Want to know one the biggest secrets of the world’s best investors?

You can have it.

Aside from the obvious of managing emotions and always making a plan. The most important part of being a great investor is thinking one or two steps beyond everyone else.

It seems simple, I know. But so few do it.

Here’s an example in the oil sector where we do exactly that and show you why we’re still not buying big into oil now or anytime soon.

No Upside, All Downside

As you know, we’ve been pretty bearish throughout the fall in oil prices (past warnings on oil are here, here, and here).

No panics. No hunches. Just the facts.

There have been a lot of facts too. Oil is still the hottest topic in the market today. Every $1 swing in the price sparks headlines.

It seems like a lot. But the entire oil situation, to your editor, is a really simple one.

The future price of oil will be determined 100% solely by supply and demand.

And if you break down both supply and demand, you’ll quickly understand why we’re not betting big on oil.

First, supply.

The world is drowning in oil. A recent AP report said the United States “running out of room” to store crude.

It’s true too. No hyperbole. The U.S. is producing and important more than one million barrels more per day than it consumes. And oil storage in Cushing, Oklahoma -- the oil trading hub for the country -- is sitting at the highest levels since the 1930s.

There’s so much oil that speculators are leasing offshore oil tanker ships to store oil. Oil analysts at Bank of America Merrill Lynch currently estimate there will be a total of 55 million barrels of oil sitting in idle tankers around the world within three months.

Meanwhile, the oil spigot from Saudi Arabia to North Dakota is still wide open.

All of that is and will continue to keep a heavy lid on the price of oil.

But that’s only half the story. The other half is demand.

Now, we don’t know what the future demand for oil will be. It’s impossible to predict. But we do know there are only three possible scenarios for it. And all of them aren’t likely to push oil prices much higher anytime soon.

Let’s take a quick look at them to see what I mean.

First, let’s say demand for oil rises. Barring another global economic boom, global oil consumption will likely rise by about a million barrels a day.

That seems like a lot. It’s really not.

The world will burn through 93 million barrels a day. One million more is just a little bit. It’s not going to be enough to break through the massive stores and oversupplies just waiting to get dumped on the market.

The second scenario is demand stays flat. That surely won’t be good for oil prices either.

New supplies keep coming and without enough demand to soak it up, oil prices would stay flat or continue to dip a bit.

The third and final scenario is if oil demand to drop.

Now, we’re not going to call for the next big recession because that’s an easy and often incorrect call to make. After all, the long run history of GDP is up. Recessions tend to be brief. Over the last 150 years or so, GDP spends a lot more time growing than it does shrinking.

But a slight drop in demand would make a bad situation even worse. Oil prices would lose another $20 or $30 a barrel if that happened.

Possibilities and Probabilities

Those are all the possibilities. None of them are particularly bullish for oil. And that’s why we’re oil bears and will remain so.

Sure, oil may go up or down $5 or $10 a barrel here and there. There’s just no catalyst for significant turnaround big enough to make investing in oil big enough for buying heavily into oil investments.

This rationale, albeit simple, is exactly what you should be applying to all your investments too.

Investing is about possibilities and probabilities. Risk and reward.

The world’s greatest investors don’t get them all right all the time (look at the billion dollar hit Warren Buffett too when he bought Conoco Philips).

They do, however, analyse all the possibilities and probabilities of each investment they make. Then continuously re-analyse them.

That’s how they built fortune’s in stocks and you can too. And it’s why we’re still largely staying away from oil for the foreseeable future.

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