Are you ready for cars that go 10,000 miles before they need a refill and cost pennies on the dollar? Get ready for hydrogen. It will change everything. Maybe.

Hydrogen is the most plentiful gas in the universe. It’s also a powerhouse– it has the highest energy content per unit of weight of any known fuel. It’s aboundant, reliable, renewable, clean ( a hydrogen-powered car produces water as its exhaust), and secure (because hydrogen is everywhere, no country would have to rely on foreign suppliers). That leaves just one requirement: affordability. The trick with hydrogen is that it never occurs by itself in nature; it always combines with other elements, such as oxygen or carbon. At the moment, it’s quite costly to separate it from those other elements and transfer it into fuel cells, which are standard storage technology for this form of energy. In fact, the cost of doing so is greater than the current value of the energy created. That’s why you don’t yet drive a hydrogen-powered car. But that will change.

Hydrogen-powered vehicles are coming in the future. Hydrogen-generating power plants are farther down the road, but they are coming, too. There is one in Iceland, the first of its kind to fuel a city. In fact, the hydrogen economy, a holistic transportation infrastructure, will arrive within 35 years.

When you consider how the auto industry started and how the mass market for automobiles evolved, it is not hard to envision the beginning of the hydrogen industry. At the turn of the last century, the idea of personal transportation that people could use to pick a destination and choose whenever they wanted to leave was a revolutionary concept. But it was the relatively inexpensive production of cars that made Henry Ford’s breakthrough brilliant. His vision of factory automation enabled the Model T to become a mass-market success.
Hydro Futures

When hydrogen becomes inexpensive in the coming years, it will follow a similar path into the future. Just as thousands of affordable Model T’s came off the assembly line into the marketplace, transforming mobility in America and the world, hydrogen, with a hungry mass market waiting, will find similar success.

To be sure, hydrogen has problems other than high cost. It is unstable and needs to be controlled. The manufacture of hydrogen requires other energy usage, such as nuclear or oil. The technology needed to store and pump hydrogen into vehicles is still primitive and not yet adopted for wide usage. But none of these obstacles is impossible to overcome. Hydrogen will transform the future of energy and ensure a more secure and reliable source of fuel for consumers, business, mass transportation, and even for space travel. Hydrogen is coming fast.

More than US$5 billion is being spent around the globe by government and industry for research and development on hydrogen– the U.S. has already launched a $1.2 billion hydrogen initiative, and auto, utility, oil, and gas companies are falling over each other to rush innovative breakthroughs to market. The largest investments are being made today at General Motors, Shell, Exxon, BP, Toyota, Ford, BMW, and Honda. More than 20 governments are directing their energy investments to hydrogen, sensing that this is the next big thing. Though significant work needs to be done, hydrogen holds the potential for fueling the future, more so than anything else.

The likelihood is that significant innovations in this energy source are coming soon. I forecast that more than US$10 billion will be needed and spent on hydrogen research over the net 10 to 10 years worldwide. This will lead to a mass-market set of innovations, similar to the innovations that first launched the modern auto, train, and shipping industries. By 2035, or even sooner, hydrogen will be a viable alternative to oil and gas, meeting as much as 35% of our energy needs.

We are at the beginning of the hydrogen economy now. Get ready. It will change everything at a rapid pace never seen before in human history.
Top Future Benefits of Hydrogen

• Reliable Source. Increased access to a reliable source of energy makes hydrogen worth working toward.
• Flexigble. Hydrogen can fuel personal and public transportation, and numerous energy-dependent devices, engines, and needs.
• Self-Reliant. Not having to count on foreign monopolies and the geopolitics of oil is worth the investment.
• Environmentally Friendly. Hydrogen produces water as exhaust, though oil is still necessary to produce hydrogen fuel.
• Hydrogen Works Today. We know hydrogen can provide power today– it is just too costly and is not ready for mass transportation use.
• Unlimited Access. Hydrogen could be an unlimited power source.
• Ultimately Inexpensive and Cost-Effective. If the Iraq war costs the U.S. between $500 billion and $1 trillion, and if the U.S. were to invest half that in hydrogen, the U.S. would see dramatic breakthroughs in energy– fast.

