Is one of the world’s most successful investors a Profit Alert reader?
Once you see what this billionaire investor is saying about oil, you’d probably think he is.
Here’s his spot-on analysis of the oil market and, more specifically, the point where he’ll start loading up on the beaten-down sector too.
A “Tremendous Opportunity” In Oil
This week billionaire and investing master Carl Icahn explained revealed his take on oil.
Icahn made his name in huge deals by taking huge positions in undervalued companies and agitating management for change.
The strategy has paid off big. Over the years he has consistently delivered huge gains to him and his investors too. Returns of 30% to 40% a year are the standard he has set.
Needless to say, Icahn knows more than a thing or two about how markets work and timing great opportunities.
And when it comes to oil, we completely agree with him. Heck, he could have been lifted his entire rationale right from these pages.
So his recent comments about oil weren’t a surprise to us. But they were probably a surprise to many investors who haven’t been able to resist the temptation to buy into oil throughout it’s slide.
He summed up the entire oil situation concisely in an interview with CNBC when he said:
I think oil will continue to go down unless there is some outside event.
I wouldn't rush in now on oil. And that's talking against myself because I own a lot of oil stocks.
If you look back over the past decade or two, oil prices [tend to] bounce back.
So it will be a tremendous opportunity when oil does [eventually hit bottom].
That’s the situation as he sees it and we see it.
And we may not have long to wait to buy into the third best time to buy oil in the past 20 years.
Good vs. Great Trades
Avoiding buying into oil too early has been a really easy call to make.
You see, oil’s collapse has been fast one. Any major asset that declines 50% in six months is a staggering swing.
Fast declines always bring a lot of investors hoping to buy the dip. But when an asset’s price is falling sharply, it tends to dip again and again.
Basically, most investors have been trying to catch the falling knife of oil prices. We’ve learned the hard way over the years you never want to catch a falling knife. You must be prepared to wait and wait until everyone has given up hope to buy in.
That’s the simple truth of this trade. But it won’t always be like this.
We’ve watched similar cycles play out hundreds of times over the years. And there’s always one key thing to wait for before buying now.
That key is the undershoot.
Right now oil seems fairly priced at between $45 and $50 a barrel.
You could make a reasonable case oil prices fall to $35 or $40. And you could do the same that oil prices are going back to $60 or $70.
So the fair value for oil would be somewhere between $35 and $70 a barrel based on marginal production costs, supply and demand, and the thousands of other factors driving oil prices.
The key point to know when it’s finally time to buy in -- and why top investors like Icahn expect more carnage to come -- is when an asset undershoots the reasonable fair value range.
For years oil prices were too high. The combination of stagnant demand (a world mired in economic malaise) and rising supply (new technology finding and tapping into billions of barrels of new oil reservoirs) doomed oil at those prices.
That was an overshoot of the fair market value for oil. It wouldn’t and didn’t last. They never do.
Now, with oil falling, history has shown us they will undershoot the fair market value.
If we put that value between $35 and $70, the undershoot will come when oil drops to $20 or $30 a barrel.
If and when that happens, you’ll see oil sector stocks take another major hit.
Then and only then will investors like Icahn and other of the smartest money around really load up the oil sector. And we’ll follow them too.
In the end, the entire oil collapse should prove a valuable lesson.
The best investors aren’t always the smartest. They’re usually just more disciplined.
And one of the toughest disciplines in investing, one that if you can master it you will instantly be a far better investor, is doing nothing.
That was and will continue to be our advice for the many readers inquiring, “Is now the time to buy oil?”
You know good things come to those who wait. As experienced investors, we know when a downtrend has started, great things come to those who can wait even longer.