Dear Mr. Berko: I bought 1,000 shares of Royal Dutch Shell at $79 about a year ago and have a 33-point loss. My stockbroker has advised me to sell it and take a loss. He believes that oil is headed down to $20 a barrel and that I could make some big money by short selling big oil companies, including Exxon Mobil and Chevron. I can afford the risks, and if oil is indeed on its way down to $20 a barrel, short selling four or five big oil companies would be a brilliant strategy. Do you think oil prices will remain in the $35-$40 range, or will they go lower? Do you think they will return to the $90- or $100-a-barrel price? Your advice, as always, would be appreciated. — LC, Oklahoma City
Dear LC: My dad's name was Samuel, and friends called him "Silent Sam" because he usually spoke only when he believed he could improve the silence. So it's easy to remember the good advice he shared with me: "Investors lose opportunities because they are too quick to ascribe long-term consequences to short-term events."
Baron Rothschild, a 19th-century British nobleman and a card-carrying member of the prestigious and ubiquitous Rothschild banking family, is credited with the following quotation: "The time to buy is when there's blood in the streets." This is contrarian investing at its heart, saying that the worse things appear in the market the better the opportunities for profit. And the baron ought to know. His grandfather made a bloody fortune (some say 83 million pounds) buying into the panic that followed the epic Battle of Waterloo. However, some believe that the baron's original quotation was, "The time to buy is when there's blood in the streets, even if the blood is your own."
Knowledgeable people in the oil business believe there's an 85 percent degree of probability that the price of West Texas crude will double in the coming 12 to 18 months. They can expound and posit dozens of logical reasons oil prices will go higher. Knowledgeable naysayers, who are fewer in number, disagree. But their logic extrapolates future use from current consumption patterns and fails to address a potential worldwide recovery in commodity prices.
I recall oil at $75 a barrel in the summer of 2006 and watching it crash to $55 six months later. Investors panicked and thought the price was going through the floor. Many sold their oil stocks and later wished they hadn't. In the summer of 2008, oil rose to $134 a barrel, and in January 2009, it fell to $39 a barrel. Oil patch investors were certain as sin that oil prices were headed to $20 a barrel. Again they sold their oil stocks and wished they hadn't. They made the common mistake of ascribing long-term consequences to short-term events. And now they're doing it again, insisting that oil prices are headed lower in the coming 18 months. And if the economies of Europe, Russia, China and other Pacific Rim countries don't improve, they'll be right. But the economies of Europe, Russia, China and other Pacific Rim countries are grudgingly beginning to improve, so demand over the coming 18 months may move oil prices higher.
My recommendation is to sell Royal Dutch Shell (RDS-B-$46), establishing a long-term loss of $33,000, and then buy it back 31 days later. This is a fine company with a 5.3 percent dividend yield and a long history of dividend growth. Because you can afford high-class risks, I also recommend that you buy 1,000 shares of Chevron (CVX-$88), which yields 4.76 percent. CVX should increase its dividend in 2016, as it hasn't missed a dividend increase since 1982. Then buy 1,000 shares of Exxon Mobil (XOM-$77), yielding 3.75 percent, which hasn't missed a dividend increase in 30 years. Also purchase 2,000 shares of Enterprise Products Partners (EPD-$26), yielding 6 percent, and then 1,000 shares of Hess (HES-$47), yielding 2.1 percent. If oil moves to the $50 level, HES RDS-B, CVX, XOM and EPD will move up significantly. And while you're waiting for a price recovery this winter, the dividends will keep you warm.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
Photo credit: Jeffrey Zeldman