When it comes to
investment decisions, I would like to
make as few as possible. If I want to invest (or speculate) in
a given asset, I would like to know the trend (whether it is
rising or falling) of such asset. The longer the trend, the
fewer trades, and fewer decisions I have to make. "Trend"
can mean fundamental (revenue, earnings, purchasing power, ...)
or technical (price, volume, momentum,...).
What sort of trends that are long but produce very high rate of
return? They are difficult to spot unless there is a broad participation
of individuals. The most notable ones are financial bubbles or manias
which, at the end, affected a broad segment of a population.
The following are examples of manias and performance of
representative assets:
Gold in1970's: Gold from 60 in 1972 to 800 in 1980
Japan in 1980's: Nikkei from 7000 in 1982 to 39000 in 1989
Technology in 1990's: Nasdaq from 600 in 1992 to 5000 in 2000
If an investor can correctly identify a mania, 90% of the work is
done. The other 10% is buy fund/stocks he/she likes, or an index
fund to make things simple, and wait a few years to reap huge
profits.
The question is, of course, what is the next mania?
I asked one person such question, and the answer I got was
"US housing". I personally think it is US real estate in
general. Other possibility is energy.
I will discuss the details later.
These days, the media is swamped with stories
of high oil price. It is true that supply of oil is
finite, but whether the price gives a true picture
of supply/demand is something else.
In general, a product such as energy goes through
several steps from raw material to the end user
(could be either a manufacturer or a consumer)
They are:
1. Exploration (getting out of ground)
2. Processing
3. Distribution/transportation
Is there some money to be made in energy? I think
so. However, I would like to invest in sectors of energy
where revenues are not so depedent on energy price.
Looking at each step above, exploration is very price
sensitive and I would be very cautious on this sector.
What about processing? Profits seems to be less
price sensitive, although I would not invest in refinary
at this time. Distribution/transportation? Does not
seem to change much unless there is a subtantial fall
in either supply or demand.
What sort of companies are in distribution/transportation?
The kind I like are pipelines. They are usually in the
form of limited partnerships (LP's). Limited partnerships
work in such way that investors (limited partner) put up the
money and receive a portion of the profits, but are not involved
in operations. A management firm (general partner) handles
all operations of the partnership.
There are quite a few pipeline LP's.
http://www.dividenddetective.com/mlp_directory_pipelines.htm
The biggest one is Kinder Morgan.
Judging from the price chart of Kinder Morgan, share price held
up well while oil price tanked from 1998-1999. Although past
performance is not indicative of future results, I think the earnings/
distributions of pipeline LP's should be reasonably stable going
forward (in the absence of supply/demand collapse, of course).
Granted, prices have run up quite a bit. However, considering
30 yr treasury bond is paying 4.4% as of today, 5-7% yield
doesn't look too bad.