What the heck is a financial futurist? Well, if I knew the exact future, I would be at the track instead of typing this letter but as a futurist, I don’t look for trends, as is the habit of most stock market prognosticators, I look for fault lines in the crust of the world’s economy, the places where the paradigm will shift.
I’m an M.B.A. from a top school with 30 years of investing experience, but I’m not a financial wonk. I look everywhere change is going on and then find companies that will benefit from that change.
I went to graduate school right out of Oberlin College at age 21 with a freshly minted degree in Communications Arts and only summer work experience for the local CBS affiliate. Though my GRE’s were exceptional, Stanford and Harvard told me to apply again in a couple years. Maybe they were right; I could have been tending bar in the Caribbean though I doubt that was the type of work experience they had in mind. Indiana had a pretty good program at the time (still does I guess), so I went there. Upon arriving, I realized I was not at Oberlin anymore, Toto.
The classrooms were full of the future property of Procter & Gamble, all married, twenty-eight year old, willing corporate cogs in the making. Though I played the game and learned the religion they live by, I realized some years later that the greatest value of the time spent there was studying the system and declining to become a part of it. Business school graduates in the pre-internet era had a stark choice of joining the corporate humungous or staying in academia. Few M.B.A.’s took the third way I chose; I became an entrepreneur and started my own communications company as an advertising agency at age 23.
I bring up my educational background because it shaped my approach to investing. That era of FORTRAN punch card computers was the dawn of regression analysis. This new dogma put forth the proposition that the past could be used to predict the future. Incredibly, this bull is still the sacred cow of most financial prognostication. Today, some financial soothsayers follow fundamentals, some are technical analysts, but they all believe in charts and trends. These metrics cannot predict the future, but they can measure the present. The economy is a tide that ebbs and flows and affects the perceived value of all assets. Most stocks float on this unpredictable sea. Extending my geological metaphor, sometimes there are undersea eruptions that blast through the ocean of equities and shoot skyward. I believe it is the recognition of these economic fault lines beneath the surface we all see, brought on by changes in technology, demographics and social norms that provide the best opportunities for profits in financial markets.
Predicting these eruptions is like trying to time an earthquake. One can learn to see where the fault lines are located, but when the event will occur will always be tough to call. Anyone who bets on market moves in the short term is a gambler and would have more fun in Las Vegas. I look for the fault lines and predict who will benefit and who will suffer most when the inevitable occurs. That’s my approach. I’m a financial futurist.
Where are the hidden fault lines from which the future will erupt? I have recognized quite a few in the past. The first of these finds came from my own experience.
I learned personal computing on a Mac and have always considered Windows a disfigured bizarro world version of the elegant Apple operating system. Even when Michael Dell was pronouncing Apple dead, I knew there were at least enough Mac addicts that even the horrendous management of Sculley and Amelio could not kill Apple. When Steve Jobs was brought back, I bought Apple. A fault line shift was easy to recognize if you were a Mac user like me. I bought at $5 (adjusted for the split). Everyone knows Apple is currently at around $330. (I don’t use percentages; I use real numbers).
In 1995, I self-published a collection of humorous essays and found that Ingram, the most significant distributor at the time, would not carry the book. About that time I was becoming familiar with the Internet and came across an on-line book distributor that agreed to stock my book as well as do the entire fulfillment. This amazing company wanted my book so they were obviously a bunch of geniuses. When Amazon went public a couple years later, I had little trouble picking up a sizable chunk of their IPO. Adjusting for splits, the price I paid was $1.50. Again, this was a fault line shift. Amazon proved people would buy something over the Internet. They happened to pick the right thing, books.
Do I still own these stocks? No. I always ask myself a question about my growth holdings not paying high dividends. Can this or that stock double soon? When the answer becomes “No,” I start selling.
