1) More research doesn’t make you more accurate than others.
2) Stocks that go up don’t make it expensive and stocks that go down don’t make it cheap, either.
Unfortunately 2015 wasn’t a year that oil companies in South-eastern Texas wanted to see.
The further acceleration in declining oil prices prevented further capital expenditure and hiring. Most students who connected with recruiters from oil, oil dependent companies and industrial companies didn’t end up heading to jobs in the morning. Unfortunately most of them are now rethinking even living in this region as the progress of expansion and job creation comes to a pause. The last seven years have been what I call “grease on the train tracks.” The financial credit meltdown of banks over leveraging on housing derivatives, insurance tied to these loans and actual loans to the un-qualified subprime population from 2001 to 2008 has translated into the oil sector.
Banks have lent out immense capital to oil companies to drill. “Drill baby drill, Drill baby drill!” Guess what? They’re not chanting “drill baby drill” anymore!
The banks and investment firms who have financed the oil patch have been caught with their pants down and their jaws to the floor. What was once seen as a continued source of revenue and investment for banks in the oil patch is now a dried up losing game as oil companies have a mere pittance to pay back as prices head towards $20 a barrel. Consumers are irrational. Actually the whole world is irrational. Students are irrational, consumers are irrational and companies are irrational. Nothing in life acts accordingly.
Most people would have assumed that if gasoline prices declined by more than 50% in a year, they would save at least some of it. Recent consumer data shows people are not saving the majority of that difference between end of 2014 and end of 2015 cost of gasoline. They have decided to buy better quality gasoline at other gas stations or higher octane gasoline. Consumers who only need 86 or 87 octane gasoline have been buying the 89 or 91 octane gasoline since prices have declined. Which comes to my first lesson: More research doesn’t make you more accurate than others, consumers have always been irrational and always will be irrational.
My second lesson to learn from 2015 is to remember that just because a company’s market value and stock price fall by 75 percent doesn’t make it cheap.
In an environment in which companies are scraping for cash to just pay bills and their employees due to collapsed prices is not the best time to buy. Why invest in a business that has a significant higher chance of going bankrupt? I couldn’t count how many times I heard students around the business building saying that they can’t wait to buy oil stocks as the spring semester was coming to a close.
Industries that have a crunch on commodity prices take years upon years to reshuffle, rebalance and shift back to normal. This could very well be a decade long drought of low prices, low employment opportunities and little to no growth. Too many companies depend on the oil patch in the Houston to Dallas region.