My grandson is turning 4 in October. Time flies. It seems like just yesterday he was coming home from the hospital and we had our first visit. When it comes to grandkids, time is a blur.
Not so much with money.
If I invest some of my hard-earned dollars in a mutual fund or a company I like, I expect to see some earnings. And I would like to see it quickly.
Yesterday, I wrote a post on my feelings that the energy sector might be a good opportunity. You can read it here.
Most ideas I have are about companies. I fall in love with Netflix as a customer and next thing I know, I’m buying a few shares.
But in the case of energy, it is a sector of the economy in which I’m interested. I think it may be an opportunity and because I don’t have a particular company I’m targeting, I may buy a basket of several companies.
I still do my research, but I spread my investment across 3-10 companies to limit my risk.
3 Years??
That was some bonus material, but let’s get back to the 3 years. I bought a basket of energy companies and I noted that I would enjoy the dividends but wait 3 years or so for the story to play out.
That means that I’ll hold these companies and as long as my thesis on any one doesn’t change (i.e. no accounting scandals or management shake-ups or other red-flashing warning signs), I’ll hold until at least August of 2028. I’ll be 65 years old (sweet – medicare starts and I can ditch my expensive health insurance plan!)
That’s a long time.
I put some money to work. I want to see the results of that work.
And I’m like you, I checked the stock prices today. Some are up, some are down. All less than 1% moves. No 100% gain in 24 hours. Bummer.
Why Did I Invest?
This is part of my thesis with any investment. What’s my goal?
I don’t need to produce 10 pages typed, double-spaced on this. I’m not handing it in. A sentence or 2 will suffice.
This was all in the post.
- I expect demand for electricity to increase
- The aging grid will likely cause prices to increase
- AI will have a ravenous demand for electricity
- The end of solar incentives will likely slow the addition of new producers (like me)
Energy producers like oil and gas exploration and development companies, as well as utilities that deliver the energy to our homes and businesses will likely thrive.
And I expect this will play out over the next 3 years. Maybe more, maybe less.
I’m not able to predict the exact moment that demand will exceed supply, or that prices will increase. I just know that I need to get in before this happens and watch.
But a second important point is that I am investing for the future. The distant future.
Asset Allocation
Back in 2018, I started adjusting my asset allocation to prepare for retirement.
I had been pretty heavily invested in equities to provide long-term growth. As I started to think about needing income from my investments, I sold some equities and bought some CDs, treasuries and bond mutual funds and ETFs.
My investment income helps pay my bills now that I no longer get a paycheck.
I still have a good chunk invested in equities, but the percentage is much lower than it was in 2018.
Energy
So, my expectation for Energy is that I’ll put a few dollars towards a basket of stocks and watch.
I expect to hold this basket for 20 years. I expect these catalysts will continue to exist for many years. The 3 year part is only the 1st test.
If some new technology arrives that changes my thesis, I may sell the basket.
Let’s say Elon develops a shoe-box size gadget that collects sunlight and stores enough power to run our home or car for a week. Who needs oil, gas, nuclear, refineries, and transmission lines?
Not likely, so as long as my thesis holds, I’ll collect a roughly 4% annual dividend and watch the stock prices appreciate over many years.
Chips
I did the same with computer chips in 2022.
It paid off sooner than I’d expected, but I had to power through a rough 2022 until I hit some gains.
Nvidia was the big winner in this basket with some shares up over 1,000%. It feels good now, but in late 2022, when I had bought at $24 per share and the price dropped to $14, I sold some of my shares.
I took a loss of 35% on those shares. Had I held on, they’d be up 1,167%.
Wrap Up
While most of my ideas are about companies like Apple, Amazon or Netflix, I sometimes get optimistic about an industry like chips or energy.
In these cases, I generally buy a basket of some of the best-in-class companies in that industry. This takes some work and some reading, but for me, it’s fun to learn.
And just as with individual companies, sometimes my reading leads me to the conclusion that this may not be a good investment, and I move on.
And for any idea, whether it’s a company or an industry, we need to give it time. If we can’t, maybe our money should be in a nice short term treasury or high-yield savings account.
I learned this lesson with chip stocks. They pulled back quickly after my first investment. I bought more on the way down. It took a while to recover, and even longer for the exponential growth to kick in. I had the right idea, but I didn’t nail the timing perfectly.
Unless we have a crystal ball, nailing the timing is almost impossible. This is why good research, commitment and patience is important.
Over the past 100 years, an investment in a nice low-cost S&P 500 fund would have earned us on average 10% per year with dividends reinvested, but some years we would have lost 30% or 40%.
A company like Nvidia can earn us far more than that 10% average per year, but we’ll need to ride out even more volatility.
It’s hard. I sold about half of my Nvidia position when I got cold feet. Watching our balance drop is never fun.
Good luck!