Tuesday, May 16, 2017

Lessons From Trading Norwegian Art

From The Macro Tourist:

We all know Buffett’s line about sitting around the poker table, but too often, we fail to apply it in our day to day trading or investing. It’s easy to fall for the latest story sweeping Wall Street without thinking about the next move, or who the narrative benefits. I am by no means immune.

The other day one of my astute new readers sent me a note that demonstrated a keen understanding of how markets really work. He didn’t bother with the headline news, but had already calculated the next move. Like a grand chess master, he wasn’t worried about the obvious noise right in front of him. Instead he had accepted that portion of the story, and figured out what that meant for the markets further out in time.

It reminded me so much of one of my favourite stories about trading, I had to share it with you. For those who know me well, they will have heard me tell this tale before, so I apologize in advance. This fable was recounted to me by another trader at my old shop, and I have never been able to verify its legitimacy, but I take refuge in the old line that one should never let the truth get in the way of a good story…

In the mid 1960s, Norway was a regular Scandinavian country, subsisting on an economy centered around agriculture, timber, and fishing. Life was good, but by no means out of the ordinary (apart from all you can-eat-cod buffets).
[oh my Cod, I'm not even sure what this is. Cod? really? world record?]
Then in the summer of 1969, while the rest of the world was focusing on hippy love, a Norwegian off-shore oil driller named the Ocean Viking struck oil in the North Sea. In the next six months, before the decade concluded, it became obvious Norway was sitting on a massive oil resource.

There was a mad scramble to buy off-shore drilling rights. Money poured in, chasing the untold wealth that would be created. Oil company share prices exploded higher. Visions of riches filled the minds of investors. It could be described as the original DotCom boom, only this time with oil companies. The Norwegian government was able to auction off the remaining oil drilling blocks for massive amounts. After all, the market realized Norway was about to become a world leading oil producer.
Into this frenzy, most traders focused on buying companies which would best benefit from this massive wealth creation. However, the market had discounted this new information, and before long, the excitement had created an environment where it was difficult for companies to meet heightened expectations.

And this is where the hero of our story enters. This wise sage sized up the situation, and instead of chasing the headline news, spent some time thinking about how this transformational discovery would affect the Norwegian economy. Practically overnight, Norway had created a raft of millionaires that had been lucky enough to get in early (back then, a million meant something).

Realizing the big money had already been made, and that the market had taken prices to levels that were more gambles than investments, our patient investor decided to focus on the second order trade. He thought about what all this new found wealth would mean for Norway....MORE