Tsunami Investing

My investing style has always featured a concentration in one or a few sectors with powerful growth dynamics. For many years I focused in the area of my prior business experience, cable television. I built and operated a cable company from 1975 through 1996, when I sold the last piece of it. I became a “professional” investor out of necessity in 1989, having sold the bulk of my cable TV assets. Starting in 1996, when the EIS account was first funded, investing became my family’s only source of income.

My early investing years seemed not to have any general organizing philosophy. But a recent analysis showed that my investment decisions have always been guided by a set of beliefs that I now call “Tsunami Investing.” It consists of concentrating on economic sectors that are experiencing very rapid bursts of growth and operate in business areas that relate to my background and skillsets so that I can understand them.  I expanded on this notion in Newsletter # 16.  

Not all businesses are comprehensible to me. For example, biotechnology is in a long term growth trend and probably will be for many decades to come. But I cannot evaluate the sciences of biotechnology. The same is true of the huge computer and internet industries. When I have invested in such fields, I have generally lost money.

On the other hand, luck has allowed me to directly participate in three industries from their infancy through to their maturity - mobile homes, cable television, and cellular telephony. Each has had enormous impact on investors and on society. Investors who participated in them over long time periods - say, a decade or longer - created significant personal wealth. Each industry benefited from a super-powerful, long-term trend, a “Tsunami.”  Participating in these businesses has shaped my investment outlook. It has convinced me that Tsunami Investing offers superior rewards at surprisingly low levels of risk.

The risks of Tsunami Investing are macro-economic, effecting nearly all investors, and not particular to a given Tsunami. That is, when something occurs, like a recession, that causes all stocks to decline, Tsunami stocks decline too, regardless of their excellent long term prospects. In fact, Tsunami stocks often decline more rapidly than the market as a whole during general market downturns. To mitigate this risk one should avoid becoming too leveraged. Leverage is unnecessary for achieving excellent returns when one is invested in businesses that themselves have outstanding growth potential. And leverage can cause such emotional reactions when the portfolio undergoes its inevitable periods of decline that you can lose your whole position. This is a lesson I have learned through much painful experience.

One of the benefits of the energy Tsunami is the great breadth and the enormous scope of energy-related businesses and therefore the opportunity to diversify to some extent while still maintaining the energy theme. On the other hand, since most energy-related companies will be effected in the same way by changes in the prices of oil and natural gas, investments outside the energy area are also required to obtain true diversification.

Why the Energy Sector?

If you can find a sector undergoing a long term trend, you are by definition looking at a potential investment opportunity. If that sector is one of the most important in all of the economy, and if its growth is based on a scientific certainty and if the price to earnings multiples of many stocks in that industry are reasonable, you have identified an enormous opportunity. That’s why I began to focus on energy.

In 2004, it dawned on me that the world will run short of oil one day, probably within the foreseeable future. If that was true, the implications were enormous. I became a student of energy. I read books and blogs and news reports - everything I could find - to learn about the history and technologies of producing and distributing energy. My interest level grew with my knowledge of the field - to the point that energy is now one of the primary lenses through which I view both investments and the world at large.

The best ways to invest in the energy space came into focus slowly. I began to buy companies that produce oil and gas. Then I discovered opportunities in industries that provide equipment and supplies for the discovery, drilling, maintenance, and optimization of oil and gas harvesting. Eventually alternative energy companies, and those in various energy conservation businesses presented themselves. I became aware of the multitude of interlocking relationships between energy and the total economy. Over time I became convinced that the changing energy mix is the most powerful investment Tsunami likely to present itself during my lifetime, perhaps ever, more powerful than were mobile homes, cable television, or cellular telephony - nearly comparable with the power of the Internet itself.