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Bill Konrad 1930-2011

May father died on December 7th, and I just published his obituary on Forbes: As a life-long investor and IT CEO, I think it would have pleased him to have it published there.

Interviewing his friends and family in the process of writing it was a great help in coming to terms with losing him, as was this shorter poem I read at his memorial ceremony:

Dad could be a little prickly and hard to know at times,
just like the cacti you see around you here,
at his favorite spot,
overlooking the Pacific ocean.

I believe he loved them because he saw a parallel between them and himself.
That parallel was not the unexpected beauty of their blooms,
a trait he never would have admitted to in himself…
But I think that was just his needles talking.

Instead, I think he valued their ability to thrive in adverse conditions.
Above all, he loved to watch them grow,
To see what unique forms they would take on.

Just recently he told me that, when he was young, he was somewhat sickly.
Against the odds, he did thrive.

Dad was a risk-taker, but not a gambler.
He did everything he could to stack the odds in his favor.
With his health, he exercised religiously, and kept careful track of everything he could,
from his pulse rate to the most recent medical research.

In the stock market, he would place big bets on individual companies,
but only when he knew everything he could about those companies.
He made his first million before he was thirty because he saw the emergence of of a new electronics industry long before most other investors.

His diligence continued to pay off even when he was 70,
When he won his age division in the Big Sur marathon.

Dad was a great role model.
He set goals for himself, and he succeeded at them.
One of his goals and successes was to be a great father.

I love you, Dad.

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A Greener Way to Shorten

I’ve been using as a url shortened for a couple years now, and never stopped to wonder which country is “.ly”. It turns out it’s Libya. As in a Libyan firm whose chairman is Col. al-Qaddafi’s eldest son, Mohammed al-Qaddafi, not the rebels.

Sure I could just switch to one of several even shorter url shorteners, like… except tha one seems to be down. Maybe… at least they can keep a website up.

The same people who brought you JouleBug (of which I’m a fan, although I still don’t have a FaceBook account; I already spend too much time online as it is) have another option: I like a shortener that’s targeted at greens. And, since not many people are using it yet (they just launched), I now have a few short versions that make sense for my own websites:

I guess I’m a cybersquatter.

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My Microwave, GE, and a Failure of EcoMagination

I’ve long been a fan of General Electric’s (GE) Ecomagination initiative.  I believe that CEO Jeff Immelt believe that more efficient and renewable energy products will be strong growth industries for years to come.  I quoted him in early 2007, “Renewable energy, energy efficiency, environmental technology – we’re going to own it."

But being green goes much deeper than selling Renewable Energy and Energy Efficiency products.  It’s also about product lifecycle.  A truly green company makes sure that the lifecycle of their products will have low impact on a Cradle to Cradle basis.

That’s where my microwave comes in.  I bought it a year and a half ago, and it started losing power at the oddest moments, and then coming back on unpredictably.  It seems to me the most likely problem is loose power connection, which should be simple to repair.  GE provides only a 1 year warranty, but I hate to recycle something so new that it looks like I just got it off the shelf of the store, so I looked for a place I could drop it off to get it repaired.

GE doesn’t do drop offs after the warranty date.  Instead, they want to send a service technician out, at a cost of $70 for the house call, plus parts and labor.  In other words, I’m practically guaranteed to have to spend more than the microwave cost new to get it repaired.  

If it had been during the warranty period (1 year), I could have dropped it off where I bought it.  Why can’t I do that after the warranty period, if I pay for the repair?

In sum, I see some easy improvements that GE could make to become greener with their appliances, not just their wind turbines and locomotives:

  1. Stop building appliances so cheaply that they fall apart so quickly.  This is the subject of an excellent book I finished recently, Cheap: The High Cost of Discount Culture, which is worth a read.
  2. Extend the warranty to a reasonable length (say 5 years) and advertise it heavily.  After all, if the appliance were built right, warranty service would not be expensive to implement.  Am I the only one who hates to have to recycle (or worse, throw away) an appliance after 18 months?  I doubt it.
  3. Better yet, institute cradle to cradle practices, taking the appliance back at the end of its life.

In April, GE announced that they had started an initiative for lifecycle assessment of their products.  It’s awfully nice that they’re doing a study, but I really don’t need a study to tell me that not giving me the option to drop off my microwave for repair when it’s 18 months new is not helping its lifecycle environmental impact.

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Managing the Peak Fossil Fuel Transition 


by Tom Konrad, Ph.D.

Current renewable energy technologies must be adopted in conjunction with aggressive Smart Growth and Efficiency if we hope to continue our current standard of living and complex society with diminished reliance on fossil fuels. These strategies have the additional advantage that they can work without large technological breakthroughs. 

Energy Return on Investment

Energy keeps our economy running.  Energy is also what we use to obtain more energy.  The more energy we use to obtain more energy, the less we have for the rest of the economy.  

The concept of Energy Return on Investment (EROI), alternatively called Energy Return on Energy Invested (EROEI) has been widely used to quantify this concept.  The following chart, from a SciAm paper, shows the EROI of various sources of energy, with the tan section of the bar representing the range of EROIs depending on the source and the technology used.  I’ve seen many other estimates of EROI, and this one seems to be on the optimistic (high EROI) end for most renewable energy sources.

The general trend is clear: the energy of the future will have lower EROI than the energy of the past.  Low carbon fuels such as natural gas, nuclear, photovoltaics, wind, and biofuels have low EROI compared to high-carbon fuels such as coal and (formerly) oil.   

The graph also clearly shows the decline in the EROI over time for oil.  Other fossil fuels, such as coal and natural gas, also will have declining EROI over time.  This happens because we always exploit the easiest resources first.  The biggest coal deposits that are nearest to the surface and nearest to customers will be the first ones we mine. When those are depleted, we move on to the less easy to exploit deposits.  The decline will not be linear, and new technology can also bring temporary improvements in EROI, but new technology cannot change the fact that we’ve already exploited all the easiest to get deposits, and new sources and technologies for extracting fossil fuels often fail to live up to the hype.

