The Only Three Questions That Still Count: Investing By Knowing What Others Don't, 2nd Edition

In the Center Ring—Oil Versus Stocks

As investors, we seem compelled to assign causality where none exists, creating the basis for false investing “truisms.” As our Stone Age brains try to establish order in a disorderly world, we data-mine, look for data confirming our biases, ignore contradictory evidence and commit other cognitive errors. Unfortunately, this trend of taking two otherwise unrelated events and creating hysteria by purporting causality shows no sign of stopping. Hence the need for Question One.

Recall, your goal in asking Question One is to prove or debunk the factors behind your decisions. When you discover a baseless myth with Question One, you haven’t just avoided another investing mistake. You may have a basis for a market bet. If everyone is fretting over something they believe will surely cause stocks to drop or rise and you can disprove the connection, you can bet against the consensus and win more often than not. You have found something where the outcome they expect simply won’t happen.

An excellent example, and frequently a popular cause for panic, is the high price of oil. Investors presume when oil prices are high, that’s a negative for stocks. Few disagree: If oil’s price keeps rising, stocks must suffer. You hear it in the media consistently by an unending barrage of TV wags—so this is a great Question One candidate.

Oil as a cause for hysteria isn’t new. It cycles in and out every few years or so. In the 1970s, we had disco, Jimmy Carter and oil ...