My TFSA Update November 2018

Last update on Dec. 24, 2018.

Image Credit: Vintage Tone / Shutterstock.com

 

In this series, I (Jin Choi) talk about my journey of investing in my TFSA account. If you want to know what a TFSA is, I recommend you read my free book.

November Results: Down 17.8%

At the end of November, I had $39,038 in my TFSA account, which was down by 17.8% since the start of the month. By comparison, the Canadian stock market went up by 1.1% while the U.S. stock market went up by 3.1% in Canadian dollar terms. Therefore, my portfolio severely underperformed the broader market.

The majority of my portfolio consists of oil and gas stocks. Oil prices fell from $65.31/bbl to $50.78/bbl (in US dollars) in November. My oil stocks therefore did poorly during the month.

I believe the recent plunge in oil prices has gone too far. Oil had started to fall about two months ago on worries that shale oil producers would once again flood the market. Although those producers have been able to grow production very quickly this year, they will need higher oil prices in order for them to continue to grow strongly next year. There’s some debate over what the minimum oil price should be, but I believe it’s somewhere around $55/barrel.

With prices below $55/barrel, shale oil producers will soon idle their rigs, and US oil production growth will slow dramatically. This, combined with the recent production cut from OPEC, will leave the oil market in a state of undersupply and lead to higher oil prices.

But if the case for higher oil prices is so obvious, then why aren’t more investors betting on it? Indeed, data shows that investors have been pulling money away from oil, rather than putting more money into it. There are two reasons for this.

First, many investors are worried about a potential recession ahead. Leading economic indicators have been deteriorating over the past few months, and although they’re not yet signalling an imminent recession, the deterioration has been enough to cause stock markets to fall as well. Furthermore, investors are worried that we’ve only just begun to feel the effects of the US trade war with China, and that things will only get worse from here on.

Second, investors have been relying more on algorithms in recent years, and those algorithms have been telling investors to sell. One particularly popular algorithm that oil investors use is the trend following algorithm. In essence, trend following tells investors to buy when prices are rising, and to sell once prices have fallen by more than some predefined threshold. With oil prices having come down by roughly 40% from peak, it’s safe to say that most, if not all, trend following algorithms have advised investors to sell oil in this current environment.

Of course, such algorithm driven selling is not based on any fundamental reasoning, and I believe it partly explains why oil prices have come down so far. Although such selling has made my TFSA performance look terrible, I believe it’s really a blessing since it allows me to buy oil at unreasonably cheap prices.

I’ve therefore begun to buy some oil commodity ETFs in some of my other accounts. These will be short term trades - I’ll sell them when oil hits $55/barrel again. I won’t commit a lot of money either - just enough to make it interesting and to earn some easy cash.

Note that I won’t commit more money into buying oil company stocks. As I’ve already experienced, higher oil prices don’t necessarily translate into higher oil stock prices. I’ve learned that it’s better to bet on a sure idea with a smaller upside, than to bet on a less certain idea with a higher upside.

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