While there is room for improvement in renewable energy technologies, the fact remains that fossil fuels allow us to exploit the energy of millions of years of stored sunlight at once.  All renewable energy (solar, wind, biomass, geothermal) involves extracting a current energy flux (sunlight, wind, plant growth, or heat from the earth) as it arrives.  In essence, fossil fuels are all biofuels, but biofuels from plants that grew and harvested sunlight over millions of years.  I don’t think that technological improvements can make up for the inherent EROI advantage of the many-millions-to-one time compression conveys to fossil fuels.

Hence, going forward, we are going to have to power our society with a combination of renewable energy and fossil fuels that have EROI no better than the approximately 30:1 potentially available from firewood and wind.  Since neither of these two fuels can come close to powering our entire society (firewood because of limited supply, and wind because of its inherent variability.) Also, storable fuels such as natural gas, oil, and biofuels all have either declining EROI below 20 or extremely low EROI to begin with (biofuels). Energy storage is needed to match electricity supply with variable demand, and to power transportation. 

Neither hydrogen nor batteries will replace the current storable fuels without a further penalty to EROI.  Whenever you store electricity, a certain percentage of the energy will be lost.  The percent that remains is called the round-trip efficiency of the technology, shown on the vertical axis of the graph below, taken from my earlier comparison of electricity storage technologies. (Click to enlarge.)

Storage Technology Comparison

Round trip efficiency (RTE) for energy storage technologies is equivalent to EROI for fuels: it is the ratio of the energy you put in to the energy you get out.  You can see from the chart, most battery technologies cluster around a 75% RTE.   Hence, if you store electricity from an EROI 20 source in a battery to drive your electric vehicle, the electricity that actually comes out of the battery will only have an EROI of 20 times the RTE of the battery, or 15.  Furthermore, since batteries decay over time, some of the energy used
to create the battery should also be included in the EROI calculation, leading to an overall EROI lower than 15.

The round trip efficiency of hydrogen, when made with electrolyzers and used in a fuel cell, is below 50%, meaning that, barring huge technological breakthroughs, any hoped-for hydrogen economy would have to run with an EROI from energy sources less than half of those shown.

Taking all of this together, I think it’s reasonable to assume that any future sustainable economy will run on energy sources with a combined EROI of less than 15, quite possibly much less. 

It’s Worse than That: The Renewables Hump

All investors know that it matters not just how much money you get back for your investment, but how soon.  A 2x return in a couple of months is something to brag about, a 2x return over 30 years is a low-yield bond investment, and probably hasn’t even kept up with inflation.

The same is true for EROI, and means that users of EROI who are trying to compare future sources of energy with historic ones are probably taking an overly-optimistic view.  For fossil fuels, the time we have to wait between when we invest the energy and when we get the energy back in a form useful to society is fairly short.  For instance, most of the energy that goes into mining coal comes in the digging process, perhaps removing
a mountaintop and dumping the fill
, followed by the actual digging of the coal and shipping it to a coal plant.  Massey Energy’s 2008 Annual Report [pdf] states that "In 2008… we were able to open 19 new mines, and ten new sections at existing underground mines."  This hectic rate of expansion leads me to believe that the time to open a new mine or mine section is at most 2 years, and the energy cycle will be even quicker at existing mines, when the full cycle between when the coal is mined and when it is burnt to produce electricity requires only the mining itself, transport to a coal plant, and perhaps a short period of storage
at the plant.  Most coal plants only keep a week or two supply of coal on hand.

In contrast, Nuclear and Renewable energy (with the exception of biofuels and biomass) present an entirely different picture.  A wind farm can take less than a year to construct, it will take the full farm life of 20 years to produce the 10 to 30 EROI shown in the graph.  Solar Photovoltaic’s apparent EROI of around 9 looks worse when you consider that a solar panel has a 30 year lifetime.  Only a little of the energy in for Nuclear power comes in the form of Nuclear fuel over the life of the plant: most is embodied in the plant itself.   

Jeff Vail has been exploring this concept on his blog and the Oil Drum.  He refers to the problem of the front-loading of energy investment for renewable energy as the Renewables Hump.  He’s also much more pessimistic than the above chart about the actual EROI of most renewables, and found this chart from The Economist which illustrates the up-front nature of the investment in Nuclear and Wind: 

In terms of EROI timing, those technologies for which the cost of generation includes more fuel have an advantage, because the energy used to produce the fuel does not have to be expended when the plant is built.

In a steady state of technological mix, EROI is the most important number, because you will always be making new investments in energy as old investments outlive their useful lives and are decommissioned.  However, in a period of transition, such as the one we are entering, we need a quick return on our energy investments in order to maintain our society.  Put another way, Jeff Vail’s "Renewables Hump" is analogous to a cash-flow problem.  We have to have energy to invest it; we can’t simply charge it to our energy credit
card and repay it later.  That means, if we’re going to keep the non-energy economy going while we make the transition, we can’t put too much energy today into the long-lived energy investments we’ll use tomorrow.

To give a clearer picture of how timing of energy flows interacts with EROI, I will borrow the concept of Internal
Rate of Return (IRR)
from finance.  This concept is covered in any introductory finance course, and is specifically designed to be used to provide a single value which can be used to compare two different investments with radically different cash flow timing by assigning each a rate of return which could produce those cash flows if the money invested were compounded continuously.

Except in special circumstances involving complex or radically different size cash flows, an investor will prefer an investment with a higher IRR.

Energy Internal Rate of Return (EIRR)

I first suggested that IRR be adapted to EROI analysis by substituting energy flows for investment flows in early 2007.  I called the concept Energy
Internal Rate of Return, or EIRR
.  Since no one else has picked up the concept in the meantime, I’ve decided to do some of the basic analysis myself.

