Gas prices call for counter-cyclical moves – not conformity

August 14th, 2008
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My “Letter from Calgary” column from the August 2008 issue of the Investment Executive newspaper:
The other day my investment adviser sent along a hilarious though grimly apt graph from a Trimark presentation showing the emotional cycle of investors as they ride – and bungle – the investment cycle. Feelings like “thrill” and “excitement” accompany the market’s rise, peaking with “euphoria”. The presentation notes this is also the “point of maximum financial risk”. Then the market’s slide sets in and I nearly spewed coffee at the barrage of negative emotions – panic, capitulation, despondency. The graph neatly and chillingly explains why so many people buy high and sell low.
With the news media churning out daily gasoline-pricing doom plus a barrage of dubious coping advice, it struck me there are powerful parallels in the psychology of these separate pricing dynamics. The emotions from the graph – denial, fear, anxiety – are similar. So are associated behaviours. There’s the exaggeration by hucksters presented as gurus. There’s the crushing peer pressure to match one’s responses to social trends. Then the conformism itself exacerbates consumers’ irrationality. Trends accelerate and damages compound in a feedback loop of overreaction generating self-destructive decisions. Finally, there’s counter-cyclical opportunity – by nature taken by few.
The capital markets’ rise and fall matches the inverse cycle in fuel markets: first falling (or flat) and then soaring prices. In the first phase we have mass insouciance, record sales of SUVs and those Chrysler 300M pimpmobiles, people commuting solo in Yukon XLs or Ford Excursions, and nobody even glancing at the gas pump. That parallels stupid equity buys, exaggerated faith in market momentum and throwing value out the window. Pump prices may be cheap or capital markets soaring, but in both cases it’s careless to forego opportunities to optimize your dollars.
Today, people are going beyond rational moves to save money – like commuting in their more fuel-efficient vehicle, combining separate trips to big box retailers or ensuring they car pool on recreational day trips. Signs of desperation, panic and capitulation are everywhere. They’re selling seemingly fuel-wasting items just as capital values are plunging – willingly losing $10,000 in dumping a big vehicle to save $1,000 a year in gasoline. Or cancelling the family’s annual driving holiday to the Grand Canyon or the Carolinas to save $400 on fuel – instead booking some $5,000 destination package. It’s analogous to desperation stock selling, sloppily tuned stop-losses and ill-timed moves into or out of exchange-traded-funds.
Doom-mongers flog a false dichotomy in demanding everyone dump current vehicles for a Prius. The typical Canadian family already has two or more vehicles – so it’s not a choice between monster diesel truck and Smart (sic) car. You can have both. Commuting and shopping with a small car can save more than enough to enjoy the bigger vehicle when it’s needed, like hauling lumber, towing the boat or taking the family on a driving trip. You avoid massive losses on ill-timed sales, while maintaining the enjoyable possibilities the bigger vehicle creates. The false dichotomy reminds me of investment managers who insist it’s gotta be all exchange traded funds and no stock picking, or that everything should be invested abroad, or you should never time the market. What’s wrong with a blended approach?
Current irrational mass phenomena driving exaggerated effects should create counter-cyclical opportunities. Thousands switching to public transit might lower downtown parking rates enough to offset higher vehicle costs. Tourism attractions that depend on drive-in traffic should start offering major deals – going double for remote destinations left vacant by people staying closer to home. Larger vehicles are selling at huge discounts – enough for years worth of fuel. If you already have one, park it at buddy’s acreage rather than selling into a terrible market. Look for real estate deals, such as in remote vacation properties. Values among outlying U.S. subdivisions are already being slashed as homeowners herd themselves back into city cores.
Don’t panic and don’t despair. When it comes to your gas tank, stay rational and think like a counter-cyclical investor.
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