Some of our investors have commented on our investment in oil and gas versus alternative and renewable forms of energy. We’re very interested in these forms of energy production and follow developments closely. Someday, probably not in the immediate future, the cost to find and produce hydrocarbons will make more forms of alternative energy competitive. In the past, our funds and separate accounts have invested in wind turbines, geothermal, solar, natural gas and biomass fuel cells and hydroelectric with good results.
We may wish it were otherwise, but there are constraints on our making substantial investments in alternative and renewable energy. We’re value investors, first and always, and investments in this space are often overpriced. Many ventures rely heavily on government subsidies and we are skeptical of equity investments in companies that can’t withstand the rigors of the market without that kind of help. Subsidies can come and go on political whim. We’re not engineers and we cannot evaluate advanced technology with the education and experience that the science requires, nor can we trust endorsements by those with a stake in the outcome. We continue to look for investment opportunities in alternative and renewable energy, but we do not intend to lower our investment standards as our primary responsibility to you is to maximize returns while managing risk.
Look carefully at the enthusiasm for electric (not hybrid) vehicles. They’re versatile in their choice of fuels. If one lives in Colorado, they are powered by natural gas; in the Northeast by coal or heating oil; along the Gulf Coast by uranium; in the Northwest by hydropower. Very seldom are they powered by wind or the sun. Never are they actually powered by electricity, for electricity is only a conduit for the source of energy and only occurs in nature in annoying or lethal quantities.
Until technology comes along in the form of a much-improved battery, a flywheel, a water tower or whatever, the electricity generated by wind or the sun will be auxiliary and will not contribute to the base load, the steady source of electricity supplied by natural gas or another source that can be turned on and off on demand. Battery or other storage technology is developing rapidly, but, in all fairness, it has been developing for years and may still be years off.
In the meantime, we are obliged to rely on traditional sources of energy if we want to live in the modern world. The abundance of natural resources accounts for much of the prosperity of the United States and Canada and the scarcity of natural resources accounts for much of the misery in India, sub-Sahara Africa and elsewhere. The U.S. is fortunate that it has the time to find long-term solutions to our energy needs.
With this in mind, we are putting together our second energy fund to invest in minerals, primarily in Texas, Oklahoma, Colorado, Wyoming and North Dakota. As in the first energy fund, we will own and lease minerals in place and will not drill or operate wells, thereby avoiding liability and overhead associated with drilling and leasing.
We continue to be amazed at investor behavior in the public markets. ETF’s are presumed to have replaced the need for analysis. There is a new ETF that owns all of the markets in the world—how much analysis do you suppose goes into the decision to buy that ETF?
Switzerland is usually considered the pinnacle of financial prudence, yet the Swiss National Bank, that country’s central bank, owns 2% of Apple, among hundreds of other equities. The Japanese central bank owns much of that country’s equities. If these and other central banks that have wandered into equity markets panic, the downside to the markets would be exacerbated.
We don’t have a consensus view of cryptocurrencies (and don’t own any), but their popularity tells us that there’s an enormous amount of mistrust in fiat currencies. Just a thought, but gold has a track record versus fiat currencies about 5,000 years longer than cryptocurrencies and doesn’t rely on the electric grid for safekeeping.
For an insight into investor psychology, read Thinking, Fast and Slow by Daniel Kahneman (or the Reader’s Digest version—The Undoing Project by Michael Lewis). There’s a lot going on, much of it irrational. Kahneman and his partner, Amos Tversky, introduced psychology to economics, making human actions, rational and otherwise, a new focus. Much of what we see in the public markets today can be explained by their experiments. Their associate, Richard Thaler, recently received a Nobel Prize in economics for his work along the same lines.
One phenomenon, the endowment effect, is the propensity to value an investment more highly because one owns it. Instead of evaluating a stock critically and continually, one becomes fond of it and loses objectivity.
Confirmation bias is the effect of surrounding oneself with others who are of the same mind, reading the same magazines, listening to the same podcasts. The result is that one hears no criticism, no new ideas. Investments like the FANG’s (Facebook, Amazon, Netflix and Google) is a good example.
You get the idea—the human mind often ignores history and works to the disadvantage of an investor. The reversion to the mean can be a nasty experience.
At Branzan we work to overcome these biases as best we can. Each of us on the investment committee has a different education, background and interests. We all read different books and periodicals. We are critical in our evaluation of new investments and don’t hesitate to cut losses when we make a mistake. We don’t fall in love with our investments. Most importantly, Branzan employees and their families are the largest investors in all three Funds. Every investment decision affects us personally. That likely distinguishes us from most, perhaps all, of your other investments. We think that’s meaningful.
As always, we welcome any questions you have.
Very truly yours,
Branzan Investment Advisors, Inc.