To convert an EROI into an EIRR, we need to
know the lifetime of the installation, and what percentage of the energy cost is fuel compared to the percentage of the energy embodied in the plant.  The following chart shows my preliminary calculations for EIRR, along with the plant lifetimes I used, and the EROI shows as the size of each bubble.


The most valuable energy resources are those with large bubbles (High EROI) at the top of the chart (High EIRR.)  Because of the low EIRR of Photovoltaic, Nuclear, and Hydropower, emphasizing these technologies in the early stage of the transition away from fossil fuels is much more likely to lead to a Renewables Hump scenario in which we don’t have enough surplus energy to both make the transition without massive disruption to the rest of the economy.

How to Avoid a "Renewables Hump"

Note that the three fossil fuels (oil, gas, and coal) all have high EIRRs.  As we transition to lower carbon fuels, we will want to keep as many high EIRR fuels in our portfolio as possible. 

The chart shows two renewables with EIRRs comparable to those of fossil fuels: Wood cofiring, and Wind.  Wood cofiring, or modifying existing coal plants to burn up to 10% wood chips instead of coal was found to be one of the most economic ways of producing clean energy in the California RETI study. The scope for incorporating biomass cofiring is fairly limited, however, since it requires an existing coal plant (not all of which are suitable) as well as a local supply of wood chips.  Some coal plants may also be converted entirely to wood, but only in regions with plentiful supplies of wood and for relatively small plants.  The EIRR for this should fall somewhere between Wood cofiring and Wood Biomass, which is intended to represent the cost of new wood to electricity plants.

Natural Gas

To avoid a Renewables Hump, we will need to emphasize high-EIRR technologies during the transition period.  If domestic natural gas turns out to be as abundant as the industry claims (there are serious doubts about shale gas abundance,) then natural gas is an ideal transition fuel.  The high EIRR of natural gas fired generation arises mostly because,
as shown in the chart "it’s a gas" most of the cost (and, I assume energy investment) in natural gas generation is in the form of fuel.  Natural gas generation also has the advantage of being dispatchable with generally quick ramp-up times.  This makes it a natural complement to the variability of solar and wind.

However, I think it is unlikely that we’ll have enough domestic natural gas to both (1) rely much more heavily on it in electricity generation and (2) convert much of our transportation fleet to natural gas, as suggested by T Boone Pickens.  We’re going to need more high-EIRR technologies to manage the transition.  Fortunately, such technologies exist: the more
efficient use of energy.  

Energy Efficiency and Smart Growth

I have been unable to find studies of the EROI of various efficiency
technologies.  For instance, how much energy is embodied in insulation, and how does that compare to the energy saved?  We can save transportation fuel with Smart Growth strategies such as living in more densely populated areas that are closer to where we work, and investing in mass transit infrastructure. 
The embodied energy of mass transit can be quite high in the case of light rail, or it can be very low in the case of better scheduling and incentives for ride sharing.

Many efficiency and smart growth technologies and methods are likely to have much
higher EIRRs than fossil fuels.  We can see this because, while the
embodied energy has not been well studied, the financial returns have. 
Typical investments in energy efficiency in utility run DSM programs cost
between $0.01 and $0.03 cents per kWh saved, much less than the cost of new fossil-fired generation.  This implies a higher EIRR for energy efficiency, because part of the cost of any energy efficiency measure will be the cost of the embodied energy, while all of the savings are in the form or energy.   This relationship implies that higher IRR technologies will generally have higher EIRRs as well.  

Smart growth strategies also often show extremely high financial returns, because they reduce the need for expensive cars, roads, parking, and even accidents [pdf.]

Conclusion: Brian or Brawn

The Renewables Hump des not have to be the massive problem it seems when we only look at supply-side energy technologies.  By looking at demand side solutions, such as energy efficiency, conservation, smart growth, and transit solutions, we need not run into a situation where the energy we have to invest in transitioning from finite and dirty fossil fuels to limitless and clean renewable energy overwhelms our current supplies.  

Efficiency and Smart Growth are "Brain" technologies, as opposed to the "Brawn" of traditional and new energy sources.  As such, their application requires long-term planning and thought.  Cheap energy has led to a culture where we prefer to solve problems by simply applying more brawn.  As our fossil fuel brawn fades away, we will have to rely on our brains once again if we hope to maintain anything like our current level of economic activity.

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The Green 50

Inc. Magazine  just did a series of profiles of businesses working to solve our environmental problems.  There’s not much here for investors… almost all of the companies profiled are private.  (Interface, Inc. being one notable exception), but it always give me hope to see all the people out there working to solve the immense problems we face… it’s nice to remind ourselves that we are not alone; we’re all doing out part in our own way.

 Thanks to Nancy LaPlaca for sending me this.

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Want to be Rich? Grow up First.

  Here’s a great article in the New York Times about people who got rich and then managed to lose it all.  It includes parts of an interview with George Foreman, who came very close to losing it all, but managed to rescue himself from the brink of financial disaster.  He says:

“A lot of people just don’t grow up,” he says. “I mean, 65-year-old men. They just don’t grow up. They don’t understand that money does not grow on a tree and that you’ve got to respect every dollar. Like Rip Van Winkle — the guy who slept — they party, party, party, then they wake up. ‘Oh my God!’ And they do something desperate trying to recapture what they had. And it doesn’t work like that. You must stay awake.”

What does this have to do with the readers of this blog, few of whom are ever going to make millions of dollars in their jobs?  The same rules apply to the rest of us: if we don’t treat money with respect, if we approach the stock market, or life in general, like a gigantic virtual slot machine, we’ll lose everything we have.  Money does not have the power to rescue us from ourselves. 

It is possible to make money in the stock market at random, by the luck of the draw.  The problem with this is we’re not good at acknowledging that it was just dumb luck.  When we think back on our luck, we’re much more likely to think that hunch we had was our brilliant intuition or a message from a higher power. 

If there is a higher power out there giving stock tips, She has a mean sense of humor, because I don’t know of any religous figures who are making out in the market.