Nanotechnology for Energy… to be continued

Several years ago, a former Saudi oil minister issued what has since become an oft-quoted prophecy: “The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.” It was a lament, an acknowledgment that a day of reckoning was coming that would change the global balance of wealth and power. A fluke of geology had made the vast emptiness of the Saudi desert the number one source of the most important commodity on earth. But the good times would not, and could not, last forever, and he knew it.

Top 10 Extreme Energy Trends

1. We are running out of energy. New global demands from every nation will outpace supply within twenty-five years unless plentiful new sources are found. Less energy will be a drag on GDP.
2. Democracy is at risk. Energy terrorism will become a future weapon threatening democratic reforms, the rights of the individual, global peace, and security.
3. Energy, being linked to all vital services such as health, food, transportation, and commerce, will be a key driver of the future global economy.
4. The world’s addiction to oil must end. Clean, renewable energy sources such as solar, hydrogen, nuclear fusion, and wind will be essential for future prosperity.
5. Foreign oil is politically risky, expensive, and unreliable as a long-term fuel for the future.
6. New energy innovations must attract billions in investment. Economic growth and productivity will decline if non-oil energy solutions are not invented fast.
7. Pollution from fossil fuels will be lined to a growing number of future public health risks like global warming.
8. Energy security will become an explosive battleground in the 21st century, ushering in a new era of either global cooperation or conflict.
9. Nations will rise and fall based on their access to future energy resources. New economies like China and India will compete with the U.S. and Europe in a new geopolitical power struggle.
10. New energy innovations will invigorate global commerce, spawn new industries, and provide new jobs.   

The Myth of Aboundance

Most people in the U.S. (and Singapore) are oblivious to our extreme dependence on energy. We expect energy to be there always, everywhere, for every need we have now or in the future. We live an illusion of sorts, perpetuated by the aboundance of the moment, far from the reality of the future I am here to predict. Storms of change are brewing, driven by an energy-competitive and energy-restrictive future. Our cheap oil habit and energy dependence, which is so fundamentally linked to everyday existence, is about to end. Unless, that is, there are fundamental changes in energy supply. Even President George Bush admitted, “We are addicted to oil.”

First, some perspective. The United States imports about 12 million barrels of oil a day, or about 60% of the oil it consumes. In 1970, dependence on imported oil was just 21.5% of U.S. consumption, according to the U.S. Department of Energy. The U.S. is the world’s #1 oil consumer, using more than 26% of the world’s oil (Japan and China, the next two leading consumers, together account for 13%). Roughly 11% of global oil production is devoted purely to providing gasoline for cars and trucks on American soil. America spends more than US$25 billion a year on Persian Gulf oil. At the same time, the U.S. possesses only about 3% of proven reserves (opening the Arctic National Wildlife Refuge to drilling would increase that by just 1%). Already, you can see just how close the ties are between oil– especially foreign oil– and what we consider the American way of life.

Looking ahead, world oil consumption is likely to rise by 50% by 2020, and the U.S. is projected to play a leading role in that anticipated increase. If you consider the needs of fast-growing, oil-hungry countries like China and India, as well as the other emerging developing in Asia and Latin America, what you have is an unsustainable energy world. China alone is expected to quadruple its oil demands by 2020. Now try adding three billion more people to the planet in the next 50 years. Oh, and did I mention that new global oil discoveries peaked several decades ago?
The Future of Energy

A variety of energy sources are emerging now that will offer productive choices in the future. Some of these sources have the potential to be significant in becoming viable alternatives to petro-based energy. First, though, it is useful to forecast the preferred ingredients that would drive these trends. The following is a list of 6 requirements for future energy sources that would make a difference in weaning us off the oil habit and enabling a more sustainable global world. New energy sources must be

• Aboundant
• Reliable
• Renewable
• Clean
• Affordable
• Secure 

 Depending on whom you speak with, there are any number of potential sources that might satisfy all those requirements. I’ll touch on several, but based on my forecasts, the two that offer the most promist, and therefore deserve the most immediate attention, are hydrogen and nanotech.

