Arjun Murti – You’ve Got to Get Out of the Battle At Some Point

BIO: Arjun Murti has over 30 years of experience as an equity research analyst, senior advisor, and board member, with global expertise covering traditional oil & gas and new energy technologies.

STORY: Arjun made a call that oil prices would quintuple from $20 a barrel in the 90s to $105 in the 2000s and stay there for at least five years. The price averaged $100 a barrel from 2000 to 2014, entirely consistent with Arjun’s call. However, after the 2008 financial crisis, the return on capital in the energy sector started falling. Arjun made excuses and continued to ride the wave all the way down.

LEARNING: Let go of your ego and get out of the battle at some point. Frameworks need to grow, evolve and adjust to circumstances. Understand and inculcate reversion to the mean into your thinking.

“At some point, you got to get out of your own ego and get out of the battle.”

Arjun Murti

Guest profile

Arjun Murti has over 30 years of experience as an equity research analyst, senior advisor, and board member, with global experience covering traditional oil & gas and new energy technologies.

The bulk of his Wall Street career was at Goldman Sachs, where he retired as a partner in 2014. He recently “un-retired” to join Veriten, an energy research, strategy, and investing firm. Arjun publishes Super-Spiked, a Substack blog focused on the messy energy transition era.

He is on the board of ConocoPhillips, a senior advisor at Warburg Pincus, and on the advisory boards for ClearPath and the Center on Global Energy Policy.

Worst investment ever

At the height of his career, Arjun made a call that oil was going to go from the $15 to $20 a barrel range it had been in from the mid-80s. He said the price would rise to between $50 to $105 in the 2000s and stay there for at least five years. And with that, the returns on capital and profitability in energy as a sector would do very well. Arjun called this the super spike.

In 2002, the market started becoming bullish, and oil went from the 20-dollar range everyone thought the sector would be at forever to ultimately as high as $147 in 2008. The price averaged $100 a barrel from 2000 to 2014, entirely consistent with the high end of the range of Arjun’s original call. He was pretty excited about the sector’s profitability and experienced an ego boost after being proven right for five years.

However, the returns on capital started rolling over, and Arjun made excuses for it. From 2006 to 2008, oil went from $65 to $100 a barrel, but returns on capital for the sector fell from 22% to 19%. 19% is still an excellent number, and that’s the excuse Arjun used to continue riding the call. The sector then got interrupted by the great financial crisis of 2008, which Arjun never viewed as an energy event. The industry rebounded dramatically off those 2008 and 2009 lows, but the returns on capital had now fallen to 16%. Arjun kept making excuses as the returns continued to fall and never got off. Making excuses for his framework the entire way down became his worst investment mistake ever.

Lessons learned

• At some point, you’ve to get let go of your ego and get out of the battle.
• Frameworks need to grow, evolve and adjust to circumstances.

Andrew’s takeaways

• Understand and inculcate reversion to the mean into your thinking.
• Understand what the average is. Ride the wave but remember the numbers will go down to the average and, in some cases, below.
• Research shows that high returns on invested capital tend to revert toward the mean. However, that’s not the case with cyclical industries like oil.
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