So we get lucky in the market, and it goes to our heads.  We look at the $10,000 we managed to turn into $20,000 with a couple lucky picks, and we start thinking that if can just have a couple repeat performances, we’ll be able to pay off our mortgage.  So we follow a few more hunches, and pretty soon we’ve got $5,000.  Easy come, easier go.

 As the stories in the article suggest, it may be even easier to lose money by simply spending it than it is to lose it in the market… and at least you had some fun along the way.  Either way, you end up broke, and, worse, you lose you confidence in yourself.

What’s my point?  If you have dreams of ever being rich, now is the best time to get ready, and learn self discipline.  Michael Jackson is a prime example of the fact that there is no amount of money an overgrown child can’t spend his way through. 

Learn self-discipline and respect for your money now, before there are millions riding on the line, and you’ll be able to keep those millions when you get there.  Self discipline is also a great help in getting there.

Don’t know where to start?  Try Suse Orman’s The Laws of Money.  In my mind, each of her five laws boils down to acting like an adult around money; respecting it, but not letting the idea of money have power over who you really are.   And she’s a lot better at persuading people than I am.

Yes, I keep recommending the same books.  If that bothers you, you can do one of three things: 1) Stop reading my blog, 2) Complain, or 3) Read them. 

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There’s Ethanol and then there’s Ethanol

In the renewable energy community, Ethanol has a bad rap, due to some often-quoted, seldom checked studies on energy payback.

It’s received wisdom that ethanol from corn has an energy return on energy invested (EROEI) of somewhere between 0.8 and 1.0; i.e. you get less out than you put in.  The persistence of this idea is possibly due to some great cartoons.  I’m probably going to undermine my whole argument here, by including this one…

Then again, I expect that my audience is highly intelligent, and not easily distracted.  If you weren’t, you probably wouldn’t still be reading my extremely dense and often-tortured prose.  You deserve a good cartoon every now and then…

Back in the world of ethanol, times have changed.

Even though cellulosic ethanol is still very much in its technological infancy, a lot of companies and people are doing a lot of interesting things with corn ethanol to make the process more efficient, and, get those energy inputs in the form of “free” waste heat from some other process, or from renewable sources such as cow manure or landfill gas.

I’ve been educating myself a lot about this reading C. Scott Miller’s Bioconversion blog.  I admit I’m having to do a lot of catch up on this, because I was one of those people who believed ethanol was a total government subsidized boondoggle until recently.

All that said, even at an EROEI of 1.25 to 1.8, ethanol is not much of an energy “source.”  Sure, we’re getting a little energy out of the process, but one way to think about EROEI is how much effort it takes to get our energy. 

As a rough illustration, at an EREOI of 2, there has to be one person working to get energy for every person doing something else.  So if civilization were to exist one out of every 2 people would have to be employed in the energy sector… the other 50% would then have the energy they needed to do other useful things, like be doctors, politicians, soldiers, engineers, builders, investment advisers, bloggers, artists, manufacturers, scientists, psychologists, food farmers (as opposed to energy farmers), talk show hosts, etc.

 You might argue that some of those professions aren’t very useful (investment advisors and politicians perhaps), but even if we eliminate all those “useless” professions, I think the more useful professions like talk show hosts and artists might start finding themselves a little squeezed.

There is a reason that the human race was 95%+ farmers or hunter gatherers for most of of our history: the energy sources we were using were not powerful enough, with too low EROEI to sustain higher forms of civilization, such as talk show hosts.

If you don’t believe me, read this great article on “Peak Wood,” the cause of the iron age.

Back to ethanol: it’s not going to solve our world energy problem.  It’s a useful way to turn non-liquid fuels (manure, biogas, or coal) into something you can put in your car, but if we in the U.S. are  looking for a domestic source of energy that will wean us off the Middle Eastern oil teat, we can do it, only if we want to be a nation of farmers, witha much smaller population and lower standard of living than we have now.

Ethanol is big business these days, and it will make a tiny dent in our oil addiction, so all the investment is probably doing some good.  I predict that the biggest beneficiaries will be the farmers, and considering how hard farming is, that’s not a bad thing.  It’s probably better than out-and-out farming subsidies.

Basically, I’m no longer worked up about ethanol subsidies and mandates.  There are a ton of better ways we could be spending the money, but it’s hardly the stupidest thing our government does with our money.   I’d even be happy about it if they’d simply replace the money spent on all farm subsidies with subsidies for farm based energy.

I just don’t want it to distract from the important work we have to do to deal with the twin probems of peak oil and global warming:

  1. Improve energy efficiency (especially of our vehicle fleet.)
  2. Develop high ERoEI energy technologies: Wind, Solar concentrating, Geothermal.  PV will probably make it on this list as the technology improves.
  3. Displace some of that oil in transport with renewable electricity, via plug-in hybrids.  (Economic fuel cells are still too far away to make hydrogen a viable transportation fuel in the next 20 years)

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Books meme

I’ve been blog-tagged by PK at Jetson Green.

My assignment, tell about the books in my life.   I’ve actually been planning on writing a book-recommendation blog for some time.

I’m currently reading:

Against the Gods: The remarkable story of Risk, by Peter L. Bernstein.  The first couple chapters were very interesting to me, because I kept on coming across names I had heard in math classes, but didn’t know a lot about.  Now I’m getting bogged down in the history of statistics, which I’m already familiar with.  I’ll probably skip ahead a few chapters…

I’ve already talked about Suroweiki’s The Wisdom of Crowds.

I think everyone who will ever get a paycheck should understand Suse Orman’s The Laws of Money.  I think of her content as Money 101.  It’s a prerequisite for getting into the financial markets.

A book I’ve been meaning to read 

I’m looking forward to reading Travis Bradford’s Solar Revolution.  I heard him speak at Solar 2006 about the silicon industry.  He seemed quite intelligent.

