Jackass Investing “Poor-Folio” Award To President Obama And Other Critics Of Speculation

May 10, 2012 11:58 AM ET
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Portfolio Strategy

Contributor Since 2010

Founder, CEO & Director of Research for Brandywine Asset Management and author of "Jackass Investing: Don't do it. Profit from it." I have been a professional investor/trader since 1979 and have experience in stocks, options, managed futures, commodities, mutual fund arbitrage, market neutral equity, and long/short equity. Brandywine currently provides investors with "a smarter way to buy and hold" by maintaining 100% long equity positions with protection against bear markets.

In this political environment, high energy prices remain a hot issue. Policy-makers, often driven by politics and emotion, are once again ramping up their attacks on "evil" speculators for driving up the price of oil and gas.

In fact, President Obama, in a Rose Garden press conference on April 17, 2012, along with certain members of Congress, has blamed high oil prices on "speculation" and called for greater federal oversight of oil markets. The President's proposal is intended to root out market manipulation and speculation. After all, we need to blame somebody for such high energy prices. Right?

Well, if speculators are to blame for high prices, then they must also be praised when prices are low; but you will never see a politician taking such a stance. Why not? Because an attack on speculators for low energy prices obviously does not fit their political agenda.

President Obama's proposal to increase CFTC enforcement of the energy markets due to high gas prices is at best silly political pandering, and at worst, creates divisiveness and encourages attacks against market participants. It's as ridiculous as if he asked for an increase in the budget of the SEC in order to clamp down on "investors" who have earned profits in their 401(k)'s over the past couple of years as a result of the bull market in stocks. It just doesn't make sense.

A primary purpose of markets is to allow participants to hedge or transfer the risk of price changes. Functioning energy markets require the participation of both hedgers (such as the large oil companies or the airlines) and speculators. Without speculators, the hedgers would be subjected to the risk of extreme price swings, which would adversely affect many businesses. The bottom line is that markets benefit from the participation of speculators.

As I discuss in Myth #11 of Jackass Investing, commodity prices are no more volatile than stock prices, and many commodities are much less volatile than many stocks. In fact, most commodities (including crude oil) are less volatile than many stable, large cap stocks, such as Exxon Mobil, Berkshire Hathaway, and GE. Speculation serves to reduce market volatility.

One prior ill-conceived politically-inspired regulation was the U.S's ban on the short-selling of financial stocks in 2008. As I show in Myth # 10 of Jackass Investing, this resulted in both greater volatility and lower prices for those stocks relative to the market during the period the ban was in effect.

President Obama today is attempting to portray speculators as wild gamblers driving up the price of oil for their personal gain and at the expense of the "American People." This is no different from regulators who in 2008 blamed speculators for driving down the price of financial stocks. Neither argument is based on fact. Speculation cannot affect the long-term price of markets. That price is set by end user supply and demand. If those end users think speculators have temporarily pushed prices out of line, they can take advantage of that "artificial" mispricing; much like Southwest Airlines (NYSEArca: LUV) did by locking in low fuel costs prior to the run-up in prices in 2008.

As I mention in Myth #14 of Jackass Investing, government regulations will NOT protect you. The road to a "poor-folio" is often paved with good intentions; however, the "best intentions" of politicians are intended to benefit them, not you, the rational investor.

As a result of their political pandering and blatant mistrust of free markets, I am awarding a Jackass Investing "Poor-folio" Award to . . .

  • President Obama
  • Members of Congress who support his politically-motivated call to, essentially, criminalize speculation

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