In his 2020 Giverny Capital Annual Letter, François Rochon explained how on April 20, 2020, a bizarre event occurred in the financial markets when the price of West Texas Intermediate crude oil futures for May delivery plummeted from $18 to -$37 per barrel.
This unprecedented situation, where sellers paid buyers to take oil contracts, highlights the unpredictability of markets and the dangers of using margin. Despite such anomalies, it remains crucial to invest with a long-term perspective, focusing on intrinsic business value rather than short-term market fluctuations.
This approach prevents investors from falling prey to the market’s occasional irrationality, ensuring their financial stability.
Here’s an excerpt from the letter:
Warren Buffett has often said that “strange things can happen in financial markets.” On April 20, 2020, a very strange thing did indeed happen: the price of a futures contract for a barrel of West Texas Intermediate crude oil deliverable for May fell from $18 to -$37 during the day.
It was certainly strange to see the price of oil trading at a negative level. Sellers were presumably willing to pay buyers to get rid of their oil contracts (so they wouldn’t have to receive barrels at home!). Such a thing has never happened before to my knowledge, and it completely defies common sense.
This anomaly was certainly very short-lived, but it was certainly long enough to ruin speculators using margin to buy these contracts. This shows us all that almost anything is possible in the world of financial markets in the short term and that using margin always carries a small probability of disaster. Even if the odds are 0.01% of losing all your capital, why take such a chance? And it seems even more baffling to me for someone who is already rich.
The fact that nonsense sometimes happens in financial markets obviously does not change our philosophy of behaving as owners of businesses. It is those who focus exclusively on short-term market quotes who put their financial future in the hands of others.
We must never forget that while in the long term, the stock market adequately reflects the intrinsic value of companies, the stock market only reflects the opinion of what others think a company is worth in the short term. This opinion is generally pretty fair and reasonable but, for strange reasons, can sometimes turn out to be downright ludicrous.
You can find the entire letter here:
Giverny Capital 2020 Annual Letter
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