 Book that changed my life:

Elizabeth Moon’s Deed of Paksenarrion.  What can I say, it was the right book at the right time in my life.  Mostly, it’s a great fantasy adventure, but it helped form my ideas of what true courage is. 

Elizabeth Moon is one of the most successful graduates of the Austin, TX based Slugtribe, which I was an active participant in from 1999 to 2002 or so (Elizabeth was a member long before I showed up.  She didn’t attend Slug meetings anymore, but she was in Austin often, so now I have a signed copy of the Deed of Paksenarrion.)  I wanted to be a science fiction writer, and they helped me develop the skills.  Along the way I realized that I had wanted to write in order to have written.  My favorite part of the meetings was helping other members with their stories, and seeing them come back with better stories that incorporated my suggestions.

A book that I wish had been written:

Dead Cat Bounce, a Sci-Fi adventure of the future’s equivalent of a commodities trader (she traded orbital slots in a crowded system) in a world where a lot of people have been mentally modified to have forms of Asberger’s Syndrome and Tourette’s which make them serf labor who are either biological computers or super-warriors.)  That was the novel I was working on when I stopped writing SF.

So I’ll blog-tag Wendy Wheeler, the unofficial SlugTribe organizer, and the reason (Along with Jennifer Evans) that it has lasted almost 20 years now, Jayme Lynn Blashke, whom I’ve lost touch with, so it will be interesting to see what he has to say, and Tim, who is thinking about ways to profit from unmasking untruths in the market.

(I totally messed up this meme… going off on my own tangents.  If my tag-ees want to get it back on track, here’s a link to the original post that started it all). 

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High stakes decisions: Where to put your money, and mistakes to avoid

I’ve recently read two articles about the state of healthcare in the world today, one by speculator and libertarian Doug Casey, with a somewhat paranoid (but perhaps justified) view of the state of cancer treatment, and another in Business Week, about the lack of evidence based decision making in medicine today.  The underlying theme in both these articles is that medicine, as it is practiced today, shows a remarkable hostility in the medical establishment towards rigorous evaluation of therapeutic alternatives.


I see a parallel here between medical treatment and investment advice.  In both cases, the choice of expert is an extremely high-stakes decision: if your landscaper does a lousy job, you may have to replace a few dead shrubs.  If your doctor prescribes the wrong course of treatment, you may not wake up the next day.  An incompetent investment advisor may leave you unable to ever retire.


The extreme high stakes of these decisions can lead to us making worse decisions in the first place.  Combine that with the fact that, when it comes to expert services, it is very difficult for the customer to determine the value of what they are getting.  When we visit a doctor, we have no way to know if they are prescribing unnecessary tests or prescriptions, we only know our ongoing state of health, and as we often do not even know what the other alternatives are, we can’t compare the outcome from the particular course of treatment.


Similarly, we don’t know how good our advisor’s recommendation for portfolio allocation is until it’s too late.  He can show us fancy charts about how the portfolio has performed in different historical market conditions, but in the same breath, he’s obligated to tell us that “past performance is no guarantee of future results.”  Investing is more an art than a science, because it is impossible to perform a repeatable experiment; financial markets constantly change and adapt to new information, including to the results of past experiments.


That is not to say that superior investors do not exist, but the sad fact is that most investors and advisors truly believe themselves to be better than average.  The sad fact is, that even if everyone were honest with each other, we still wouldn’t know if we were competent investors ourselves, or if the people offering their advice were, either.  Worse, the only measuring stick we have is past results, which, I’ll repeat, are no guarantee of future returns.


It’s enough to make you throw up your hands in frustration and go home.  Which is exactly what people who advocate index investing suggest.   Indexers basically ascribe to the theory that if you don’t know if you’re buying rotten fruit, buy the fruit that you know is only lightly bruised, and pay discount prices.


I’m a great fan of discount prices, but most people do not have enough saves that they can afford to accept the slightly-below-market (because of fees) returns promised by index funds, especially since we have very little idea what those market returns might be.  Historically, stocks have returned around 10% depending on how you count, over the long haul.  However, current valuations look more like those typically seen at market peaks, and investors who buy at market peaks typically have to wait a decade or more to get their money back.  With this perspective, slightly-below market returns look much less appealing.


I feel that the biggest mistake we can make with our investments is to believe that we deserve a particular return, because that is what we need to reach our retirement goals.  This belief leads to chasing returns; moving money to a new manager/stock/fund/asset class because it has had the returns that we thought we were going to get in the manager/stock/fund/asset class we thought we were in.  This usually makes our problem worse.  Recent performance is just about the worst reason to choose an investment or manager.


What is a good reason to choose an investment or investment manager?

  • Because you are getting a good value: you should have an idea of what you are buying is worth, and be paying less than that.  This should be an absolute valuation (“apples are worth $1 a pound”), not a relative valuation (“apples cost less per pound than oranges”,) because relative valuations lead to us buying the least rotten apple on offer, when we should just keep our money in our pocket and look at the oranges.  When it comes to investment managers, most, in my opinion, are rotten apples.  If you do not have the time and patience necessary to decide if a manager is as good as he thinks he is, you’re better off indexing your investments in a low fee, no-load life cycle fund.  This is essentially what you’d be getting from most planners, and the bells and whistles some add on almost never justify the fees they charge.  As far as I’m concerned, with most financial planners, you’re essentially paying for hand-holding.  Following this logic, I first got into investing because I thought I could so better saving the 1-2% fees I would have been paying with an advisor and doing it myself.  

When should you switch investments or managers?

  • When the reasons you got in in the first place have changed.  If you chose an investment manager because you thought he had a methodology that would beat the market over the long term, if you later found out that he was picking stocks that he heard recommended on Mad Money (I actually think Jim Cramer’s a very smart guy- if a bit hyper for my taste- but even the best guru’s picks cease to be useful when too many people follow them… and Cramer’s worse than most in this regard because he makes stock picking fun… The best investments tend to be ones it’s hard to get excited about… because that means no one else is excited, either.)  On the other hand, if you chose a mutual fund because it has low fees, the time to switch is as soon as you find one with lower fees.

