When you trade, you get things wrong. The only time that becomes a problem, though, is when you can't admit it, whether to yourself or others. I learned that from bitter experience.
I was working on a desk in London where one of the guys had a client that nobody liked. We all took positions, and therefore often small losses all day. When this one trader got a position as the result of quoting this one customer, however, he always seemed to be wrong, and every time he recorded one of those losses, we would all give him a hard time.
Eventually, rather than record a loss from one of those trades, he decided to try to turn it into a profit. Rather than cut, he averaged, then when that went against him, averaged again. Before long, he was hundreds of thousands in the hole and taking the loss just wasn't an option. That ended up costing him his job, and the rest of us our bonuses for a year or two.
All because he couldn't admit to getting something wrong.
The same thing can happen to individual traders too, just without the peer pressure. Sometimes, we just can't admit to ourselves that we were wrong, and we run losses until they become disasters. That can mean big losses, which is bad enough, but there is another downside as well.
If you can't admit you are wrong, you can't analyze what you did wrong. You can't learn from a mistake that you don't admit to.
I mention this because, in the midst of the party conventions here in the U.S., thoughts…
When you trade, you get things wrong. The only time that becomes a problem, though, is when you can't admit it, whether to yourself or others. I learned that from bitter experience.
I was working on a desk in London where one of the guys had a client that nobody liked. We all took positions, and therefore often small losses all day. When this one trader got a position as the result of quoting this one customer, however, he always seemed to be wrong, and every time he recorded one of those losses, we would all give him a hard time.
Eventually, rather than record a loss from one of those trades, he decided to try to turn it into a profit. Rather than cut, he averaged, then when that went against him, averaged again. Before long, he was hundreds of thousands in the hole and taking the loss just wasn't an option. That ended up costing him his job, and the rest of us our bonuses for a year or two.
All because he couldn't admit to getting something wrong.
The same thing can happen to individual traders too, just without the peer pressure. Sometimes, we just can't admit to ourselves that we were wrong, and we run losses until they become disasters. That can mean big losses, which is bad enough, but there is another downside as well.
If you can't admit you are wrong, you can't analyze what you did wrong. You can't learn from a mistake that you don't admit to.
I mention this because, in the midst of the party conventions here in the U.S., thoughts are turning to the coming election and last time, I, along with pretty much everyone else, made a mistake in the runup to and immediate aftermath of the Presidential election.
I assumed that a Trump victory would be good for energy stocks.
Instead, what we have seen since election day is this…
Figure 1: XLE
That chart is for five years of the SPDR Energy Sector ETF (XLE). The blue line marks the approximate price immediately following the election.
As you can see, the boom in energy stocks that we all expected hasn't happened, even though Trump's administration has been as pro-fossil-fuel as everyone anticipated.
So, what went wrong?
One could argue that the terrible performance of the energy sector was exactly because the Trump White House was so industry-friendly. Encouraging oil and gas companies to "drill, baby, drill" as Sarah Palin once put it, and relaxing environmental regulations that restricted drilling and pipelines, both sound like positive moves for the industry. However, they had an "unfortunate" side effect.
U.S. oil output soared, keeping oil prices and therefore most energy stocks depressed.
Figure 2: U.S. Crude Commercial Production
It took the shutdowns prompted by the pandemic and the resulting destruction of global demand to stop the meteoric rise in production, but by then, the damage was done, and the sudden collapse caused its own problems. WTI was, for one stunning day pushed into negative territory as collapsing demand met massive oversupply.
Encouraging massive growth in U.S. crude production made sense in many ways. It did create jobs and made us less reliant on Middle East oil, which can't be a bad thing. It's just that the dynamics of commodity pricing meant it wasn't as good for energy stocks as everyone assumed it would be.
So, what does admitting the mistake here suggest we should do as this election season gets into full swing?
Based on polling at this point, a Biden win looks like the most likely outcome of November's vote. Yes, I know Clinton was leading in polls last time as well, but her lead was mostly within the margin of error and wafer-thin in some battleground states. Biden has a double-digit lead in polling averages and leads in just about all the swing states, so the situation is quite different.
Logically, that expectation should start to show itself in the market over the next few months. If history is our guide, one of the impacts of an expected Democratic win will be lower energy stocks. Based on last year's false assumptions, however, I won't be drinking the Kool-Aid this time around.
There is also the chance that Trump pulls off another stunning win, and even if Biden wins, the evidence suggests that it won't be too bad for energy. After all, the Obama administration, with Biden as VP, saw the greatest increase in U.S. oil output in history. That is unlikely to be repeated given the starting point and the demand situation, but it hardly suggests that big oil and gas will be sacrificed at the altar of a green new deal when push comes to shove.
All in all, then, If the market makes the same mistake as this election approaches as we all did four years ago, it will be an opportunity. Traders and investors will probably be making assumptions based on stereotypes about how each party will treat energy, despite the evidence of the past. In that case, buying into weakness should Biden continue to dominate, or selling on a Trump surge, would both make lots of sense.