I was a guest on a webinar, yesterday, hosted by NAB.
Hosted by Gemma Dale, it was a fun chat, and a chance to share my thoughts on portfolio construction, stock picking and some of the hottest trends around.
(Yes, I was asked about Bitcoin. And lithium. And China. And renewables.)
And I made the point that there are trends.
And then there are trends that make money for investors.
I used the example of oil.
Now, if you had been told, in early 1900, the story of oil demand over the next 120 years, you would have sold your house, your car and your dog, and put the lot into oil, right?
The data is a little sketchy from the very early days, but from a standing start of, well, zero back then, the world was producing around:
— 500 million barrels of oil, per year, in 1920
— 2.5 billion barrels per year in 1945
— 5 billion per year by 1955
— 10 billion in 1963 or 1964
— 20 billion by 1970; and
— Just under 35 billion barrels of oil per year, in the most recently available data.
Can you imagine how much money you would have made???
Oh… you want something else?
You want to know the price?
I see you’re onto me.
Now, I couldn’t easily find data back as far as the early 1900s, but according to one website, the price of oil, adjusted for inflation, is the same as it was back in 1974.
It’s barely double what it was in 1948.
So, volumes were up around 17 times, but the price went up by a factor of only 2!
The answer — you’re ahead of me already, aren’t you — is that supply came on stream, and fast, keeping prices down, even as volumes skyrocketed.
Air travel is a similar, but even worse example.
Even before COVID, while the number of passenger miles skyrocketed over the previous 50 years, airlines went broke.
The lesson is clear: while a ‘trend’ — say, skyrocketing demand for oil, or a huge and sustained growth in air travel — might be real, it just simply doesn’t follow that prices or profits will necessarily follow.
You still want to bet on lithium prices?
Be my guest — but history isn’t full of examples of sustained high prices — or profits — for things best described as ‘commodities’.
Unless you have a sustainable cost advantage…
… or supply is limited…
… or you can lock up a market …
… I don’t like your odds.
Because remember: the oil price has merely doubled in 70 years… and that’s even with the OPEC cartel doing its best to control supply!
Now, that’s not to say you can’t find, and profit from, trends.
After all, the internet as a megatrend has made a lot of money for a lot of people.
But even there, the internet itself became a medium, more than a profit centre per se — and the winners were those who could most successfully take advantage of the new technology to capture audiences and create businesses — in e-commerce, social media, streaming and hardware and software design.
Trends can be a fantastic wave on which to surf.
Or they can wash you straight onto the rocks.
Wave — and trend — selection is key.