To be continued…

Order of Preference John Mary Bill
1st…………………………… X ………… Z ……… Y
2nd………………………….. Y ………… X ……… Z
3rd…………………………… Z ………… Y ……… X

Each individual can order his or her choices: first, second, third. John, for example, prefers X to Y and prefers Y to Z; hence as an individual he logically must prefer X to Z. Likewise, Mary prefers Z to X and X to Y; so she prefers Z to Y. But the preferences of the group are not so accommodating. The reader can verify that John and Mary– a majority– prefer X to Y, so that the group as a whole prefers X to Y. A majority (John and Bill) also prefer Y to Z. But nevertheless the group prefers Z to X, because Bill and Mary prefer Z to X. It is not always possible to rank group preferences, even when individual preferences can be ranked.

This is a critical aspect of group logic for investors to understand. The activity of a stock market on a given day, quarter or year is the aggregate of the activity of the individual investors who participate in the excitement– however, the resulting moves in the market indexes is almost certainly not a reflection of the fortunes of all the individual investors, and perhaps not even the majority. The rapid rise in price of a popular ‘hot’ stock is not likely to the reflection of the opinions of the majority of market participants– and could reflect the buying action of just a handful of institutional money managers among millions of individual investors. Likewise, the fall from favor of a formerly admired business may not reflect the fundamentals of the business as assessed by the majority of investors– but could result from the heavy selling of a handful of short-sighted fund managers.

The individual parts of a larger whole simply are not one in the same. Sometimes the parts by themselves don’t even resemble the whole. One famous philosophical example is the argument that blood cannot be red. When viewed under a microscope the individual components that make up blood– white cells, red cells, and platelets– all appear a yellowish-straw color. If the parts are not red then the whole cannot be red– but by observation– blood red it is. This is called the fallacy of division– if the group is large all its members must be large too, right? Of course not. As every architect and engineer knows, thousands of triangular building blocks can be assembled into a perfectly strong and stable rectangular structure. But then, if the whole is tiny– say, an atom– then its component parts– electrons, protons and neutrons– indeed must be even tinier. Likewise, if all the parts are made of plastic then the whole must also be made of plastic. These sorts of whole/part arguments are sometimes valid, but not automatically, and should be viewed with healthy skepticism.

Consider this stock market whole/part argument:

During a protracted bull market there is a narrowing of P/E ratios due to a phenomenon commonly referred to as ‘a rising tide raises all ships’. Value investors, those who search for stocks with a PE much lower than the market average, do not thrive in a bull market as the P/E differential narrows. Therefore a value investor would much prefer a bear market environment.

The conclusion is that a value investor prefers a bear market to a bull market (as narrowing P/E ratios reduce investment appeal). The value investor would indeed suffer from scant choices if all stocks converged on a single high P/E ratio, but perhaps a great deal of narrowing could occur before that point is reached, with a great amount of profit realized along the way. No value investor wants the entire differential of P/Es to disappear, but it does not necessarily logically follow that they want no part of that difference eliminated– after all it is just this eventual narrowing that supports their investment philosophy– that stocks acquired at low P/E, if they are indeed good businesses that are simply out of favor or ignored temporarily, will one day move back toward their true intrinsic business value (i.e., rise to a higher P/E). Moving from a large P/E differential between ‘low P/E stocks’ and ‘high P/E stocks’ to complete P/E ubiquity is what mathematicians call the ‘limit of the change’. But differentials can continue to narrow for some time without equality resulting. As Patrick Shaw points out: “Cutting down on food cannot be a continuing process unless it leads to death from starvation; nevertheless, my present consumption of calories might still be too high.”

One final example from the field of economics– if one farmer increases his output he can expect to make more money. But if every farmer increases his output then it does not logically follow all of them will see rising incomes. Because of supply and demand dynamics, if a small single farmer manages to increase his output he can easily sell his extra crops into the market without upsetting prices. When all farmers suddenly increase their crop output the market will be flooded with supply, probably well in excess of demand, and prices will begin to plummet– perhaps more than wiping out the benefit of excess production for all farmers. In this case, each individual farmer hopes to have not just better absolute performance (increase crop output), but better relative performance (increased crop output relative to all other farmers).

