The Only Lottery Worth Playing

Two men approach you at an investors’ conference. One is young and casually dressed. He says, “I am a trained scientist and engineer and I’m full of ideas. I have no doubt that several of them will earn me millions if not billions. If you give me $100,000, I will triple it in five years.”

The other is 60-ish and wearing a very expensive suit. He says, “I have led many companies, small ones at first and very big ones more recently. The one I head now has done quite well. I am confident I can continue its success and even improve upon it. If you give me $100,000, you will not lose a penny and most likely will profit handsomely... but I can’t say by how much.”

So, who do you give your money to? Do you go for the big score from the “genius”? Or do you go with the proven CEO?

Potential Profits Don’t Pay the Bills

Scary thought: What if both men were “at that very moment living up to their full potential?” (I’m paraphrasing Lily Tomlin’s collaborator, playwright Jane Wagner.)

The young man would forever be brimming with ideas never executed. The older man, on the other hand, would stand an excellent chance of making good on his reasonable promise of profiting “handsomely.”

Then again, in checking up on the young guy, what if other people felt he was another Bill Gates or Jack Welch in the making?

Problem is, the financial world is littered with broke investors seduced by this particular “what if.”

Michael Masterson recently said... “Let me tell you something about triple-digit returns. They happen. They happen all the time. But they don’t happen to me all the time. And they probably won’t happen to you.”

Michael’s right. My solution is to invest most of your money in the sure things and use the “speculative” small portion of your savings (we suggest 5%) for the “geniuses.”

I gotta confess: I mostly invest in proven companies with track records going back not just years but a decade or more. But I’m also constantly on the lookout for the second coming of Microsoft or Google or GM (in its heyday). The payoff would be enormous. And just as Walmart replaced Sears... and Microsoft replaced IBM... and Toyota replaced Ford... there will be future Toyotas, Microsofts, and Walmarts replacing them.

They probably exist right now, hiding among the thousands of companies that won’t scale such heights in a million years.

The trick is to figure out which companies have the best chance of growing into these enduring powerhouses.

I can help you with that. But first, I wanna tell you a tale of two famous investors... one who disdains “potential” for the “real thing” and the other who “dreams things that never were and says, ‘Why not?’” (Thank you, George Bernard Shaw.)

Warren Versus T. Boone

T. Boone Pickens is on a serious losing streak. His multimillion wind farm project in Texas went south due to lack of funding. And his bet on ever-increasing oil prices cost him a cool $2 billion when oil prices rolled over beginning in July 2008.

And where did the $62 million he spent on pushing wind mills get him during the presidential election? Nowhere.

Then again, anyone who can lose $2 billion and still be called a billionaire deserves being paid attention to.

So get this. T. Boone is now switching horses. Goodbye wind and hello natural gas. The problem with T. Boone is that he needs Obama to make his “potential” energy vision spring to life. He wants the government to convert the entire federal automobile fleet to natural gas. Then he wants the government to give large tax credits to companies that use natural gas vehicles and filling stations that install the necessary equipment.

If the government does all he asks, he’s golden. But that’s way too many “ifs.” Boone is asking the government to turn its back on all the technology behind hybrid and fully electric cars. Ain’t gonna happen.

T. Boone should know better. He’s shown that he knows how to make money. But “big ideas” are a dime a dozen. Executing them and profiting from them, now that’s a different story.

So let’s give credit to Chinese auto company BYD (Build Your Dreams). Its vision of an electric car that can outdistance the “energizer bunny” is a cold reality. BYD’s electric car can go over 200 miles on a single charge (by comparison, the Chevy Volt only goes 40 miles on its battery before the gas engine kicks in).

And guess who has a piece of that company? Warren Buffett. Warren makes sure the companies he invests in can carry through with their ideas. I’m not surprised that BYD is bringing a groundbreaking car to market.

Does Warren see a young Ford or Toyota in BYD? Who knows. But if he does and he’s only half right, he’ll make a boatload of money.

Gaming the government is a time-honored American corporate tradition. But T. Boone is out in left field chasing his own shadow. Buffett has a company with here-and-now products and tons of potential down the road. You’ll be seeing Chinese cars in the U.S. auto market before Thanksgiving.

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Another Asian Auto Success Story

Going hybrid isn’t the only auto trend. Another is going small & cheap.

China’s BYD has competition. The other big auto companies are also developing electric and hybrid cars. The fact that China isn’t bringing up the rear is a big step forward for China’s auto industry.

But India has a monopoly on super-small and dirt-cheap. India’s Tata Motors makes the Nano, with a price tag of around $2,200. It has AC, wipers, a radio, and a small but efficient engine that powers the car to over 60 mpg.

And right now it’s got no competition. Nissan says it’s coming out with a similarly low-priced car this year. I’ll believe it when I see it.

Tata says it sold 74,707 vehicles around the world in December, a hike of 84% from a year earlier. This is the same car company that bought Jaguar and Land Rover. Tata is also the world’s second-biggest bus manufacturer.

Buffett doesn’t have a piece of this company. But maybe he should. Chinese auto-related engineering is still significantly ahead of India’s. And manufacturing cost is just as cheap as it is in China. India didn’t have as big a surge in auto buying that China had last year. But if you think (as I do) that China’s surge pulled in a lot of buyers who would have been buying this year, you won’t be surprised if India’s auto sales have a more robust year than China’s.

You should consider investing in Tata Motors on its next dip. The company has a bright future. Now... whether it’ll become the next Toyota, let’s face it. Its chances stink. But I believe they’re still better than those of 99% of the other auto companies out there!

Finding Future Superstars

To find future superstar companies, you should...

• Look in sectors where groundbreaking changes are taking place.

• Look in countries that grow their companies big. Big countries -- like China, India, Russia, Indonesia, and Brazil -- beget big companies. But some small ones -- like Japan and Korea -- also grow their companies big.

• Look for CEOs who have been there and done it before (grown companies from small to big). For every Bill Gates (young and brash and capable), there are a thousand so-called corporate leaders whose best and sometimes only asset is their mouth.

• Look for trends these companies can ride – the bigger and longer, the better. You have several megatrends to choose from... including the rising middle classes of poor countries and emerging clean energies. My colleague Bob Irish lists six of the most important long-term trends you should be paying attention to in the January issue of Sound Profits.

Of course, you can find future superstars in the U.S. too. We grow our companies big here. Your best bet would be in high-tech. If you’re a techie and you know a company has knock-out technology and exceptional leadership, go for it.

Remember, you’re speculating with these companies. That means you’re using your play money... the money you really don’t need. Have fun with it – because in this game, you’re gonna lose much more often than you win. But if you win – even once – it’ll feel like winning the lottery.

Invest Safely,

Andrew Gordon

Investor's Daily Edge

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