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Book Review: Fisher Investments on Energy

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Book cover


Written by: Fisher Investments with Aaron M. Azelton and Andrew S. Teufel.

Published: February 2009, Available on Amazon for $21.95


This book is interesting to the general reader for three reasons. First, it focuses on the Energy industry. While it does glance at Alternative Energy, 95% of the book focuses on Oil  & Gas, the fuels OEIC believes we should learn to use less of.

Second, it is a look at the energy industry from the unbiased perspective of a professional money management firm. I say firm because the lead author is Fisher Investments (FI), a well regarded, privately owned, investment management firm, managing over $39 billion of assets from over 27,000 clients and over 100 large institutions. The two additional named authors of the book are FI employees – Aaron M. Azelton and Andrew S. Teufel. Andrew, a Vice Chairman of FI, has been a member of Fisher Investments’ senior management group (the Investment Policy Committee) since 1996, further strengthening the sense that this book is the collective assessment and guidance of the firm and thus the considered opinion and practice of a group of intelligent and informed professionals.

Third, the book explicitly addresses Peak Oil, which I will get to in a minute, but first I will summarize what the book has to offer its target reader.

Per its preface, “The Fisher Investments On series is designed to provide individual investors, students, and aspiring investment professionals the tools necessary to understand and analyze investment opportunities, primarily for investing in global stocks.” In short, it is a well written, easy to read book, divided into three sections, focused on investing in general and on investing in Energy specifically.

The first section, Getting Started in Energy, introduces the scope of the Energy investing sector (one of 10 sectors in the investment universe) and revels that it includes thousands of businesses in: Upstream (exploring, acquiring and taking energy from the Earth); Midstream (processing, storage and transporting energy); and third Downstream (refining and marketing oil and gas products). A brief explanation how the global industry works, how companies are classified, and what drives growth and profits in Energy in general. It is also noted that some mega-companies, such as Exxon Mobil, BP and Chevron engage in all three levels.

The second section, Energy Sector Breakdown, breaks down the Energy sector into two industries (Oil, Gas & Consumable Fuels and Energy Equipment & Services) and their seven sub-industries. Next is a discussion about what drives each sub-industry – the relevant fundamentals (supply, demand, inventories, refining utilization, capacity, etc.). Included in an appendix are sources for obtaining current energy data of the fundamentals that are discussed.   

Note: This book was mostly researched and written during the last half of 2007 and the first half of 2008 (published early 2009) so most of the graphs and data are through 2007; however, this was the same period of time during which oil prices went from $75/barrel to $145, yet very little is made of this – no end of the world was predicted, but Peak Oil and Alternative Energy were discussed! It would have been interesting to see how their weighting of the Energy Sector changed or didn’t during this period, but I have no way of knowing that detail.

In section three, Thinking Like a Portfolio Manager, many concepts and procedures of investing are discussed within the framework of “Top-Down Investing Method.” The Fisher philosophy of investing as a science that maximizes the probability of beating a benchmark over time is discussed, and it is shown that most of a portfolio’s return (as much as 70%) is based on asset allocation and the balance on sub-asset allocation (~20%) and security selection (just 10%). How to use benchmarks and the process of developing your own portfolio are covered, including security analysis with specific questions by sub-industry that should be asked when evaluating energy companies.

So, if you are interested Energy and would like to invest versus gamble (picking a few “good” stocks) this book has a lot to offer. It does not present a get rich quick scheme but rather shows what is involved in the science of investing. It also comments on two topics I find very interesting – Peak Oil and Alternative Energy. Interesting not so much due to the depth of analysis but rather because of the perspective – intelligent, experienced analysis of market information.

Now for the Peak Oil part… We often hear how Economists discount Peak Oil because decreasing supply with inelastic demand will raise prices and push investments to substitutes and consumers will adjust. “If oil hits $10,000 a barrel by 2110, it’s virtually certain people won’t be driving gasoline-powered cars – the only use would be running antique 2010 Ferraris in museums. (Picture an eccentric museum curator shuffling around the display floor and telling first-graders: Centuries ago, humans used to mine icky black oil from the ground and burn it to make autos run. Strange but true!)”

Yes, there will be a transition period (timing and depth not quantified)! So, Fisher Investments does not deny Peak Oil, but states (as we all would agree) that “we will never run dry.” What they do assert is, “The future of oil supply is simply a matter of economics and politics.” And they advise us to “trust supply and demand.” People will adjust (trade SUV for smaller car or hybrid, carpool, work from home, move closer to work, do more online shopping, bike more and so on); people will adjust faster or slower, depending on how much prices rise and how quickly. And so will investors and business adjust – for example they talk of opportunities in oil sand and oil shale.

For them and investing (and in many respects for us too) the question is not about whether Peak Oil is real but rather when will production start its decline. They put forth a series of reasons it may happen sooner: few discoveries, aging fields, we just can’t get it, no trespassing restrictions. And arguments for later: there’s more out there, we’re getting better at extracting, and demand matters too. How you answer this question will have a big bearing on how you invest, which is their next discussion topic.

“If you believe peak oil is decades away or may never occur, then it should not be a factor in your investment decisions today. The market doesn’t discount information decades into the future. At most markets discount information three to seven years ahead.” [italics mine] Interestingly, we can garner much about our near-term energy situation by observing the collective assessment of the investment community in the buying and selling of stocks. As FI indicates on the web site, “We… believe capital markets are effective discounters of publicly available information.” Fisher Investments on Energy fully describes the information that should be watched and provides a list of sources of the information.

“If you believe peak oil will be a reality within the next several years – or that it has already occurred – there are a number of possible actions you can take…” They go on and lay out several scenarios and recommend some additional reading.

This is an interesting book and I highly recommend it. I learned a lot about the oil industry, in particular how big and varied it is. I learned a lot about investing, in particular a structured process and how much effort and information is required. Unfortunately, I didn’t learn much about Peak Oil, in particular I didn’t learn when it will or if it has occurred!

Dan Gibson is the Reporter and Chief Coordinator of Our Energy Independence Community (www.OEIC.us). Previously he performed home energy audits for five years in NYSERDA’s Home Performance program and new home ratings in the New York ENERGY STAR Home program. He is currently building a 100% Solar Home. He can be reached at DanG@OEIC.us.

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