This does not hold true in all fields. A mutual fund investor, for example, takes little solace from watching his investments fall by a smaller amount than other mutual funds– he has still lost money as the fund manager brags about good relative performance. Several years of this sort of good relative performance may wipe out his retirement savings. He cares more about absolute performance of his investment portfolio– as does every investor during a down (bear) market. Ironically, during a rising (bull) market, investors are less satisfied with an absolute return that lags behind the overall market rise– suddenly changing their emphasis to measuring positive returns relative to the market index.

This article is extracted from the WallStraits publication, The Philosophical Investor, 2005.

Logic arguments can move from these simple ‘if, then, therefore’ formats to more complex three or more interconnected statements. Consider this longer argument:

If interest rates fall below 5% Joe will invest in a portfolio of stocks instead of bonds. If Joe invests in stocks then he will expect a total return over five years of at least 11% to compensate for the excess risk compared to bonds. Therefore if interest rates drop below 5% Joe will expect his portfolio to achieve total returns of 11%.  

 The premises of this argument can be disputed, but if they are accepted then the conclusion must logically be accepted. The form of argument is valid and obvious, and simply uses a longer chain of reasoning than the earlier arguments, and there is no reason why the reason chain cannot be extended indefinitely. Consider this lenghty logic argument by a fundamental investor:

If a disciplined investor only purchases good businesses at times when the market prices them below their intrinsic value then this investor can outperform the market index over time. If a good business generates consistently high cash flow from operations then it may not need to borrow money to fund further growth. If a business has borrowings less than a single year’s net earnings then it is not using debt to finance growth. If a business has consistently increased sales, earnings and cash flow from operations at more than 15% per year over the last decade then it may be safely assumed to continue this trend in future years. If future growth is predictable then a company can invest to establish a dominant brand that commands a premium price. If pricing power is established with a respected brand then profit margins will be high. If high profit margins allow continuous investment in new product development and brand building activities then the company will have a sustainable competitive advantage. If the company has sustainable competitive advantages it is likely to achieve a high return on shareholders’ equity (net assets). High ROE businesses would be expected to command premium prices in the market. Therefore, if high ROE businesses can be purchased at a discount to their intrinsic value the investor will eventually outperform the market.

 Some arguments present an ‘either, or’ dilemma, where two premises appear to be mutually exclusive, such as the following:

Either you invest wisely or you invest foolishly. If you invest wisely then your friends will be jealous of you. If you invest foolishly then your professional peers will lose respect for you. So either your friends will be jealous of you or your peers will disrespect you.

 Of course, there is an alternative view that is also valid, and more optimistic:

Either you invest wisely or you invest foolishly. If you invest wisely your professional peers will respect you. If you invest foolishly your friends will comfort you. So either your peers will respect you or your friends will comfort you.

 The second argument is actually a subtle rebuttal of the first argument. It is a clever restatement, which does not directly invalidate either of the premises, but brings the argument to a conclusion with much more appealing consequences. Such a rebuttal leaves the original dilemma intact. It accepts the conclusion but tries to show that there are other consequences, which must be taken into account: the consequences are less dismal than they seemed.

Another important point for making logical assessments is to understand that what is true for a group may not hold true for each individual within that group. Charles Dow founded the Dow Jones Industrial Index (DOW) in 1986– maing the index 111 years old in 2007. This does not, however, mean that every company in the DOW index today is 111 years old. In fact, the truth is that only one of Dow’s original 12-stock index companies in 1896 has even survived to be a component of the 30-stock indes in 2007– General Electric (GE).

The British philosopher John Stuart Mill proposed a similar argument a century ago that ‘because it is true of each man in a community that he desires his own happiness, therefore it is true of all that they desire the happiness of all.’ Observation, however, shows us that in any group, while individual members typically (selfishly) desire their own happiness– there is seldom universal desire for the happiness of all. A nation may benefit by fighting for precious beliefs and a desired way of life– but the brave soldiers who sacrifice their lives to preserve the rights and lifestyles of the survivors are no longer around to enjoy the furits of their sacrifice. The group, in this case, directly and greatly benefits from the ultimate sacrifice of some of its members. It is obvious, and common, for groups and individuals within the groups to experience different consequences from a single action or decision. Consider an economic policy decision by a country:

Singapore will be made richer by embracing free trade agreements with larger nations, so if some Singaporeans fail to welcome the removal of tariff barriers and protected domestic markets either they fail to realize that they will benefit or they do not want to benefit.

