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FUTURE VALUE

May 04, 2007 | About:
10qk

Krasimir Karamfilov

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At the beginning of this year, I bought a stock for $7.15. I discovered the company in December 2006. I read a great article about it, and realized that, if I bought some shares now, my chances to retire well-off would increase dramatically.

I’ve never owned shares of an energy company in the past. This one has sales of over a hundred million per quarter and it’s currently one of the top 20 energy companies in the country. My buying of the stock was based on the estimate that if things went well in the next few years, the company may jump into the top 10.

In all honesty, I bought this stock without doing any research on the company. Later on, upon further investigation, I discovered that its earnings per share were abysmal and the company was in a couple of lawsuits, trying to protect its patents. In other words, no educated investor worth his or her salt would have bought this company. But I bought it.

Why?

To answer this question, I’ll retell the story of Henry Ford, who woke up one morning and decided to design a car engine with all 4 cylinders cast in one block of steel. He assigned the task to his engineers, who worked for months on the engine to no avail. Finally, after a couple of years of work, they figured it out. In 1908, Ford’s Model T was introduced and the rest is history.

The lesson in this story is that Henry Ford imagined the future value of a 4-cylinder engine. He believed in something that wasn’t there and had never been there.

When I thought about this, I realized that we all believe, sometimes, in things that don’t make sense right now, but make perfect sense a few years later.

That’s why I bought this energy company. First, it makes power converting products that no other company is making, and second, it’s now creating a moat, which will be impossible to cross in a few years by any other company.

This month, the stock fell 40% since I bought it in January. What did I do? I doubled my position. Some guru investors would have called me crazy, but who cares. I’d rather act like Henry Ford than not act at all.

I’m sharing this with you not to foster random buying, but to encourage you to think about the future of the companies you buy the way you think about your future. Imagine great things happening to them, the way you imagine great things happening to you.

In investing, as in life, taking a calculated risk is one of our best strategies for advancement. Warren Buffett plays the “intrinsic value” risk, and he’s advanced beyond our reach.

With this energy company, I decided to play the “future value” risk. How far will I advance? I don’t know, but I believe in the future, which always comes one day.

The company in question is Power-One, Inc. (PWER). Check it out and see the future bonanza for yourselves.

About the author:

Krasimir Karamfilov
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.1/5 (7 votes)

Comments

buffetteer17
Buffetteer17 premium member - 7 years ago
I think it is fine to take small positions in companies like this. If one out of four do well, you'll be way ahead. My high risk new company is CREE. They make high power white LEDs. White LEDs are going to replace the light bulb and flourescents as well. They're 10x as efficient as standard bulbs, have a lifetime of 50000 hours, and do not have early failures. On the down side they're expensive, need a regulated power supply, and have too high a color temperature (look bluish). These problems will be solved. But CREE has abysmal and declining earnings right now.

Two things have kept me from plunking down actual cash for the CREE stock. First is something Peter Lynch said: "check back later." His point is that with such companies, you can afford to wait until they get their financial act together. He gives many examples in "One up on Wall Street." If the company is going to advance 100x, you'll miss the first 10x but still capture the next 10x with a lot less risk.

Second is that I've got a day job and have been spending entirely too much time looking at companies and playing long shots. So I set a rule for myself: I will not invest less than 5% of my portfolio in any single opportunity. I wouldn't be willing right now to put 5% into CREE (or PWER either). But both bear watching. Good luck to you. I may join you after the first 10x.

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