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The Wisdom of Crowds and Selecting an Investment Manager

The Wisdom of CrowdsI just read James Surowiecki’s The Wisdom of Crowds.   The provocative title refers to the idea that, given the right circumstances, a group of people will consistently reach decisions which are better than the decisions that the smartest people in the group would be able to reach on their own. 

As someone who considers himself an investing expert, it might be surprising that I like this book.  After all, he frequently cites examples from investing as to how bad the “experts” are.  For instance, a vast majority of mutual fund managers under-perform their benchmarks in any given year, as well as over longer periods. 

Surowiecki’s conclusion is that the crowd (in this case, the market as a whole) is smarter than most mutual fund managers, and even if there are managers who are smarter than the market (The namesake of my cat, Warren Buffett, being a prime example), the amount of effort necessary to distinguish a superior manager (if it is possible to do at all, since past performance is not a guarantee of future results) is far in excess of the possible reward.

Why are most money mangers so bad at the job they are paid to do?  Because it is more risky for them to take non-consensus positions, than it is for them to buy the same stocks everyone else is buying, even if they know those stocks to be overvalued.

Surowiecki concludes that, while there may be superior investment managers who can consistently outperform the market, the effort necessary to identify those managers is likely to be prohibitive.  After all, past performance is no guarantee of future results, and we are as likely to be fooled by randomness into choosing a manager who is lucky as we are to choose a manager who is killed.

I disagree.  I feel it is possible to identify superior managers, and Surowiecki has laid out the tools to do so, even if he does not realize he has done so.  He shows quite convincingly that stock markets can be very efficient when the participants are diverse, and reach decisions independently.   As he also shows, most money managers fail on all counts.

Markets are efficient at finding the best prices for stocks when the participants are diverse and independent.  Since that is often not the case in the stock market, there will be opportunities for individuals to outperform the market.When looking for such an individual, what are the clues?

  • Any manager whose holdings mimic the entire market (i.e. are extremely diversified) can be ruled out.  His returns will also mimic market returns, and will likely even under perform, due to fees and commissions.
  • His choices should not be random; they should be based on private information or research that is not available to (or is being ignored by) the entire market.
  • There should be some reason to believe that this private information or research gives him some true insight into the value of his investments: a portfolio of five companies chosen at random will not perform the same as the market as a whole, but there is no reason to believe it will outperform, either.

If you believe, as James Surowiecki does, that the necessary effort is prohibitive to find a manager like this, the best investment strategy would be to index, that is try to mimic the entire market’s return for the lowest possible fees. 

To me, the possible gains from above-average performance seem well worth the effort necessary to find the few superior managers. Over a period of 20 years, the difference between a 7% annual compounded return and an 8% annual compounded return is about 25%.  In other words, you would get the same effect by starting with $100,000 and earning 8% for 20 years, as you would by starting with $80,000 and earning 7% over the same period.

 The trick is not to give too much weight to past performance, but instead concentrate on the factors which might allow a manager to acheive superior performance in the future.  As an example, here is how I would go about selecting a mutual fund based on the above criteria.  The same approach would apply to a hedge fund or private account manager, except for the fact that in this case, the search for such a manager might truly be outside the ability of most individuals, since the relevant data is not readily available in a searchable form.

  1. Have a small number of positions (since these are less likely to mimic the market,) or changing emphasis on particular industries or sectors which vary significantly from market weighting.
  2. Have low turnover (private information is hard to come by, and given the effort involved, it is not likely to lead to rapidly changing strategies.)
  3. Have a methodology that emphasizes independent research, and is easy to explain.  Black box approaches based on computer models can work for a time, but the market has a tendency to make them go rapidly obsolete.  This is a large part of the reason past performance is such a bad predictor of future results.  “Fundamental” investment strategies tend to pass this test, so long as they are based on deeper research than plucking various ratios from a company’s financial statements.
  4. Look for funds that don’t fit well into any one “Style” or capitalization category.  Independent and diverse thinkers will be hard to categorize.
  5. Funds with less than $1 billion under management.  When assets under management get too high, it becomes difficult to act on what private information you have without greatly moving the market.
  6. Look for low “Beta” compared to the fund’s category. Beta is a measure of correlation with the market as a whole, and can be a proxy for diversity.
  7. Make sure that the fees you are paying are justified by the excess returns (in comparison with the risk involved) the strategy is likely to yield.

Using the Yahoo! Mutual fund screener, with the following criteria: manager tenure > 5 years; no load; expense ratio < 1%, assets < $1 billion, turnover < 30%, is a good place to start.  This yields a reasonable number of funds to sort through, and the choices can be further narrowed by ignoring the index funds, and by checking Beta under “Risk.”

Happy Hunting!

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Energy security worries – a two-edged sword

The best thing to happen to renewable energy and energy efficiency this century is without a doubt the relentless rise in all forms of energy.  Gasoline going from $1 to $3 in just a couple years, higher utility bills, and worries about terrorism have defense hawks worried about “energy security” and environmentalists together for the first time.

Having a Republican president talking about renewable energy has certainly been nice for investors in renewables, but I know I’m not the only long term clean energy advocate whom this makes more than a little nervous.

I’m happy to have Bush, et al on board and paddling, but I’m worried that they’re also grabbing for the rudder with their emphasis on energy security rather than environmental degradation and efficient use of resources.

