Posts Tagged ‘centralised power’

How the rich make their killing from soaring oil prices?

Sunday, June 1st, 2008

Take a look at this article from the news media: Opportunities in crisis as oil stocks dwindle,

A new oil shock that is sweeping the world has sent airline tickets soaring, car drivers reeling and retailers bemoaning the shrinking purses of customers. It is an oil shock of rare proportions.

It is in such events that investors thrive: surely there is an opportunity here for an investor to make a profit from the rising oil price?

Well, how would the rich profit from the soaring oil prices?

There is one rule of thumb that all investors, especially the budding ones, should take note: by the time you get to read about profit opportunities on the media, the biggest and most lucrative killings have already been made. What remains are the leftover scraps. The best investors hop on to the long term major trend long before the mainstream media screams about it. As early as the end of 2006, we had already whispered about the future of oil prices at Is oil going to be more expensive?. The world-class investors who are making a killing from soaring oil prices now would have made their move two years ago.

So, now that mainstream media are talking about how to profit from soaring oil prices, what will the world-class investors be looking at right now? No doubt, they will be thinking steps from the crowd. We believe they will be casting their eyes on alternative energy.

Back in April last year, we examined the idea of alternative energy- see our currently evolving guide, How to profit from rising energy prices?. In particular, take a read at Part 3 (Centralised or Distributed Power) of the “Smart money in alternative energy” series to see how the future of energy will look like in the long run. Regardless of whether you believe the former model (centralised power) or the latter model (distributed power) will be the outcome of the future, there is one problem for the investor: currently, there is no certainty on which forms of alternative energy (e.g. wind, solar, geothermal, nuclear, clean coal, biofuels, etc) will be implemented or commercially successful in the future. By the time the world work them out, the most lucrative profits would have already been made.

But how would the best investors invest in alternative energy? Remember the concept of the asymmetric pay-off strategy in our guide, How to profit from a stock market crash?? The same applies to alternative energy. We do not know which alternative energy will be the winner, but we know that the winner (or winners) will probably win a whopping big victory (or victories). The losers may end up discarded and forgotten (we believe ethanol will probably go the way of the losers). Therefore, the way to invest in alternative energy will be to allocate fractions of your capital into each and every alternative energy candidate that you believe will have good chances of winning. Eventually, one or more of the candidate will win so big that your combined losses on the losers will pale in comparison to the combined wins.

Obviously, this strategy will work only for those who have large enough capital.