While opening domestic businesses in the tiny city-state of Singapore to fight toe to toe with giant foreign competitors may benefit the nation as a whole in the long run, there is certainly reason to believe that many individuals and small businesses will suffer in the short term, and perhaps not survive to enjoy the longer term benefits of the nation. Inferences from group to individuals and conversely from individuals to group are not valid. Sometimes the individual talents of group members meld together to create a powerful synergistic group experience that exceeds what individual members could accomplish on their own, such as the London Philharmonic Orchestra. Other times talented members suffer under the weight of group dynamics, such as 100,000 talented drivers jammed into a Bangkok highway at rush hour, or Warren Buffett joining an investment club where stock selections are made by democratic majority-win voting.

Often all members of a group are assumed to possess the attributes of the majority of the group, which is also a dangerous and false conclusion. Because America is a rich country does not mean that all Americans are rich. Because George W. Bush won the 2000 national presidential election does not mean that all Americans voted for Bush (indeed, not even a majority did). Because the stock market (index) rose today does not mean all stocks rose today (not even that all index stocks rose today). The attribute attached to a group is never likely to refelct the attributes of all the individuals making up the group, and sometimes only describes the attributes of a particular influential minority of group members. If we say that the residents of the state of California have voted Arnold Schwartzeneggar, the Terminator, to the office of Governor, the truth may be that less than half of the millions of voters in California actually voted for Arnie (and a good many apathetically abstained from voting at all), but with a dozen candidates to choose from he was able to carry the election with a minority number of votes from the group.

 Similarly, when a TV financial journalist states that, “stocks fell today on profit taking”– they may be describing the result of actions by a small minority of investors, but that minority controlled a great deal of institutional money, thus their selling of only a few large company stocks that day forced the overall market index lower. Whether they were selling for a profit or a loss is a blind guess by the journalist– a mindless market cliche. A given individual investor may not have sold any stocks that day– and may well have seen a rise in the value of their portfolio.

There are some important lessons for investors here… to be continued…
This article is extracted from the WallStraits publication, The Philosophical Investor, 2005.

If Golden Delicious are pears then they are fruits. Golden Delicious are not pears. Therefore they are not fruits.

Or,

If stock XYZ has a high PE ratio (>25) then it is a growth stock. Stock XYZ does not have a high PE ratio. Therefore stock XYZ is not a growth stock. 

 In the first example, the first premise is true– if Golden Delicious were pears they would certainly be fruits. The second premise is also true– Golden Delicious are apples, not pears. However, the conclusion is flawed. In the second example, again, the premises are true, but the conclusion is false– and if we get from true premises to a false conclusion then the argument is obviously not valid, and certainly very dangerous.

The solution comes back to our ‘If and ONLY if’ test for the first premises. If and ONLY if Golden Delicious are pears then they are fruit. No, not true on an exclusive basis– because if Golden Delivious are cherries, grapes or kiwi they will also be fruit. Likewise, if and ONLY if stock XYZ has a high PE (price to earnings ratio >25) is it a growth stock. No, a growth stock could certainly be temporarily out of favor and fall in value to a PE ratio below 25. Whenever an argument begins with a premise that fails the ‘if and only if’ test, it opens the door to multiple alternative premises and is very likely to invalidate the eventual conclusion.

Sometimes arguments are presented as ‘either, or’ statements, which appear to exhaust all other possible premises when it is not actually the case. Consider these arguments:

Either Hitler wanted peace or he wanted war. Hitler certainly didn’t want peace. Therefore he wanted war.

Or,

Either stock XYZ is a growth stock or it is a value stock. It is certainly not a value stock. Therefore it is a growth stock.

