This is a situation where the narrative has made even institutional investors very wary… all of this is false. There’s this thing out there called reality. And there’s no way the world’s going to run on sunlight, solar panels, and wind power. It’s just not going to happen.
That’s my friend Tain Nix again. We were chatting on his Expat Phyles podcast last week and the conversation veered towards the investment markets. And we both agreed that energy is likely the biggest opportunity out there right now. At least when it comes to investing in the stock market. That’s thanks to the environmental, social, and governance (ESG) push of recent years.
It’s important to understand that the equity markets are constantly pricing every publicly traded stock out there based on the information that’s available. But every now and then external distortions cause the market to misprice assets. And that’s exactly what’s happened in the energy sector.
On one hand, the ESG narrative has pushed the idea that we need to put a damper on traditional energy production. As such, it’s been taboo to invest in traditional energy like oil & gas in certain circles.
At the same time, there’s been a tremendous effort to keep a lid on the price oil and gas in recent years.
For one, the current administration in the U.S. drained the country’s Strategic Petroleum Reserve (SPR) specifically to push down oil prices. At the same time, the Brent Crude benchmark index changed its weightings in April to artificially lower oil prices. Then there’s been heightened activity in the oil futures market that’s almost certainly been used to keep prices down. Oh, and several key oil refineries and pipelines have mysteriously blown up recently as well.
Put it all together and it’s clear that there have been immense distortions in the oil and gas markets. At some point those distortions will be ironed out… and the price of oil and gas will rise sharply. Top-tier energy stocks should do very well as this happens.
We have a similar set up with uranium right now. Uranium is the key component that powers nuclear fission reactors. But the ESG movement has demonized nuclear in recent years – despite the fact that these reactors produce no carbon emissions.
However, that trend appears to be reversing.
Most countries have awakened to the fact that their energy costs will skyrocket if they close down their nuclear reactors. Germany learned this the hard way. German energy costs had increased by a factor of six at the height of summer last August.
Meanwhile, Finland put a new nuclear reactor online this year. It was the first nuclear reactor to open in Europe in sixteen years. And guess what? Finland’s energy costs fells by about 75% on average.
That’s hard to ignore. And if this becomes a trend, demand for uranium will increase significantly. That’s another great investment opportunity.
So smart energy investments could serve as a cornerstone of a great stock portfolio for the years to come. Then a few blue chip property and casualty (P&C) insurance companies could be the other cornerstone…
If we think about it, P&C insurance is probably the best business in the world. Let’s use homeowners insurance to demonstrate why that is.
We all buy homeowners insurance just in case our house were to burn down. We have to pay premiums to the insurance company annually or semi-annually to keep our coverage in place.
But here’s the thing – our house probably won’t burn down. That means we are paying the insurance company for a future service that they likely will never have to provide.
It’s the same dynamic on the enterprise level.
Large corporations buy P&C insurance to protect their buildings, assets, equipment, labor force, and everything else. Yet most of the time they don’t have any claims… so the insurance company gets paid without having to do anything for the money. I can’t think of any other business that enjoys this luxury.
At the same time, the insurance companies invest these premiums to earn even more money. They compound their returns year after year.
So if we can identify the insurance companies that are good at what they do, and then if we can buy them at the right price, we’ve got an investment that will anchor our portfolio for years to come.
Simply building a portfolio around energy and P&C insurance today will set us up for strong performance for the rest of this decade. But we can take it one step further…
With the two cornerstones in place, I think it’s a good idea to sprinkle some small bleeding edge technology stocks into the portfolio.
These are more speculations than investments. But if we can find a few companies that are doing something potentially world-changing… well, that’s how we can really juice our portfolio returns.
These are the three major investment themes on my radar for the coming decade. The Age of Paper Wealth is over… but there’s still plenty of opportunity out there if we are disciplined with our approach.
-Joe Withrow
P.S. I talked with Tain Nix about these ideas and a lot more on his Expat Phyles podcast last week. Here are the links if you would like to give it a hearing:
Apple Podcast Link: https://podcasts.apple.com/us/podcast/joe-withrow-a-world-class-libertarian-analyst-talks/id1686906959?i=1000617572575
YouTube Link: https://www.youtube.com/watch?v=XZ7qwTXTd0