Here are the directions the energy security types are pursuing I think are misguided:

  1. Coal.  Because of rising energy prices, and the threat of future caps on carbon emissions, utilities all over the country are rushing to build coal plants (read the excellent press release from Environment Colorado) while they still can: they justify this because coal is a domestic resource, and it is “cheaper” than other sources of electricity (this is not true, when compared to wind, but it was true so recently that most people still believe it.)  Energy efficiency measures are much cheaper than any type of new generation.
  2. Nuclear.  Energy security hawks tend to be big fans for nuclear energy.  How having more sources of plutonium and hazardous waste around that could be attacked or used by terrorists increases our security, I don’t know.  Not to mention the fact that nuclear power is quite expensive.  I can only attribute the energy security hawk’s attachment to nuclear to their love of big solutions to big problems.
  3. Ethanol.  Cellulostic Ethanol will be a wonderful thing, when it emerges from the lab and becomes a commercially viable technology, but all the subsidies for corn Ethanol do very little to improve our energy security or reduce the amount of carbon we emit.  I see them mainly as a subsidy for farmers, cloaked as a move for energy security.  I do like the push for more flex-fuel vehicles, because it only costs $150 to make a vehicle flex fuel in the factory, over the cost of the gasoline version, and when and if cellulostic technology comes of age, the vehicle fleet will be ready for it.

In short, I’m glad to have the energy security hawks on board, but I’m hoping we can get them to listen a little more carefully to those of us who have been rowing this boat all along.

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Ethanol vs. Biodiesel

A new study from the university of Minnesota comparing the lifecycle energy costs and emissions of corn ethanol to soy biodiesel is all over the press this morning. 

The results are no surprise to any of us who follow the industry: corn ethanol yields 25% more energy than it takes to produce it; while soy biodiesel yields 93% more.

The numbers for ethanol ar not new: people have been arguing about the EROEI (Energy Return on Energy Invested) for ethanol for years, and the numbers have slowly risen with improving technology from about -10% to today’s 25%.  What are new, are the EREOI numbers for soy biodiesel.  I had only heard one number for the EREOI of “biodiesel” before – and no mention of the feedstock was made, nor was I able to trace it back to a reputable source… I suspect it was a back of the envelope calculation by a biodiesel advocate.  That number was a 220% return, quoted to me twice, once by management at Blue Sun Biodiesel, and once by the person manning the booth for the International Center for Appropriate and Sustainable Technology, both of whom do good work, but who have an incentive to believe this highest number they hear.  Disclaimer: I too have an incentive to believe the highest number I hear because I have a Jeep that I use biodiesel in to minimize my carbon emissions.   Using the new numbers, my Jeep Liberty has about the same carbon footprint as my 2002 Prius, when running on B100.  On B20, which I use in the winter, the Prius still looks much better.   I’m pining for a plug-in hybrid diesel.

But I’m very happy to see reality injected into the whole biofuels debate.  Neither ethanol not biodiesel (nor both together) is going to save the US from having to import petroleum: if our entire corn and soybean output were shifted to these biofuels, that would only replace about 12% of gasoline demand, and 6% of diesel demand… are we ready to start talking about massively investing in increasing the efficiency of our vehicles yet?

One other new note in the article, which I like given my affection for biodiesel, is that soy is a much less fertiliser intensive crop than corn, and so growing it has fewer local environmental impacts. I hope these authors continue their work, and expand the study to include other feedstocks for both ethanol (sugarcane, cellulostic) and biodiesel (canola, algae, recycled oil).

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The silicon wafer industry

At Solar 2006, the annual meeting of the American Solar Energy Society there was much talk  of the shortage of polysilicon wafers, which are used to make the dominant type (crystalline) of solar Photovoltaic panels.  The other major use of polysilicon is for computer chips, which has been the dominant use until recently. 

I sat in on the following panels where the industry was discussed:

The CEO spotlight, where Goran Bye, the CEO of REC Silicon; as well as the “Market Status and Trends” panel, where several of the panelists discussed the polysilicon supply.  In particular, Hilary Flynn presented a paper by herself and Travis Bradford entitled “An assessment of global silicon production capacity and implications for the PV industry.”

According to Flynn and Bradford, the silicon wafer industry is highly consolidated, with the following major players: Hemlock, Wacker, REC Silicon, Tokuyama, MEMC Semiconductor, Mitsubishi, and Sumitomo having about 99% of the market in 2005.   Demand currently far exceeds supply, with more polysilicon being used in 2005 than was produced, with the excess being a drawdown of inventories, recycling, or an artefact of inaccuracies in the sampling method, or a combination of those factors.

From my own reading, there is much anecdotal evidence of the polysilicon supply shortage, with PV manufacturers scrambling to tie up contradts for supplies sufficient for their projected production, and even some failing to do so, with MEMC even reneging on an agreement with Evergreen Solar to supply them.

However, the silicon processing is extremely capital intensive, with long lead times, and all the major manufacturers are announcing large planned expansions to investment, and several new players are also entering the industry.  There is a long lead time between when a plant is announced, and when it come on line, so the silicon market is likely to remain out of balance, with extremely high prices and profits for silicon processers through both 2006 and 2007, assuming 30% growth in PV production.

It seems unlikely to me that PV manufacturers will be able to continue to make up the polysilicon shortfall in 2006 and 2007 from inventory (although no one seems to know what inventories are, except that they’re small, hence supply of PV growth will be constrained below 30%.

Hence I expect all polysilicon manufacturers to be very profitable through 2007, with prices beginning to subside (and perhaps crash) in 2008-9.  A crash of polysilicon prices would be facilitated by overbuilding of producers, combined with less than anticipated demand from PV manufacturers.  This might be aggravated if one of the other PV technologies (CIGS, CdTe, or Amorphous silicon) were to grab market share from crystaline silicon due to price breaktroughs and constraint in the supply for polysilicon.  Both CIGS and CdTe have the potential to be cost competitive with crystalline silicon (“PV value chain supply and demand challenges” Booz Allen Hamilton, presented at the conference), but will probably be constrained by the limited supply of Indium (CIGS) and Tellurium (CdTe) both of which are very rare.  As an aside, this might produce a large opportunity for investment in mining companies with large proven reserves of Tellurium or Indium– if one of these technolgies make much more rapid strides than crystalline PV.