 Technically, these are valid arguments, but less than convincing proofs. The arguments present premises that at first glance appear to cover every possibility– exhause the alternatives with an ‘either, or’ positioning– but they don’t really do so. It may be that Hitler was completely indifferent between war and peace; that he neither wanted peace nor watned war. He may have wanted something else, the aggrandizement of Germany or to exterminate racial groups he deemed inferior. He may have been confident he would achieve this end, whether by peace (slowly developing diplomacy) or war (prolonging inevitable defeat), and quite unconcerned which method he used, as long as it afforded him enough time to accomplish his other objectives. There is a difference between being willing to resort to war if needs be and wanting war.

Likewise, if stock XYZ is a growth stock it doesn’t necessarily eliminate the possibility of it simultaneously being a value stock– or, depending on market conditions, the same stock may oscillate between ‘growth’ and ‘value’ labels as deemed appropriate by various analysts and investor perceptions of the terms. Warren Buffett, considered by most a fundamental value investor, made a very bold investment in The Coca-Cola Company in 1988. Most would consider Coca-Cola a ‘growth’ stock given its long track record of growing revenue and earnings and its PE ratio consistently higher than the market average. However, Buffett commented, “Our goal is to find an outstanding business at a sensible price, not a mediocre business at a bargain price… Growth is always a component of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.” Buffett continues (paraphrasing Benjamin Graham),

“In addition, we think the very term ‘value investing’ is redundant. What is ‘investing’ if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value– in the hope that it can soon be sold for a still-higher price– should be labeled speculation (which is neither illegal, immoral nor– in our view– financially fattening). Whether appropriate or not, the, the term ‘value investing’ is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics– a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield– are in no way inconsistent with a ‘value’ purchase. Similarly, business growth, per se, tells us little about value. It’s true that growth often has a posotive impact on value, sometimes one of spectacular proportions. But such an effect is far from certain. For example, investors have regularly poured money into the domestic airline business to finance profitless (or worse) growth. For these investors, it would have been far better if Orville had failed to get off the ground at Kitty Hawk: The more the industry has grown, the worse the disaster for owners. Growth benefits investors only when the business in point can invest at incremental returns that are enticing– in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts investors.”    

Consider the logic of the Darwinian natural selection and Creationism arguments, simplified as follows:

Either the order in nature is the result of an intelligent plan or it is the outcome of pure chance. It does not result purely from chance. Therefore it is the result of an intelligent plan.  

 As with the ‘value/growth’ or the ‘war/peace’ arguments, this statement positions the wonders of nature as an ‘either/or’ result of an intelligent plan (and infers the existence of an all-knowing planner– or, God). The argument is formally valid. If the premises are true then so is the conclusion. Are the premises true? The first premise takes for granted that there is order in nature. From Aristotle on, every philosopher has marveled at the order, or non-randomness of nature– as though some invisible hand guided it toward some unknown ultimate design and purpose. There are just too many perfectly designed plants and creatures built to survive and thrive in their particular environments to accept a randomness theory. During the 20th century, scientific advances in many fields, including geology, paleontology, physics, molecular biology, anatomy, and even behavioral finance and psycyhology have continued to pile up evidence of innate order and purposeful design in nature. Few would dispute the first premise in this argument.

If it is not chance, then, is the order and precision of design observable in nature the outcome of an intelligent plan (attributed to an omnipotent God)? This supernatural argument would only be valid if it exhausts all other alternatives– such as natural causes. Indeed, the ‘God’ conclusion appears to be a lazy explanation that insists on no further investigation of possible alternatives. Charles Darwin finally explained the existence of creatures and plants precisely suited to their environments in his theory of evolution by natural selection. The far more complex explanation to the order and design of nature is accounted for partly by chance– random genetic mutations of an unpredictable manner– and partly by natural causes, since animals which are lucky enough to receive mutations that make them better adapted to their environment will be more likely to survive and produce offspring (passing on those fine, however random, traits).

The complex order in nature can be explained scientifically– although the explanation took a bit more observation and thought than simply attributing it to ‘God’ and calling it a day. Indeed, it was another century of careful consideration that eventually proved Darwin’s alternative hypothesis along the thread of discovery from Mendel’s inheritance of sweet pea traits to Watson & Crick’s deciphering of the structure and function of double-helical DNA before it was universally accepted as the most plausible theory.

Logic arguments can move from simple to complex… to be continued…
This article is extracted from the WallStraits publication, The Philosophical Investor, 2005.