Lazy Man and Money

Oils Well That Ends Well Revisited

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With rising gas prices making daily headlines ($4.50 a gallon for me Northern California), I thought I’d revisit an article from the past: Oils Well That Ends Well. The article about our investments was written at the end of November, 2008.

I made a point that we had been picking up shares of Vanguard Total Index (VTI) and Vanguard All-World Ex-US (VEU) since the Dow Jones was around 8200. That’s looks good in hindsight, however, that wasn’t the point of the article.

The article made the point that oil at $65 seemed like a tremendous bargain compared to the $150 oil that was the norm a few months before. I invested in oil via PowerShares DB Oil Fund (DBO). However, with rumors of oil going to $30 a barrel at the time, I was concerned it wasn’t the smartest decision.

I ended the article with the idea that even if oil did get $30 a barrel, “I can’t help but feel that at some point in the next 3 or 4 years we’ll see $100 oil again.” It’s now 3 and half years later and I read that on Friday that oil passed $125 a barrel.

So I should be doing the Dance of Joy, right? Not so much.

I signed into my Zecco account for the first time quite a long time to count my millions. Turns out that they weren’t there. I had bought in at $26.71 with the stock off its highs of around $55. With the price of oil getting near its peaks that had DBO trading at $55, I thought the stock would be back there. On Friday DBO closed at $31.88. That’s a gain of around just 20%, where I was hoping to see a 70% gain.

I’m not sure where things went wrong. Perhaps there’s not enough investors speculating on oil yet. One side of me says that with the stock up sharply, it might be time to lock in some gains. The other side of me says that it will only continue to go up like gas prices this summer.

In either case, I’m still a big fan of buying oil stocks on dips. It definitely helps with the shock at the pump.

Oils Well That Ends Well

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I’ve been really surprised that the Dow Jones industrial average continues to drop. The last time it dropped to 8,200 I thought it would be the last chance at those prices. As I write this, the mark is at 7,500 and some indications seem to say that it could go even lower. Despite that, we’ve been buying some index funds with our Zecco account. Specifically we’ve been picking up Vanguard Total Index (VTI) and Vanguard All-World Ex-US (VEU).

However, one of my worst investments seems to have been PowerShares DB Oil Fund (DBO) which generally moves with oil prices. If you’ve been following gas prices you’ve seen the drop they’ve taken lately. What did I see in DBO that interested me? I remember that a barrel of oil was around $150 this summer towards it’s peak. Recently with it $60-65 it seemed like a tremendous bargain. Consider this 6 month chart of DBO:

Here is where I made my mistake. I didn’t look at the big picture. If I had, I might have remembered that $150 was due to speculation. I might have looked at this 20-month chart:

The chart might be a little small (you can play with a full version here), but if you Rip Van Winkle’d 2008, the price of DBO might seem in line with 2007.

The price of oil just broke below $50 and some are saying that it get as low as $30. If it gets below $40, I may have to dollar cost average and pick up some more of DBO. I can’t help but feel that at some point in the next 3 or 4 years we’ll see $100 oil again.

What are your thoughts?

How I Invested My Roth IRA This Year

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About a month ago, I asked you to help me invest my money. I got a lot of great recommendations. As he did last year, Get Rich Slick had the most creative idea, involving options trading. Like last year, I’m sure it will do fantastic. I’m currently not entirely comfortable with options at this stage. I understand the basics of how they work, but I would essentially be putting my money in something that I don’t understand. Doesn’t Warren Buffett say that you should invest in what you know?

I looked at the other suggestions. A few people mentioned investing in gold. I simply hate gold as an investment. I don’t like how it’s not a basic necessity of life in today’s modern world. It makes as much sense to me as investing in tulips. I know it’s stood the test of time, but I think times were different before flat panel TVs and flashy cars. People would use their gold collection to show off their value in society. Today, people use other possessions. I don’t see a trend toward people selling their useful possessions for a hunk of gold. If anything it’s the other way around.

I do recognize that gold has become a way to hedge inflation and the falling dollar. However, there are other ways to do that with assets that are required in the modern world. The rising price of oil is one such example. If all the gold disappeared from the earth, we could likely make due with copper wiring. If oil disappeared, much of the modern society would have great difficulty recovering. Another example is the raising cost of food. Again, it’s a basic necessity that people are required to buy.

For the above two reasons, I heavily considered oil (Powershares DB Oil Fund – Ticker: DBO) and food ETFs (Powershares DB Agriculture – Ticker: DBA). However, in the end, I decided that they were too expensive for me at this stage. They’ve simply appreciated too much in a small timespan. DBO is up 80% in the last year while DBA is up 45%. So I went with expanding my international exposure. I purchased 75 shares of Vanguard FTSE All-World ex-US ETF (Ticker: VEU), which is essentially unchanged over the last year. I felt I was underweight global stocks in what has increasingly become a global economy.

I want to thank everyone for their help. I found there was tremendous value in reading about different investment strategies.