A couple of news stories caught my eye this week.
One was in Tuesday’s The Wall Street Journal titled “Hedge Fund World’s One-Man Wealth Machine.” The article, by Rob Copeland , tells the story of hedge fund manager, David Abrams, who runs Abrams Capital Management LP which manages about $8 billion. The main points of interest are Mr. Abrams’s extremely low profile, small staff and great annualized returns of about 15% since 1999.
The firm is value oriented, long-term, sits on a good deal of cash while waiting for opportunities and is a very patient investor. This allows it to attract capital from large investors with a long-term horizon such as pension funds and endowments.
Point being is that most investors might be well served to invest with a long-term viewpoint—something like a five to ten year time horizon for their investments.
Obviously, to make that kind of a time commitment to an investment strategy, the investor needs to understand what he is investing in and the risk he is taking. Homework is a necessary part of this strategy as a commitment on not an insignificant amount of time, because not only is patience necessary, but also the ability to adapt to a changing world.
The second story that caught my eye is the EPA’s new carbon emissions rules. This is a charged political issue and the consequences and degree of its implementation remain to be seen, but it seems to me that empirical evidence suggests a high likelihood of increased government and industry focus on carbon emissions.
What does this mean as a practical matter for investors?
Coal creates the largest carbon emissions of the fossil fuels we use when burned. Stocks of coal miners have been under pressure recently. Many publicly traded coal miners are trading at or below book value, have reasonably good balance sheets and trade at low multiples of enterprise value to revenues and have strong assets bases (coal in the ground). Why?
Could it be that the investors are wrestling with the concept of stranded assets – assets that lose economic value well ahead of their useful life? Major oil companies have said that fossil fuel reserves won’t be stranded by climate regulation and that it will take decades to resolve climate change.
Will stranded fossil fuel assets become a reality? It is impossible to tell at this point. It appears that a risk does exist whatever the magnitude. It is up to each investor to determine whether he thinks the risk is material to his portfolio and how to manage it.
James Mathis, managing partner of Echelon Investment Management, believes in enriching his clients’ lives by identifying, preserving and achieving their goals. Echelon partners with clients through every leg of their race ~ asset management, investment advice and retirement planning. Contact him at james.mathis@echelonim.com.
Disclaimers: The ideas presented here are for illustrative purposes only. This does not reflect the performance of any specific investment. It should not be assumed that past performance in any way relates to future results. The information herein has been derived from sources believed to be reliable, but this is not a guarantee as to the accuracy and does not purport to be a complete analysis of the security, company or industry involved. An investor should consider, before investing, whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s 529 college savings plan. 529 plans are subject to enrollment, maintenance, administrative and management fees and expenses. Non-qualified withdrawals are subject to federal and state income tax and a 10% penalty. Please consult with your financial advisor and tax advisor to determine the strategy that best suits your individual needs.