The Availability Cascade and It’s Implication on Investing

I’m in the process of rereading Thinking, Fast and Slow, this time in a more deliberate, note-taking fashion. The paragraph below really struck me on several levels. The obvious being in politics, fracking, climate-change, and more. But it also is very applicable in the markets, especially with the  shorter-term trading books. How quickly one person can ask a pointed question to the right person that gets repeated and re-asked and eventually stated as fact. Heard of many a hedgie use this to their advantage to enter/exit a position at a slightly better price. Just call a sell-sider and ask “Hey have you heard anything about xx.” They’ll make calls off it…guaranteed.

But even in the multi-month periods, fears can arise from seemingly nowhere, get into a feedback loop and push a stock for longer than you might think before it reverses course or normalizes with the rest of its peers.

“An availability cascade is a self-sustaining chain of events, which may start from media reports of a relatively minor event and lead up to public panic and large-scale government action. On some occasions, a media story about a risk catches the attention of a segment of the public, which becomes aroused and worried. This emotional reaction becomes a story in itself, prompting additional coverage in the media, which in turn produces greater concern and involvement. The cycle is sometimes sped along deliberately by “availability entrepreneurs,” individuals or organizations who work to ensure a continuous flow of worrying news. The danger is increasingly exaggerated as the media compete for attention-grabbing headlines. Scientists and others who try to dampen the increasing fear and revulsion attract little attention, most of it hostile: anyone who claims that the danger is overstated is suspected of association with a “heinous cover-up.” The issue becomes politically important because it is on everyone’s mind, and the response of the political system is guided by the intensity of public sentiment. The availability cascade has now reset priorities. Other risks, and other ways that resources could be applied for the public good, all have faded into the background.”

And with the rise of “social media,” the snowball/feedback loop gets going so much faster than it used to. Like Churchill said, “A lie gets halfway around the world before the truth has a chance to get its pants on.” Today I think it might be changed to before the truth gets out of bed.

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Book Review: The Frackers

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The Frackers by Gregory Zuckerman

The Frackers takes a look at the roller coaster ride of a few of the executives in the US oil and natural gas exploration and production (E&P) industry most notably: George Mitchell, Aubrey McClendon, Tom Ward, Harold Hamm, and Mark Papa. For some reason, the book also chronicles Charif Souki, the CEO of Cheneire Energy, the LNG importer turned exporter. While Souki is, I guess, interesting, I found this a big distraction from the rest of the book.

The book certainly provides a very interesting and informative inside look at the rise of the shale boom in the US; with good insight (perhaps hindsight insight) at the determination it took to crack the proverbial shale code…finding the right mix of drilling and completion techniques to make the shale productive and ultimately to change the face of the global energy business.

As a sell-side analyst who covered the E&P space after the initial Barnett discovery but during the heart of the shale maturation process, it was interesting to get the narrative that we weren’t getting as this all unfolded. Especially much of the behind the scenes happenings as the gas market imploded upon itself.  Loved seeing nuggets like:

  • Mitchell Energy’s ops guys, the ones that truly cracked the code, didn’t make jack in the sale to DVN and most lost their job.
  • It was Tom Ward that made CHK’s call to pass on the Bakken. Tom was skeptical of the shales all along, not just as his marketing pitch for SD.
  • Tom and Aubrey worked in completely separate buildings and didn’t have much face-to-face interaction on a regular basis.
  • Tom’s resignation from CHK, while resulting from a build-up of stress, appears to have been a spur-of-the-moment, knee-jerk decision.
  • Aubrey showed up unannounced and alone at Morgan Stanley’s NYC office to convince the bankers that CHK was the right bidder for Columbia Natural Resources.
  • CLR’s geologist that got them into the North Dakota side of the Bakken sold all his CLR shares the day of the IPO thinking the hype of the Bakken was overdone.

Despite the great info/data dump that came with The Frackers, I found to book to be poorly written and edited. I know Zuckerman isn’t an energy guy by background, so some mistakes are very likely, some were just so obvious it seems they should have been caught by an editor, including sentences with words missing such that they make no sense whatsoever (page 163). Also cases where the wrong shale is mentioned…despite being correct in the very next paragraph (page 269).

And the writing style itself was certainly newspaper-style prose trying to be extended to book length. Tons of false narratives, unnecessarily hyped prose (ex: when discussing something that took years to occur the author chooses to say that the subject was “shocked to discover…”), and obvious artistic license. I haven’t read The Greatest Trade Ever; so perhaps to the initiated this style is familiar.

All together, I would recommend the book to those that want a reasonable look at the history of the shale boom, the background of a few energy CEOs that will likely be around awhile, and a look at how what you see from a company is not necessarily the reality of what’s actually happening. It’s a fast read and the bad writing style is annoying, but tolerable.

Other takeaways, thoughts, questions:

  • Was the determination shown by Mitchell and Hamm good or bad? Is it stupidity rewarded by luck or skill?
  • Along the same path, with the exception of Aubrey, the big risk-takers came from poor families (McClendon was rich poor…or perhaps poor rich) and thus willing to risk it all since they had nothing. While this swing for the fences approach was what got them to where they are, it seems more luck than skill. Perhaps it’s the freshness of reading Taleb and Kahneman, but it seems they were just the benefactors of luck that rose to the top. Many of the failures in the same business ultimately did exactly what these guys did, they just didn’t luck into the same acreage at the same time.
  • Interesting to think that the shales that have been tapped are predominately in regions of known hydrocarbon accumulation, mostly via past conventional production. What is the likelihood of shales out there that may hold hydrocarbons, but have not visibly expelled them? Overlooked opportunities or, read differently, more supply to keep a lid on prices.
  • Despite horrible track records and terrible market conditions, there is always someone there with capital to fund your project. Easy to find the expensive stuff, but with the right connections there is a virtually unlimited supply out there.  Smart money is a dumb label.
  • Debt is dangerous…and more dangerous than most give it credit for.
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Books Read in 2013

Need to do a better job of note taking/outlining.

Security Analysis – The bible of investing
Thinking, Fast and Slow – Awesome look at the way we think
Margin of Safety – Klarman’s early take on value investing
Civilization (audiobook) – The rise of civilization…the West and the Rest
Guns, Germs, and Steel (audiobook) – Why did Europe and Asia evolve so differently than the rest of the world?
Antifragile (audiobook) – Great ideas by a pompous asshole.
Competitive Strategy – Porter’s bible
The Prize – The history of the oil business
The Art of Strategy – Great Thomas Jefferson biography
American Sniper – Autobiography of the late Chris Kyle, Iraq war sniper
Principles – Dalio’s manifesto (I guess not really a book)

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Security Analysis: Sixth Edition Outline

Finally read Security Analysis this summer. I’ve outlined each chapter here: Security Analysis Notes

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