Too Close To The Forest To See The Trees?

Includes: SCO, UCO
by: Peter F. Way, CFA


We investors are flooded with millions of minutia molecules a minute.

Experience is the only practical way to assemble them, organize them, evaluate them, draw conclusions, and formulate plans and strategies to utilize them.

Such experience takes literally years to develop, too long for many a recent starter to build for use in a shorter need-horizon.

The answer is to buy experience, complete with conclusions, plans, and strategies, pre-packaged, at reasonable financial cost, with ongoing daily updates. And get help on Seeking Alpha.

But don’t just trust and accept, verify.

An info-flood example from the oilpatch

ETFs providing pre-packaged bets on the coming prices of crude oil are readily available in leveraged form as ProShares Ultra Bloomberg Crude Oil (NYSEARCA:UCO) and its evil (?) twin ProShares UltraShort Bloomberg Crude Oil (NYSEARCA:SCO). Mirrors of one another, these ETFs are designed to track on a daily readjusted basis 2x the price changes in WTI crude as reported on the Bloomberg information system (from the NYMEX/COMEX exchange) as the DJ-US Crude Oil Index.

Does that sound a bit complicated? Well, it is. More than it needs to be? That remains to be seen. Intentional obfuscation? Perhaps. Venal intent? Never suggest that, it's confidence-impairing.

As a lazy-man (or ms.) investor you have the alternative of simply investing in the market at large, passively, by buying and holding an ETF that tracks a recognized market index. In a recent article we identified 3 such ETFs that offered 25+ year annual price growth rates of 8% to 12%. But here are 2 ETFs that make moves like that, and more, in only one week.

You could double a year's gain in only a week. Or lose it all, quick.

Or you could ignore it all, and go visit your grandchildren in Minot, ND. Where this specific question is a constant topic of discussion, thanks to "fracking". And the Bloomberg news services of the world won't leave you alone, anywhere the internet exists. Note the source of the second "Recent Articles".

Now, if you were inclined to have anything more than a long-term buy & hold interest in stocks, like say, Exxon (NYSE:XOM), which you own just because you buy the car's gas there, what you actually want to know is how much higher the stock's price might really go, and how long it would take to get back there.

That's a puzzle, because you know that while the price of crude is a major factor, and you know the Saudis have enough oil to club the other OPECers into line, you don't know where that line might logically be. Or guess what it may take to get those US fracking producers to turn their activities off, or whether TESLA will ever sell enough electric powered cars to make any impact on gasoline prices, or whether abundant natural gas will drive coal out of the fuel-for-electrical-generation market, or what the Brazilians will (or can) do with all their deep-ocean offshore oilfield reserves, or . . .

It's enough to make a concerned parent sit down and worry about where to get the funds to send the last kid to a decent college and still have anything left to retire on.

To answer all those investment questions

It only takes a decade or more of front-line competitive exposure in the energy business. Or equivalent experience and training. Of which there may not still be time, ability, or inclination. So help is needed.

The coterie of Bloomberg and its media competitors are eager to help, but more minutia is not what is needed. Many others are also eager to tell you what to do, and save you the trouble of thinking for yourself.

The ones who have value in their services typically (and justifiably) are expensive to engage. Nice, and a good solution, if you can afford it. The ones who don't have value, can't be afforded at any price. And often the resulting cost to the investor is exorbitant.

So, what to do?

We advocate keeping yourself at the center of the action, the decision process, rather than turning it over to someone else. But you will need assistance in developing perspective on many specific fronts. That investment perspective is: 1) what to do; 2) when to do it; 3) what to expect from it; and 4) how emphatically to pursue it.

You often can't develop 1), 2), and 3) comfortably yourself, so you need to get assistance prepackaged, from others. Seeking Alpha offers help at limited or no cost mostly, from many largely experienced contributors.

Their advice usually is quite explicit in terms of the specific securities named. The buy or sell inclinations typically are made quite clear. The stock or ETF's price now is usually a precipitating factor in the direction of the advice. Often the future price objective or threat is also indicated.

But not always. Some contributors make clear that their offerings are along the underlying technical, economic, or competitive factors that generally drive coming price changes, just not the price impacts themselves. That does not minimize the importance of what they have to say. They may seek to avoid the legal or regulatory involvements imposed on investment advisors, perhaps along with other reasons.

Many contributors are credentialed in ways that already cross that concern hurdle, such as CFAs, or SEC licensed persons. Their qualifications are usually stated in their SA Profile page. Their in-print discussions of interest often also can be found at websites of their employing firms.

So 1), 2), and 3) generally are suggested from the point of view of the contributor, necessarily without knowledge of the reader's own portfolio situation as to its size, diversity, typical activity, or urgency of attention. There are occasionally portfolio strategy and asset allocation articles focused on specific problem or opportunity areas. They tend to have little or no linkage to influence specific security action decisions.

