I am re-reading one investment classic published between 1841 and 1967 each month between now and December and writing a review for those who may have missed the greatest investment books ever written. I’m doing so chronologically so I started with the brilliant book that I believe teaches us more about human nature and market psychology than any other book ever written, 1841’s Extraordinary Popular Delusions and the Madness of Crowds (here.)
One of the excellent comments I received was, “What are the current Delusions of the crowds?” I think that’s a superb question, not just for me, but for the Seeking Alpha community writ large. What are the current mantras that we take for granted as absolutely true? What investment follies and foibles might flow from those assumptions? How might we profit by avoiding false assumptions and false syllogisms?
Thinking about this might lead to some spirited and helpful discussion and, this being the day after April Fool’s Day, it is a most appropriate time to consider investing wisdom and foolishness! I am looking to hear others’ ideas, but I’ll kick it off with three that my analysis leads me to conclude I can rely on to make my clients and myself far more money by not succumbing to the following platitudes...
1 – “The world is running out of fossil fuels.”
This notion flows from the Peak Oil Theory, which was originally conceived to discuss a particular oil field or producing region, and later extrapolated to all oil worldwide, then to all fossil fuels worldwide. I’ve been hearing some variation of it for the 40 years I’ve been investing. I entered the brokerage business in 1972, just in time for the OPEC cut-off a year later. Every single time the oil or natural gas stocks decrease for a couple months, some Chicken Little runs around alerting the media that we’re all about to freeze in the dark.
Bunkum. We do not have a clue what fossil fuels remain below the 70% of the planet covered by the world’s oceans (although the North Sea, the Gulf of Mexico, and the recently discovered elephant fields off the coast of Argentina may provide a hint of what is yet to come.) Ditto for vast stretches of land like the oil sands found in Alberta and Saskatchewan. Maybe there is even more farther north. Who knows? If I were to succumb to the Popular Delusion that there was no more coal, natural gas (of which better technology has just unlocked quadrillions of cubic feet in shale rock that we didn’t count as reserves just ten years ago) or oil, I might be investing solely in ethanol, other biomass, wind and solar companies. And I would miss the greatest dividend stream and capital gain potential from the energy that currently and for the foreseeable future provides more than 90% of all our needs.
One day, alternative energy sources like wind, which we’ve used for hundreds of years, and solar and biomass, which we’ve used for thousands of years, may be focused and collected and priced to be competitive with oil, gas, and coal. But for the immediate future, the billions our government has thrown at grants for professors to “study” this and “study” that and subsidies to encourage us to use more expensive power during a time when we desperately need to conserve cash will come to the same end as most money disbursed by bureaucrats -- disappearing down a rathole.
2 – “Global warming is (a) caused by man and is (b) proven science.”
Why is it that we know we can’t accurately predict the weather tomorrow or next week, yet we are willing to swallow hook, line and sinker that we “know” that, 50 years from now, the earth’s coastal cities are all going to be under water?
Is it “proven science” that the earth is getting warmer? Well, if you believe the now admitted as falsified information from East Anglia and elsewhere, you might believe it. Real climatologists disagree on whether it is still warming or whether it has been warming but may have reached a zenith and is now cooling. “Inconvenient” as this Truth may be, there is little evidence this trend of warming and cooling is unique to this century, or the previous one, or the Industrial Age.
Paleoclimatologists study indicators not from the last expulsion of hot air from Al Gore, but from the entire history of the earth. They study sedimentary rock to determine CO2 levels over the past 500 million years. This is considerably more rigorous than listening to someone with a vested interest in biomass companies screeching in sound bites on the evening news. These paleoclimatologists have concluded that this is one of the coolest periods in the last 500 million years.
They reach the same conclusion from their study of the Vostok ice core samples from just 400,000 years ago. These, too, clearly show the cyclic changes caused by who knows what – the Pacific vent, cloud formation, tilt of the earth’s axis toward the sun, periodic solar radiation, etc. – but certainly long before cavemen were ever on the scene, driving their SUVs and burning coal for electricity.
And even if “global warming” were man-caused – and the empirical evidence does not support that opinion – will anyone in the developing world do anything about it? Absolutely not. They need to worry about getting enough food and health care to exist, not about what some limousine liberal in San Francisco espouses as their cause du jour! This leads me to trust the solar system, the balance of nature, and empirical evidence more than shrill arrogance – and leads me to invest in those emerging economies and their energy-profligate billions.
3 – “Government is responsible for ensuring that we get proper health care, enough to eat, a place to live, and that the wealth is fairly and evenly spread around.”
I don’t really have to dignify this with a response, do I? We are responsible for our care and feeding. The moment we stop believing that, we cease to exist as a nation of consequence.
We are also a nation steeped in the belief that we should help those less fortunate, so there will be a safety net for those who fall. But our culture and history says we come together to offer these people a hand up – not a handout. Just because you are a college graduate who has chosen not to enter the work force doesn’t mean that you cannot apply for food stamps and shop for gourmet delights at Whole Foods (WFMI), as a recent Boston Globe expose rammed home. But shame on you if you do. Get to work. Pull your weight. The government trough is large, but have you seen what happens to those who dine at troughs?
Considering the above Popular Delusions, the energy, emerging market, and US private enterprise gems that I have chosen to buy instead of falling for the platitudes, truisms, and tautologies cover the waterfront. Please see previous articles with titles of interest to you for more specifics. As a start, may I suggest that to feed the world, grains, crops, livestock, fertilizer, and efficient irrigation all top my list. Deere (DE), Israel Chemicals (OTCPK:ISCHY), Nestle (OTCPK:NSRGY) and Lindsay Mfg (LNN) have been among my favorites, though most have had a great run already.
For energy, in the developing world, coal, oil and natural gas are most abundant and cheapest and will therefore be the first choice of most users. While these have been well-covered in previous articles I will mention just a few representative issues: Exxon Mobil (XOM), BP, Conoco Phillips (COP), Royal Dutch Shell (RDS.B), Magellan Midstream (MMP), Boardwalk (BWP), EnCana (ECA), Imperial Oil (IMO), Natural Resource Partners (NRP), and Penn Virginia (PVR).
Finally, we are effectively short US Treasuries via the inverse ETFs TBT and TMV, believing that any government that believes money grows on trees will need to print ever-increasing quantities of the stuff, leading to inflation and higher interest rates.
Author's Disclosure: We and / or clients for whom these investments are appropriate, are long ISCHY.PK, NSRGY.PK, LNN, XOM, RDS.B, MMP, BWP, ECA, IMO, NRP, and PVR – all with very tight trailing stops, except for XOM, which we still consider cheap. We are short US Treasuries via the inverse ETFs TBT and TMV.
The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.
Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but did not do so for 2009. We plan to be back on track on 2010 but “past performance is no guarantee of future results”!
Fine print for SA readers: until recently, SA counted someone as a follower if they made the decision to follow a particular author. In January, however, SA began pre-assigning 20 authors to each new registrant. I thought the reader should make this decision, not SA or anyone else, so I asked to opt out of this methodology and SA graciously allowed me to. Regrettably, we have now disappeared from the top 10 since new readers often look no further than the top 10 or 20, thinking those are the ones most selected by existing readers. I have been informed by SA that they will not be changing the current system, so I will opt back in to the new methodology – but only after providing 30 days full disclosure here.
Finally, it should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.