Big trends

One of the best ways to make money as an investor is ye ole “top down” approach to investing.  Top down means that you begin with big macro-level trends and work your way down to identifying investments that potentially can benefit from these trends.

Advantages of a top down approach include:

* Being able to benefit from immutable trends that continually make money even in the face of short-term obstacles.

* Surfing the wave of rich returns for many years.

* Being able to invest in many different investments that all benefit from the same trend; sometimes benefiting from different parts of the overall trend.

* Ease of finding investments that are positioned to take advantage of the trend.

Disadvantages of a top down approach include:

* Often times the trends are so obvious that many millions of investors have already positioned themselves to take advantage of the trend.  Therefore, actually making money from the trend can be difficult.

* Long-term trends sometimes take decades to play out so they require tremendous patience on the part of investors.

* Not being able to find a “pure play” investment to take advantage of the trend.  Say you identify your big macro trend but you cannot find a company to invest in that is solely in the business of taking advantage of the trend.

I almost never talk about specific investments on the blog because my goal is to provide you with discerning information so that you can make your own choices.  My goal is to help you become responsible for your financial future by teaching you how to fish, not to keep handing you fishes.  However, I wanted to identify several long-term, big trends that I feel are immutable.

1.  Technology.  Every aspect of the modern world is permeated with technology.  Even in rural, very poor third-world countries the local community often has a cell phone or a local computer lab with an Internet connection.  Additionally, even though the pace of change seems slow at the scale of a single generation, the world is getting richer.  The number of people below the poverty line is shrinking.  When people emerge from economic subsistence to economic persistence and have food and shelter taken care of, they usually want technology.  This takes on the form of televisions, cell phones, computers, refrigerators, microwave ovens, etc.

Potential investments: makers of technological devices (duh!); distributors of technological devices; and sellers of technological devices.

Chance that you can take advantage of this trend: 4; because technology is so sexy to investors the fact is that most technologies are super well tracked by the media and analyst communities.  So it is very hard to make money above and beyond what other investors are making by investing in technology.  This is another way of saying you have to get lucky or buy when prices are artificially low.  My wife and I bought Apple last year circa March 12, 2009 and nearly doubled our money in less than a year.  This kind of buying opportunity is very rare.

Backdoor way of taking advantage of this trend: Invest in companies that repair high technology or that sell equipment used in the manufacturing of high technology.

2.  Electricity usage.  This trend covers both breadth and depth.  The fact is that more and more of the tools we use in life are powered by electricity.  From electric tooth brushes to electric coffee grinders to electric post-hole diggers to electric heat.  If it used to be manually powered, chances are that you can now buy an electric version of the same thing.  This is a growth in the breadth of electronic devices.  On the other hand, as the world’s population continues to grow and as that population becomes wealthier, they use more and more electricity.  This is an increase in the depth of electricity usage.

Potential investments: power companies, especially those that generate and distribute power around the world; companies that make electricity use more efficient;

Chance that you can take advantage of this trend: 8; most investors have overlooked the providers of electricity at the same time that they obsess over the creators of technological devices.  Investing in power generation is a very long-term investment (10+ years).

3.  Natural gas.  All of that electricity has to be created by some sort of fuel source.  There is coal, oil, nuclear, hydroelectric, geothermal, wind, solar, fuel cells, and natural gas.  When evaluating these different sources of fuel used to generate electricity you have to consider the cost per unit of electricity generated.  You also have to consider the long-term environmental effects/costs of a fuel source.  Furthermore, you have to consider the amount of infrastructure already in place that makes the fuel cheaper to extract and distribute.  The fact is that natural gas remains the cheapest, cleanest and most abundant (in the U.S.) of the fuel sources.

Natural gas benefits from a fixed supply in North America with increasing demand.  Natural gas, unlike oil, is very, very expensive to import.  This is because natural gas extracted anywhere else has to be liquefied using equipment that costs billions of dollars.  Then it has to be transported across oceans and then re-gassified.  The problem is that no one wants a re-gassification facility in their backyard.  So the supply of natural gas in North America is largely fixed.  Yet our population continues to increase, therefore using more electricity; and our population continues to use more electronics, therefore using more electricity.

Potential investments: natural resource companies that focus exclusively on natural gas; natural gas pipeline companies; natural resource service companies; natural gas rig companies; ETFs that track natural gas prices

Chance that you can take advantage of this trend: 10; most investors are not patient enough to take advantage of this immutable trend.  Until the cost per unit of energy comes down for alternative energies, natural gas will remain the preferred fuel.  It’s my estimation that this will remain true for at least 15-20 years.

4.  Healthcare.  Baby boomers are getting old.  They need healthcare.  Even with the most recent healthcare legislation healthcare remains a viable and deeply profitable business.

Potential investments: hospital companies; drug manufacturers; biotech firms; healthcare technology manufacturers; mental health hospital companies;

Chance that you can take advantage of this trend: 5; this trend has been so obvious for so long that most excess returns have been priced out of the financial markets.  However, one area that seems undervalued are the makers of expensive healthcare technologies, such as CAT scan machines.  Effectively, these companies are arms dealers in the battle against ill health.

5.  Financial services.  Baby boomers are getting old.  They need financial services.  Even with the most recent financial industry meltdown the industry remains the life blood of the economy.  The fact that the financial services firms were bailed out by our government despite their many failings is evidence of its importance.

Potential investments: banks; investment banks; mutual fund companies; trust companies; pension fund managers; insurance companies

Chance that you can take advantage of this trend: 6; right now many of the financial services firms are trading at discounts to their long-term fair values.  Some, however, are not.  Any firm tinged by scandal is likely to trade down, but survive any public scrutiny.  Buy on any dips.

*****

I hope that this guide was helpful.

Be well,

Jason