Certainly I could not rely on my personal experience to make all my investment decisions. No one has that kind of exposure to everything game-changing that is happening in the world. So here is the secret to my investing success; I read the news. Not the big stories. By the time a story hits the front page, the investment opportunity is largely lost. One needs to sift through a lot of silt to find a few nuggets in the news. Not everyone recognizes the future when he reads it or has the time to read everything. That’s what I do for you.
A few years back, I read a small notice in the Wall Street Journal that an Australian mining outfit named Sino Gold had just become the first Western company to be granted a license to mine for gold in China. I was interested first because I knew the Chinese did not have as much historical fascination with gold as was common in other cultures. It struck me this could be a very big country with lots of untapped gold. Sino Gold proved the gold was there in Jilin, Heilongjiang, Guizhou, and Shaanxi provinces and convinced the Chinese government to let them dig using Chinese labor and Australian know-how. That was a great quenelle. I bought the stock on the All Ordinaries for $1.50 Australian. Last year, the company was acquired by Canadian mining giant Eldorado Gold for .55 shares to one. Eldorado Gold is currently at about $16 and even with gold’s appreciation; it has become a borderline sell for me. I ask myself if the stock can double from here? Probably not soon. So I’ve sold some, I’ve held some.
So much for past finds. I’ve had lots more winners and only a few real stinkers. Predicting the future is as much an art as a science. Weren’t we supposed to have colonies on the moon and all be flying around with jetpacks by now? As it turns out, the generally predicted future of transportation was wrong. The future has moved fastest in computer technology. A stupid cell-phone now has more computing power than the on-board computers we used to land on the moon. At the same time, we are still flying sub-sonic and moon colonies are the least of our housing concerns.
Everyone can see huge populations around the world are emerging from subsistence agrarian economies and/or political oppression to become larger producers and consumers of goods and services. Duh. Nearly all financial prognosticators are applying Western historic models over these new markets and are bidding up the price of things they think they understand. The new markets want what we want, right? Not necessarily. Sure there will be growth in the internet in China and we’ll sell a lot of tacos and fried chicken in India so Baidu and Yum make sense, but those aren’t game changers. The emerging markets will want different things than we do. That’s where the fault lines are. I’m looking for the things they will want that are not obvious on the surface.
These emerging economies are demographically young and therefore pliable and acquisitive. So we need to think about fashion and by association, advertising and retailing. Wal-Mart and other big box operations are trying to grow their Western models there and they’ll do all right, but they are not the next big thing.
And we need to think about countries as economic entities. Only the United States seems to view sovereign investments as a bad thing. China has quietly monopolized the rare earths elements market totally critical to all advanced electronics. These metals are vital for our defense industry. Not such a small story now as it was last Fall, but it will be an obvious national priority to be independent of China for our defense necessities. I bought REE and MCP in anticipation of a government-supported ramp up of these Western rare earths miners (see The Financial Futurist-Fall 2010). Now it’s every pundit’s flavor of the month, but if you can wait until some financial boob trashes the stocks and you can pick them up at a discount from current levels, buy them. We have only one dominant sovereign industry, defense. And because we’re always at war, we need to stay good at it. Guess the other country that is good at defense, Israel. I bought RADA a year ago and it’s up nicely.
The nature and need for revolutionary food production is at a fault line. What about looking to food safety? I have liked a little Florida company called Food Technology Services for a couple years now. Irradiation of food and hospital equipment to fight the infection epidemic is the future. So are battery power production companies. Which company will make the quantum leap forward in that technology? Can’t tell yet, but they will probably need lithium. Western Lithium has a huge find in Nevada they are just starting to develop.
Brilliant company management is largely a myth. I know a guy the market hailed as a boy genius when he took the steakhouse chain he managed public and was growing 300% a year. When the expansion reached capacity, the stock crashed and he was reviled in the financial press. The company was taken over in a LBO. He is still a smart guy but he was not the creator of the business and had no skills to invent a future path once the game changed. This scenario is typical. Once the creator is eased out, “professional management” will spike the stock for a time then eventually engineer an orderly decline by gutting innovation for short-term earnings growth. When Wall Street euphoria over having one of their own in control of a company leaves the news, it’s time to leave the stock.