The SA reader often is left to assemble the contents of a number of articles in order to formulate portfolio and selection action decisions suited to his/her needs. Good mental exercise, but time consuming when the "day job" is outside the investing business.

At the heart of this problem is the need to be able to make comparisons between opportunity/threat balances of present holdings and of alternative investment candidates. Such choices are centric to good portfolio maintenance.

When decision-supporting input information is single-security oriented, among several alternatives, the investor is confronted with a time and energy-consuming task. One that often argues for (or even requires) deferral to a later time. During the deferral period circumstances are bound to change, calling for the refreshment of prospects, both of candidates and of present portfolio holdings.

Unfortunately, much of the material on Seeking Alpha is single-security oriented. That is realistic, since the reading audience tends to be attracted to such story material. But those articles are more useful to investors that actively maintain value notions of given stocks or ETFs (like investment professionals) than to those outside the business who are searching for new opportunity ideas.

The notion of important attributes, simple to understand, comparable among alternative investments, presented in forms easy to match up with personal preferences can make the portfolio maintenance task less tedious and time-consuming. Several on-line programs, many free of charge, make the housekeeping job of stock identification, shares held, capital cost commitment, dividend schedules, and current prices no more of a job than simply retrieving a specific URL page of the latest information.

But the harder task is contemplating portfolio improvements of changes to raise return prospects or to reduce perceived capital threats. This requires comparative inputs that are future-oriented, rather than historic data related. On-line portfolio programs typically either do not contain such information, or merely retain your now-dated earlier entries from the last time the portfolio was reviewed.

This is where the 4) of investing perspective comes in, the emphasis of what proportion of your capital resources to put at risk at each decision point, and what risk limits you are willing to tolerate on your way to a specific goal. These are choices that only you are able to accurately specify but ones that you should establish.

To satisfy them the investor needs to develop a sense of how badly is desired a level of rate of investment return, and how much anguish he/she is willing to endure in the process of achieving that rate. The investing jargon for this task refers to "the risk~return tradeoff."

The Risk~Return Tradeoff

Unfortunately, many investors tend to focus more on the prospective amount of return, rather than how long it may take to be achieved.

Wow! A 20% gain is nice, that's twice what the market typically offers. But if it takes 2 years to get it, that's no better than the market, and it may involve enduring larger price drawdowns during the 2 years than the market typically has in one year.

And if only 10% could be achieved in just 4 months instead of one or two years, and additional 10%s are found twice more to compound the result, that +33% gain outpaces even the 20% in one year.

Now, the question that only you can answer is "how much capital loss can you endure in a particular stock until you decide to lock in that loss before it gets worse, rather than stiffening your back and holding on so it can get back to your original gain expectation."

That involved question is much more relevant than a typical " are you a conservative or an aggressive investor?"

Confront the fact that equity investing always inevitably involves the actual loss of capital occasionally, as well as, with great regularity, its prospective loss. Every well-maintained portfolio contains some stock or stocks priced below its acquisition cost at the moment.

And even the most astute of us will make an occasional mistake of judgment. There are lots of other investors out there on "the other side of our trade" that are betting against us. Some will win.

Decision circumstances are always changing. By making the rate of return an essential part of our trade-off, there can be changes that do not affect the odds of having a winning position, or even the amount of the win. But if it takes too long to achieve, then our portfolio's objective may not get met. We then may get to retire at 80, not 65. Or Junior goes to Slippery Rock State College instead of Princeton.

Comparisons matter

This is why time and alternatives are important. If a number of alternatives are laid out in a highly comparable manner, then choices can be made at an appropriate (for you) place along the array of size of return, probable time required, and odds of success that are being offered among the alternatives at this date.

It may develop that for the present no viable improvements are available. But you need to be able to see what is out there. That is hard to do when half a dozen or more articles need to be read and potential success odds, likely time requirement, and return payoffs for each need to be developed. It can be an exhausting exercise, but potentially necessary.

Instead, we from time to time in SA offer articles showing, for free, what the self-protective actions of extremely well-informed professional players in equity markets think are those prospects for a dozen or more alternative investments in related circumstances. (We also make those kinds of comparisons available to subscribers on our website daily.)

The articles also show how well these Pros' expectations of the past actually have been borne out in the marketplace over the 3 months following similar prior forecasts. That's no guarantee, but it should be reassuring to know that the data is not just sucked out of somebody's left thumb.


Because in these articles the comparisons can be made rather quickly and easily, the time dimension of portfolio review can be made more frequently and less tiringly, less likely to get in the way of life's other important duties.

It is also likely to significantly improve portfolio performance, given periodic examinations of the results of published recommendations. We expect to continue such comparative securities review articles with frequency during the coming year, 2015, and hope you find them helpful. We invite you to browse among the 200 or more of our previous SA articles.

Best wishes now for a profit-taking New Year.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.