made countless times already.

(Note: Commodity producers, inherently, are not high-quality businesses. Why? Because they are price takers. While a higher quality producer will have a commodity cost advantage over others, they are still susceptible to boom and bust cycles of the commodity.)

It was tough...
A few years back, I remember a great tweet I read that went something along the lines of, "There are days when years happen. And there are years when nothing happens." I think as I look back on my career, I had initially thought that the early part of 2016 was bad (when oil dropped to $26) only to be eclipsed by 2018/2019 where I suffered mighty drawdowns, and only to suffer an even greater beating in 2020 (COVID). And mind you, there were signs everywhere in 2018 and 2019, and many of the processes I use now were the result of those punches to the face.

And if you ever wonder why HFI Research is one of the best at forecasting US crude storage (boasting a bit here), it's because I spent years on figuring out how to make a more accurate prediction. If you ever wondered why I know so much about that damn EIA adjustment figure, it's because I spent years trialing and error on that figure.

None of these things came from simple research, these processes take time and you are almost certain to make the same mistakes over and over again, but while these tasks/processes seem mundane, they always turn out to be useful somewhere down the line.

So when people read our reports today and ask, why are some of your write-ups so short-term in nature, it's precisely because if we don't stay up to date with all of our signals, we could get punched in the face again. And trust me, getting punched in the face (investing equivalent) is the last thing I want to do right now.

Not going to be a smooth road...
When I look at the setup for the years ahead, I don't see a smooth road. I don't think anyone can just bank on the fact that global oil supplies are peaking with any degree of certainty. I think US shale is close to peaking and we will see evidence of that, but just because I say it will doesn't mean that it will. You need the data to back up your analysis and you need reality to turn into... well... reality!

So like anything in the market, the short-term events need to validate your long-term thesis. Similarly, just because we think global oil demand will grow regardless of electric vehicle penetration doesn't mean that it will! You need facts to back up your assumption and more importantly, you need to have the ability to change your mind when the facts change. < My take is that oil demand growth is "relentless" except when it is interrupted by a major global recession or a "Black Swan" event like a pandemic, after which oil demand moves quickly back to the long-term trend line. Why? because the Earth's human population is growing by over 200,000 people per day and "Energy is Life" + most of that energy will come from fossil fuels for at least decades to come. All people want a higher standard of living for their families and that takes energy.

So is the road ahead smooth? Hell no, but is anything in investing ever smooth? Is life ever smooth? No, and heck, even those people who invested in Warren Buffett's Berkshire Hathaway must have had their moments of doubt somewhere along the way. Why? Because we are all human and while we can fascinate over what the long-term may look like, we are left contending with the day-to-day and the short-term events.

My advice? It's better to start equipping your mind today with that reality than to be like me and realize it far too late. Don't be naive like I was when I first started investing. Just because I thought something was going to happen in the long-term didn't make it a fact and just because my biases convinced me doesn't mean I will make money. Always remember that the long-term is made up of short-term events and your job as an investor is to analyze the facts and change your mind when the facts change. So let's stay sharp and navigate through whatever road that is in front of us, because if the past is any guide, it's never a smooth road ahead.
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Bottomline: My "mission" is to find good public energy companies that have much better than a 50/50 chance to succeed. Some don't make it, but most of the failures have been the result of unforeseen drops in commodity prices. What you invest in is totally up to you. When you buy or sell a stock is totally up to you. Do your own due diligence and learn to use the tools that we provide. My forecast models are not perfect, but when you take the time to understand them, they can provide a guide to how a company should do in the future. Plus, EPG was formed as a "networking" group. Many of our members have decades of industry and/or investing experience.

[Fraser921]

- Life is a learning experience, only if you learn.
- Make a game plan and stick to it. Unless it's not working.


Yogi Berra