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“What Everybody Knows is Frequently Wrong”
It’s not true actually. The broad market is not a compelling short proposition, certainly. But you can find good ones if you know where to look. Natural gas, for example, offers something of a paradox. One of our largest long side positions is FCG, the natgas producers ETF. (We’ve been riding it for 11 weeks and counting.) And yet, at the same time, one of our strongest short positions as of late has been UNG, the United States natural gas fund. How does that make sense? In part because of bullish deals going on in the natural gas space — and in part because everyone is so long-term bullish natty in general. (The theory: There is such a superabundance of natural gas in existence, it’s a cinch for the U.S. government to go big on the stuff as an oil alternative. In the meantime, we’ve got supply out the wazoo.)
Recent anecdote: I was eating lunch in a diner and (surprise) reading a book. The local at the counter next to me asked what I was reading — and then what I did for a living — and the subject of trading came up. He volunteered a hot tip out of the blue, as dabblers are wont to do. “You should buy natural gas,” he said. “It’s a huge opportunity.”
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Get our best content delivered FREE to your inbox! Check out the Mercenary Dispatch page to learn more. “Some people think so,” I smiled. (We had just shorted UNG. This made me want to short more.) So what’s the point of the story? That it pays to be a smart-aleck? No. Instead, it’s a real world example of the Peter Drucker quote: “What everybody knows is frequently wrong.” It’s true in management theory (Drucker’s forte), and it’s true in markets too. In the case of natty, what “everybody knows” is that natural gas is a great buying opportunity. This is such common knowledge, it’s passed out as wisdom at the local diner. And yet, with such widespread awareness, why has the trend been down? As we have said before (and will no doubt say again), being contrarian at the wrong time is akin to arguing with a herd of cattle. There’s no money in it — and there is serious risk of getting trampled. Yet at the same time, when “everybody knows” that such and such is true, and yet the price action is not confirming that belief, it is often an indication that something interesting is happening… and that there is possibly a good trading opportunity in the works, as nothing moves a market quite like a whole bunch of investors caught leaning the wrong way. This, too, is one of the reason markets are so great. It’s not enough to go with the cliches — you have to use your head. Sometimes you smile and ride along with the herd, and sometimes you “pick your spots” for a contrarian stance. So when tempted to lay down a big bet on a popular thesis — something “everybody knows” that you believe is true also — just remember Drucker’s words of wisdom. The more popular the idea, the greater the risk it’s been discounted… or that some hidden prevailing force is set, once again, to turn conventional wisdom upside down. Ah, the trading game… how we do love it so… JS p.s. Like this article? For more, visit our Knowledge Center!p.p.s. If you haven't already, check out the Mercenary Live Feed!  Similar articles you might like:
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As a certified dabbler, I too like natural gas long term. Because I'm very slowly accumulating what will become a portfolio of gas producers, I rejoice everytime I see the nat gas price fall. If the dollar rebounds for a while and China swoons, oil prices will drop and natural gas prices will get even weaker. Hurray Hurray! But domestic natural gas–cheaper and more reliable in supply than oil–is likely to get more expensive one of these years. Especially in light of the tumult that characterizes the Middle East.
Sure — longer term the logic makes sense. And that perspective has been one of the strong bullish drivers for FCG. Those attempting to buy natural gas itself, however, have been steam-rollered by supply and demand dynamics.
On top of that,there is always the inherent risk, and opportunity, in the possibility that a thesis doesn't pan out. When a popular belief is disconfirmed, a spectacle often follows. (This is a general observation, not a prediction that long-term natty bulls will be wrong.)
Your main point is well taken: there are no guarantees that hard times won't bankrupt natural gas producers. It's an authentic possibility, because the "recovery" in the US is superficial and prone to failure.
That's why I like your approach, which emphasizes risk-limited bets, both long and short.