There are two technologies in use by polysilicon manufacturers.  The most common is the Siemens process on which the majority of production facilities are based.  This process is extremely energy intensive, about 10x more so than the other technology, fluidized bed, which is currently used by MEMC and REC Silicon plans to use in it’s new capacity.  Most other manufacturers seem to be sticking with the Siemens process, most likely due to patent issues.  For this reason, my favorite silicon manufacturer is MEMC, since their less expensive process is likely to make them better able to weather a crash in the price of processed silicon in 2008 or 2009.  In the next year or two, I think most players in the industry will probably continue to benefit in terms of profits, although much of this may already be reflected in their stock prices.

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Look where few others are looking

In order to come up with investments that will out-perform the market, an analyst must do two things:

1. Have an opinion that differs from the market consensus.

2. Be correct in that opinion.

 This probably seems absolutely obvious when I put it on the page in front of you, but when it comes to investing, few people follow these tenets.  First of all, by definition, most people *can’t* have a nonconsensus opinion; if they did, then that opinion would be consensus.  It’s a catch-22.

 Also, it is simply emotionally difficult for most people to hold an option that differs from their friends and family.  As my mom once said, “Everyone likes to be validated.”

 It may be great for your social life to agree with the people around you, but it’s a lousy way to invest.  Here’s why: when most market participants think that a particular stock or sector is a good buy, then a lot of them have already bought and are waiting for it to go up.  There aren’t many people left to buy.  When the stock or sector becomes less popular, the same people will start to sell, and it will decline.

 To produce above average returns, you have to buy before everyone else has, and sell before they do.  This means buying something when it still can become more popular, and selling while most market participants are still excited about it.

 How can we do that?  By developing an understanding of consensus opinion (the popular press is great for this), and figuring out where they are wrong (which can be accomplished by paying attention to sources of information outside the popular press (when was the last time you read a cutting-edge academic paper) or by putting together lots of different pieces of information that others have yet put together.

It’s not enough to simply hold an unpopular opinion.  Unpopular and wrong can lose you a lot of money as well.  For instance, if a little birdie told me that the whole mess in Iraq would resolve itself tomorrow, I’d probably sell the stock of a bunch of defense companies.  If instead the mess over there gets worse (which is pretty close to consensus opinion in my circles,) and the Pentagon puts in more orders for munitions, all those stocks I just sold would go up, and the person who sold those stocks expecting a spontaneous outbreak of peace wouldn’t be a very happy investor.

 When considering investing in the Energy sector, the first question to ask is, is the market over- or underestimating future energy prices?  If you think the market (by which I mean the consensus of opinion of market participants) is overestimating, then you should sell or stay out, if you think the market is underestimating, then it’s time to increase your energy allocation.

What do I think?  In the long term (a decade or two) I’d say the market is underestimating, but in the short term, it’s probably overestimating.  Conclusion: it’s probably best to wait for a pullback before allocating a serious amount of money into the energy sector, but it’s probably worth slowly dribbling a little money in, which I like to do using Cash Secured Puts , while I wait for a pullback in energy stocks.

Renewable energy has been getting a lot of press recently, so this also makes me shy away from stocks that are obviously in the sector… if the company has “Solar” or “Ethanol” or “Wind” in its name, I think it’s time to stay away, even after the recent small pullback.   I prefer the suppliers to the renewable energy companies, and companies involved in energy efficiency (which not only has better economics than most renewables, but fewer people are excited about it. A search on Google News just turned up 4370 articles that mentioned “renewable energy” without mentioning “energy efficiency”, while there were only 2340 that mentioned “energy efficiency” without mentioning “renewable energy.”  Even renewable energy advocates say (occasionally as an afterthought) that you should consider energy efficiency measures before investing in renewable energy, so the fact the renewables are so much more popular is a sign that the consensus is confused: hence it makes more sense to invest in Energy Efficiency companies now, than it does to invest in renewables.

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I’m in the business of giving investment advice for a fee.   You will probably come across a lot of information here that could be taken as company recommendations, investment advice, etc., and no doubt some readers will act on what they read here.  Here are a few things you should know before investing:

 1) Past performance is no guarantee of future results.  Neither I nor anyone else knows the future.  Any investment can go up or down, and there is no strategy which gives protection against losses in adverse markets. 

2) Anything I write only reflects my knowledge or opinions at the time of writing.  I have no intention of going back and updating past posts to reflect new information or changes in the how I’m thinking.  People who want up-to-date advice should contact me about becoming clients.

 3) I am an investor, as well as an investment advisor.  I and my family will often will have investments in the same stocks I’m writing about.  My clients will also have positions in these stocks.  If I decide it is time to buy or sell a stock, I first place orders in client accounts (for which the trade would be appropriate) and inform clients of the change.  I will next place orders in my accounts and those of my family members.  Only after all this happens will I publish the new recommendation to the blog.  You get what you pay for, when it comes to investment advice.

4) Appropriateness.   Most people should not be investing in alternative energy stocks.   Most of these companies have never been profitable, nor is there any guarantee that they will be profitable ever.  Anyone investing in alternative energy stocks should be prepared to lose everything invested.  If you are investing solely on the basis of articles in a free blog like this one, you seriously need to have your head examined.  Don’t do it!

 Any investment should be considered in terms of your entire financial picture.  If you don’t feel capable of doing this, you need to learn how, first.  I plan to include a lot of posts that will help you become a more sophistocated investor, but there are a lot more efficient ways to learn about investing than in these posts.  See my website for some good places to start. 

If, on the other hand, you just want to know more about the trends in alternative energy, and are not planning on gambling your hard earned cash based on my out of date thoughts, welcome!

5) Most people aren’t ready to invest in the stock market, let alone alternative energy.  Investing in the stock market is like sitting down at a poker table with a bunch of chain smokers wearing visors.  If you don’t know who the sucker is, you’re it. 

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The purpose of this blog

I’m starting this blog as a record of my thoughts on investing in renewable energy and energy efficiency.  I plan to include comments on the industry, links to articles I’m reading, and whatever else comes to mind.

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