Steve Jobs comes to mind. Creator leaves, the stock soared then tanked. He returns and Apple regained its mojo and more. And why is he great? How much time do you think he spends crunching numbers? Zero. He spends his time inventing the future. Maybe you and I can’t invent the future as well as he, but we can recognize it when we see it.
When I make an investment, I can’t tell when profit eruptions will happen for this or that stock, only that if the future goes the way I see it, it will happen. The goal is to be in the right place before it happens.
Something happening right now in the United States and in the other mature economies with aging populations and high operating costs is more like continental drift than an earthquake but the fault line is definitely moving. An aging population is more dependent on passive income. I look for cash generating machines such as growing telecoms and power utilities that pay out high dividends. I’ve bought quite a few in this category.
I believe in comeback stories if they agree with the predictable future. Some residential REIT’s and financials have hit bottom, have high yields and apartment demand and pricing will keep rising. I’ve bought a few for income. Gaming machine stocks have a growth future due to pent up demand, a rapidly growing number of markets that are legalizing gaming, and they have not yet recovered from the sell-off. Going long on gambling, liquor and even smoking is a sure thing. Vice is an asset class that survives downturns well and skyrockets with prosperity. Look at Macau.
Luxury retail acts like a vice (a more offensive vice than smoking in my personal opinion but I don’t make value judgments about investing). As the economy recovers and class guilt subsides, gaudy consumption by the wealthy has spiked so I bought TIF a year ago, made some bling and have since sold it. Next recession, buy luxury brands at the bottom. The rich recover first.
Amazon had sunk nearly as low as Sirius at one point but had the future on its side. For some of us, satellite radio is our favorite listening option and it comes standard in lots of new cars. Retention rate after the trial period will continue to rise. Like HBO and Showtime, Sirius will eventually figure out their optimal programming and SIRI is a monopoly.
Is there anyone in the utensil-using part of the world who doesn’t at least know about PhotoShop or use PDF files? Adobe is a great name in technology that gets no respect. Sure would be a tasty meal for some of Apple’s cash. There is very little overlap of software with the exception of Apple’s Final Cut vs. Adobe Premiere for editing video. I may be the only video producer who will put it in writing but I loathe Final Cut; Adobe Premiere is a vastly superior editing application. Someone is going to buy Adobe at a healthy premium.
I’ve given you some names so do your own due diligence to see if you agree with my positions.
My ratio of growth to stability to income is balanced for a 59-year-old man with above average net worth. If you are younger, assume more growth risk. If you are older than I and need the money, take a higher percentage of income and stability. What I mean by stability is a stock that can serve as a cash equivalent with some upside growth and some income. I am cash conservative so I keep six month’s expenses in a local bank that pays a promotional interest rate of 1.5%. Better than money markets and FDIC protected.
I’ll sift through the silt and share the nuggets I find. If some nuggets turn out to be fool’s gold, I’ll let you know as soon as I figure it out. I recently sold WestJet despite it being a Canadian airline copying the successful Southwest model. With a Calgary hub and natural resources starting to boom in their service area, I thought they would take-off soon. That was a purchase I made four years ago and they’ve gone nowhere. They may yet get off the ground but this flight’s been too long delayed for me to wait around any longer in the no-profit lounge. Sometimes the future takes too long to show up and there are better places to put money to work. Never did invest in those jetpacks.
Gary Isaacson is a writer/producer of original content in various media. He founded Isaacson Communication, Inc. in 1976, now dba www.WorldClips.TV, has four Emmy nominations, is the author of an award-winning techno-thriller book series featuring TV guru and part-time-spy Alec Timken, he writes humorous essays and publishes a currently semi-annual financial newsletter, “The Financial Futurist TM.” http://www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Ddigital-text&field-keywords=Gary+Isaacson&x=0&y=0