When I first started investing a couple of years ago, the hot area to invest in (no pun intended) was the solar industry. While I can only recall a couple of names that were frequently touted at the time (Evergreen Solar, Ascent Solar Technologies, Suntech Power, First Solar, etc.), I can tell you that their returns have been utterly abysmal (my portfolio was a testament to that). In the past five years, First Solar (FSLR) is the only one to put up strong returns (46% cumulatively); Evergreen, Ascent (ASTI), and Suntech (STP) have lost 96%, 68%, and 89% since 2007, respectively.
On the other end of the spectrum, how would a market guru approach this situation? In a Fox Business interview from a couple years ago featuring Warren Buffett, Charlie Munger and Bill Gates (link here), I heard an interesting comment that struck home with me; when asked whether he would be looking at companies in the area of “harnessing the sun, wind and sea” in their early stage of development, Charlie Munger had this to say: “Well, the companies don’t interest me very much, but the field interests me enormously.”
In Warren Buffett’s 2009 letter to shareholders, he expounded on this point, saying:
“Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950).
But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding.
Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy.”
Add solar energy to that list, along with cloud computing, tablets, smart TVs, and others; while these technologies will certainly change the way we live and likely have a bright future ahead, that doesn’t mean they should necessarily become a focal point of your investment strategy. As Warren and Munger have said for years, stick to companies with sustainable competitive advantages, and load up on them when they’re out of favor; it might not be as exciting as the cloud, but better long-term returns is a trade-off that most investors would probably be willing to make.
About the author:
I think Charlie Munger has the right idea: "Patience followed by pretty aggressive conduct."
I run a fairly concentrated portfolio, with 2-5 positions accounting for the majority of my equity portfolio. From the perspective of a businessman, I believe this is sufficient diversification.