Energy Markets: Investing Tourism by The Sova Group
If you don’t know who the pansy in the room after 10 minutes, it is probably you. Source: A lot of people…
For two years, I was the pansy. I lived in Germany from the age of 19-21. By the end of my two years, I spoke fluent German, but the cultural and historical “inside jokes” just slipped right by me (think, “The Curse,” “I am not a crook,” and “Drill, baby, drill”). You know the feeling, you laugh, smile, but you have no idea why everyone else is laughing.
A similar situation occurs in investing. In some circles, people call this tourism. For example, the current tourist destination is energy. If you are new to the energy world, and picking up your first 10-k on National-Oilwell Varco, Inc. (NYSE:NOV), Seadrill Ltd (NYSE:SDRL), Transocean LTD (NYSE:RIG), Atlas Energy LP (NYSE:ATLS), or another energy-focused company in the past few weeks, you are probably a tourist. The lure of the company that is down 20, 30, 40% is too strong for most people too resist. If you are brand or relatively new to an area, such as energy, you are probably going to miss a few inside jokes.
I still believe going through companies alphabetically is the best way to find good companies. It has the following benefits:
1. You can decide irrespective of value, price or who else owns the stock, if you think you can understand the business. Chicago Bridge & Iron Company N.V. (NYSE:CBI), a holding of Combs/Weschler is off 50% in the past year, but it could be off 99%–I could never understand that business.
2. You don’t suffer from anchoring bias when deciding whether it’s attractive. I can’t tell you how many investment pitches start out with some variation on the phrase, “It is down X% in the past 12 months.” Working alphabetically lets you come to your own valuation without reference to past prices.
3. It allows you to keep the proper perspective on timing. A good idea will come around multiple times in an investment career. You don’t have to chase what’s hot now. Think crocodile, not bumble bees…
This investment screen will never be found in a book on the Top Ten List of the NY Times or in a Factset or Morningstar screen. Why? It is just too hard. It is slow and actually takes patience. There is no magic formula. Or magic screen. Also, it is freely available. Russell’s website provides the alphabetical list of their indices. This reminds me, I should update my investor pitch book to include my “proprietary investment screening tools.”
If you still want to invest in energy, my tip would be to read The Frackers. It is a great book and will shed some light on an industry that, in my opinion, is made up of a lot of naked swimmers, hoping the tide doesn’t go out before they can sell their company…
