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Ignore the Fear Mongers, Focus on the Facts

Tuesday, 01 Mar 2011 01:41 PM

During the past few weeks, several financial-market pundits warned investors that crude oil prices could rise above $200 and that gasoline prices could spike to more than $5 per gallon as a result of the political unrest in North Africa and the Middle East.

Some of those “experts” claimed that crude oil prices could even rise to as high as $400 per barrel and that the price of gasoline could rise to more than $15 per gallon.

Most of those same “experts” and pundits said on numerous occasions during the past few years that the U.S. dollar could lose its status as the world’s reserve currency and that the exchange-value of the dollar could collapse.

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Although I agree with the possibility of each of those claims, I urge you to recognize the fact that all of the “experts” who made such claims used the same magical word in their comments about the possible direction of petroleum prices and the exchange-value of the U.S. dollar – the word could.

However, none of those persons assigned a statistical probability to their claims. That’s a very significant omission, because investors should always consider the probability for the occurrence of certain outcomes.

For example, if a large number of economic and geopolitical factors indicated that there were an 80 percent chance that crude oil prices would rise to $400 per barrel during a period of less than 12 months, and that crude oil prices would stay above that level for a prolonged period of time, then I would probably urge investors to invest 100 percent of their money in securities that track the performance of crude oil.

In contrast, if a substantial number of economic and geopolitical factors indicated that there was only a 1 percent probability of oil prices rising to $400 per barrel during the foreseeable future, then I would probably advise investors to invest their money into some other types of securities.

In regard to the ongoing political demonstrations in North Africa and the Middle East, most of the fear mongers who’ve claimed that petroleum prices could rise substantially in the event of certain outcomes appear to have overlooked the potentially positive outcomes of those demonstrations.

For example, there’s a good chance that because of those protests, several countries in North Africa and the Middle East will adopt certain democratic policies during the months ahead and that the citizens in those countries will force their governments to increase their supply of crude oil in an effort to improve their standard of living.

Therefore, I urge you to ignore the fear mongers and to focus more of your attention on the probability of different investment scenarios.

Note from Moneynews:

If you’d like to learn more about Mr. Frazier's analysis of the financial markets and how to focus on economic statistics that tend to indicate the future direction of the economy and stocks, try a free sample of his investment-advisory service, The ETF Strategist. Click Here to Find Out More.

About the Author: David Frazier
David Frazier is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes two very successful investment newsletters. Discover more by Clicking Here Now.
 

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During the past few weeks, several financial-market pundits warned investors that crude oil prices could rise above $200 and that gasoline prices could spike to more than $5 per gallon as a result of the political unrest in North Africa and the Middle East. Some of those ...
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