Thread by @ArjunNMurti

1 of 15/ Bubble psychology from the perspective of a retired stock analyst

When you first make a big call as an analyst, the doubters come out en masse as you are going against the overwhelming consensus. Initially, you are way right and everyone else is wrong. Then it switches.

2/ In 2004, we first published our call that oil could rise to a sustained $50-$80 range, a time everyone KNEW oil would never stay over $25. Many thought oil would only reach $50 if Saudi collapsed, after which the world economy would sink. Oil blew through $50 without calamity.

3/ In 2004, everyone had a 1970s mindset on what would cause oil to spike and and a ‘90s mindset on what would follow. Recency bias, anchoring, and a bunch of related terms were operating in full force. The market was willing to assume away an entire structural move. Bad idea.

4/ We fought the oil bears successfully in 2004, ’05, ’06, and ’07 — a long time for an analyst at a high profile firm. There was lots of volatility along the way, testing our confidence. As time progressed, most capitulated toward our view. We had won! Or so I thought.

5/ This is the point of the story when psychology goes wrong for the super star analyst. You remain in a “fight the bears” mindset, since they were way wrong and you were right.

6/ To be clear, even after oil collapsed in 2H2008, the perma bears were never right. They missed a 5 year structural repricing. They only proved correct in the broken clock sense of things.

7/ HOWEVER, the structural bulls, like me, at some point in 2007-08 took on updated recency bias, anchoring, and frankly hubris that comes with having made a huge, massively successful call. I remained in “fight the bears” mode on the old terms. That was a mistake.

8/ Question: If we treat the Great Financial Crisis of 2008-2009 as an excusable Black Swan event (not my view), the V-shaped bounce back over 2009-2013 proved us ultimately correct…right? Answer: Wrong!

9/ Returns on capital actually peaked in 2006-7, ahead of the mid-2008 oil px peak. I am at my core an ROCE disciple. This was the forewarning that we were late cycle in Old Energy, even if spot oil was destined to rebound. It was time to move on…very few did, I didn’t.

10/ In addition, global GDP growth post GFC was more tepid, China/EM stopped surprising to the upside, inflation was low and interest rates falling, and investors began the quest for the rare company that could grow without a big GDP tailwind, i.e., innovation Growth stocks.

11/ What are the lessons for today’s super star innovation/bubble stock analyst gurus to avoid my mistakes? (1) Stop fighting the perma bears. Ignore them. They have been wrong and you have been right. Case closed.

12/ (2) Spend time on the key macro drivers that signal regime change beyond your sector. This is no longer about 2030 sales forecast debates. GDP, QE, interest rates, and inflation cannot simply be assumed away as “already discounted” or not relevant. No way either is true.

13/ (3) Are there signs of hubris? Are your target px changes or media spots an important “catalyst”? Is your hot innovation co. preserving hard earned cash or making speculative, chique investments? Are we “only” discounting what 3 years ago were ludicrous assumptions?

14/ As an analyst, you are only right if you get off the original call. It does not have to be at the absolute peak. And stop hoping for a return simply to that recent peak. You are now on the wrong side of the call if that is what you are wishing.

15/ I definitely don’t know if global GDP or inflation are re-accelerating or what QE Unlimited ultimately means. But it does seem there has been some shift in these drivers. Maybe, perhaps, finally we are in the early days of a regime change favoring the left-for-dead sectors?