It is the season of abundance, but sometimes abundance is the last thing financial markets need. Shares fell as two stories troubled investors — the low and falling price of oil and the disappointing retail takings over the Black Friday shopping weekend. Both, in their own way, were stories about the risks of abundance.
Brent crude fell to its lowest in five years, down an astounding 34 per cent since June. While the immediate cause of the latest spectacular fall was the failure of oil-producing nations to agree on production cuts, the fundamental story is one of new supplies coming online, particularly through fracking in the US. Too much oil, apparently.
Similarly, news that shoppers spent 11.3 per cent less this year over the Thanksgiving holiday weekend sent a chill through investors, perhaps contributing to a rapid fall in the value of Apple shares. Cyber Monday, a day in which many retailers try to spark online shopping with sales, also looked slightly disappointing.
In the corridors of malls and on the internet, the problem perhaps wasn’t a lack of cash — think of all the money consumers are saving on gasoline — but possibly a surfeit of choice and opportunity. When shopping is always possible, always easy, it is less compelling, less of an event of the type Black Friday marketers would wish.
While both the energy and shopping stories highlight potential risks to the economy, both being potentially consistent with falling demand, both also speak to more complex risks modern investors face. There is an adage of investing: Never bet against human ingenuity. Don’t take risks based on the idea that a given commodity will remain just as scarce, or a given business model just as defensible against competition.
The rise of fracking is a case in point. Those who thought that geology meant we could assume only a limited amount of new supplies of oil or gas have seen the value of their investments put in peril. Indeed, investment strategist Dylan Grice, now of Aeris Capital, made the same point in a prescient piece back in 2010 when he argued against the vogue for long-term allocation to commodities as an asset class.
Now, to be clear, all of these surfeits are very good things if you want to heat your house or order olive oil over the internet. But they are just not very helpful to those who already have made investments in the way crude and extra virgin have traditionally been obtained or distributed.
Retail has seen its own revolution, one which is far from finished, as bricks-and-mortar give way to the bits-and-bytes of the internet. While this has spawned all sorts of strategies among retailers, the common denominator is that it has made times continually tough, with tight margins and omnipresent competitors and far-improved price transparency.
Amazon, among others, could be said to be winning this battle, but is doing so at the cost of massive investment. That investment is supported by profits, but keeps eating them up, preventing them from being distributed to owners.
Investors have reacted to this new landscape by assuming it is just a replacement for the old, run on the same lines. Poor Black Friday sales are a reminder that this may be a mistake.
Take Amazon, or Facebook, or a game company like King Digital. All face far more competition than a similar business might have before the advent of the internet. While there is justifiable excitement over start-ups and the ease of putting world-changing ideas into effect, all exist and compete in a world in which that is true for all of the other people out there with good ideas.
We now have a huge abundance not just of stuff, easy to get over the internet, but of opportunity. Any kid with a new idea has a much better chance of putting it in place. Some might compete directly with Facebook or Amazon, but some indirectly, by attracting attention.
We as investors have a historic psychological bias toward expecting advantages to be persistent. We look at Facebook now just a bit like we foolishly looked at Barnes & Noble or Sears 30 years ago.
We look at a business and we get excited by its growth and revenues without truly comprehending how different the world has become.
Abundance is justly celebrated, but can be dangerous to your wealth.
