One of the humorous parts of the Back to the Future movie series is that the main character, Marty McFly, has the benefit of knowing what will happen in the future. In real life, we never have perfect information. And even if we have good information, being able to predict cause and effect from it can be a dicey game.
Today marks the 10th anniversary of the Deepwater Horizon oil rig disaster. The disaster remains the worst oil spill in US history, releasing 20 times more oil than the Exxon Valdez accident. An estimated 210 million gallons of crude oil were released, causing severe environmental damage throughout the Gulf of Mexico.
But suppose on the night of April 19th you had a premonition of what was to unfold. Like Marty McFly, with your future knowledge you decide to profit from it and buy gasoline futures, certain the price of gas would skyrocket as a result.
How might that have worked out? As the chart below shows, gas prices went up slightly for two weeks after the disaster, from $2.86 / gallon to $2.93 / gallon. But less than 60 days after the disaster, during the peak summer driving season, gas was $2.70 a gallon. In fact, gas prices were down 20% before the oil spill was capped on July 15, 2010.
The appeal of an “information edge” in investing is universal, but the reality is it rarely exists. Markets are dynamic and efficient pricing machines. Our investment philosophy is similar to that echoed by John Bogle who observed, “why search for a needle in a haystack when you can by the whole haystack.”