Should the Price of Oil (or Any Commodity) Drive Investment Decisions?

09.03.2015

Recently, Mohamed El-Erian published an article entitled “Why $40 Oil Is Here to Stay.”

I’m not in a position to challenge any of the data points shown or conclusions drawn in Mr. El-Erian’s article. In fact, I probably don’t disagree with any of them. My concern is that investors and advisors may be using thoughtful commentary like this article as a guide for making asset allocation decisions.

Not too long ago, Harry Dent published an article purporting to show a correlation between the CRB (Commodity Research Bureau) price index and the S&P 500 Forward EPS (earnings per share). I’m baffled by the interpretation of this data, as the chart fails to show any causality whatsoever between the two. I see periods when commodity prices are increasing and earnings are declining just as often as I see periods when commodity year-over-year prices are decreasing and earnings are increasing.

In my mind, either article could lead a casual reader to the sensational conclusion that something bad is about to happen. Maybe something bad is about to happen— or, maybe it’s not. If these two analysts were proven right, they would be hailed as visionary, although I would attribute it more to luck than “vision.” On the other hand, if they are proven wrong, they will simply publish a new chart later on and ignore the previous misfire. There is no real accountability for guessing wrong.

The notion that past data can be used to reliably predict future events is downright ridiculous. It’s true that if you wait long enough, almost any prediction can seem to come true. It’s like those television programs touting Nostradamus’ “pin-point” accuracy in predicting world events from his centuries-old manuscripts. It’s nothing more than overlaying arcane phrases (the equivalent of modern charts) with a few details from an event in modern history, to prove the soothsayer’s ability. I am not questioning anyone’s motives, but I do raise the concern that gullible investors reading this stuff can easily be led to make impulsive decisions while the advice giver (soothsayer) bears no responsibility for the outcome.

In my mind, good advice is partially defined by the provider of that advice being somewhat accountable for its outcome. If you accept that definition, then the type of advice you would want to render is one foundationally premised on two universal truths of investing:

1) No one knows the future.
2) Diversification works far better than trying to time the market.

Points of view are important. Mr. El-Erian and Mr. Dent are highly intelligent and respected individuals and, frankly, we should all read what they have to say in order to expand our awareness. My suggestion however, is that every article like this should have a disclaimer that prefaces the article—not at the end or buried in a footnote—saying that the author cannot predict the future and that market timing is generally considered an unproductive portfolio management technique. Investors should keep that in mind whenever they read financial opinion articles.

 

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Frank Muller

As CEO and president of Provasi Capital Partners, Frank Muller brings nearly 30 years of experience in building and managing multi-channel distribution services. Frank has been a featured contributor in numerous industry publications, bringing his unique insights and perspectives to relevant issues impacting financial advisors and their clients.

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