Monday, May 26, 2008


The Big Island of Hawaii has the highest cost of electricity ($.32 per KWH) of any place in the US. It also has half the energy consumption per household of any place in the US at 2500KWHs per year per household as compared to the national average of 4300KWH per year. The Big Island of Hawaii also has one of the highest rates of energy generated from renewable energy sources (39% of the Big Island’s billed electricity).

Hawaii has vast riches in renewable energy resources. Any one of the three major renewable sources of electricity: wind, geothermal or solar voltaic could produce 10 times more than all the foreseeable energy growth for the Big Island. The sunlight is so strong and shines so much of the day that any house with solar panels on its roof can easily generate the average Hawaii Island household electricity usage of 200KWH/month. Although solar hot water heaters make a great deal of sense and are the largest source of electric usage on the East side of the Big Island, only 1 in 4 houses have them installed.

Though the capital costs of installing a solar system is high, particularly compared to the average household income on the Big Island, individual usage of solar power is of a much greater economic benefit to BI residents then power by other renewable energy sources and here’s why.

The Federal Public Utilities Regulatory Policies Act (PURPA) requires utilities to purchase power from qualifying independent power producers at a price set by each State’s Public Utility commission. In Hawaii, which is restricted to electricity generated on each island, this power purchase price has been set using a formula which is tied closely to the cost of oil. Hawaii Electric Light Company (HELCO), the power utility on the Big Island, buys alternative energy from geothermal and wind independent power producers on the Big Island at the same KWH price as it costs to produce electricity using oil. This motivates external investors to develop power plants from alternative sources and sell it to HELCO which is profitable for them and good for the environment. It also provides diversification of power sources, reduces reliance on shipping in oil, and creates a more distributed power grid.

But the Big Island residents aren’t benefiting economically from the use of alternative energy and are paying ever higher electric bills as the price of oil escalates. The growing profits made by the independent power producers are sent off Island rather than benefiting the economy of the Big Island. If residents invest in solar hot water heaters and solar electricity they are immediately insulated from rising oil costs which have gone up 40% in the past year and are predicted to go up another 40% in the next 12 months. Once the capital investment has been made back (over 2-8 years) the solar power system will free up income of the Big Island residents. These dollars will remain on the Big Island in the pockets of the local residents.

Thursday, May 15, 2008


What is the best part of life in the slow lane?

Is it eating fish caught fresh that morning everyday for breakfast?

Is it the freshly picked organic fruit - the ripe sweet papayas, the creamy bananas, the buttery avocados or is it the locally grown organic vegetables - the juicy tomatoes, crunchy cucumbers, and the best crispy lettuce we have ever tasted?

Is it the trade winds that blow warm moist air through the house all day?
Or is it the long lazy naps under a slowly moving ceiling fan on warm afternoons?
Is it swimming every day in the warm, sun heated pool and hanging out to talk story?

Or is it reading the tragic mainland news and feeling like it is some far off place that will not immediately affect us.

I think it is all of these and more that we will surely discover.
But one thing we know for sure is that the rat race to riches in Silicon Valley is overrated.

Thursday, May 8, 2008


The latest scam promoted by investment firms is “What’s Your Number” and by that they mean how much money you need to keep living the lifestyle you currently have when you retire. Their question focuses on saving enough money to achieve your number. The investment banking firms love the concept and have ads about “Your Number”, books about “Your Number” and it is rapidly becoming a part of the Boomer culture. I call it a conspiracy because it focuses on the percentage of earned income being saved and set aside for retirement and ignores by far the most important factor, which is, how well are those savings performing as an investment; what was their yearly return? Investment brokers want to focus on the amount of savings being set aside for them to invest rather than the return on investment that they are earning with the savings portfolio.

The concept of “Your Number” exists in a static world, an unchanging place where it is only a matter of saving the exact amount of money and then you are done. In fact, the world is a volatile place with times of rapid inflation, times of stagflation, and times of usually great investment opportunities. A more useful question is how skilled are my investment advisors at getting me high gains with low risk to my savings? Do my current brokers spot the opportunities to invest in the Wal-marts, Microsofts, and Berkshire Hathaway’s of tomorrow? Are they focused on getting the highest return for themselves or for me? The easiest money a broker can make is to put all your savings in a mutual fund that pays them a high commission and roll it over yearly to keep their commissions coming in. While we were in Silicon Valley, working ridiculous hours, our broker made more money off of our saving then we did. He invested all our savings into mutual funds that in total performed less than 1% a year and yet his commissions were 6% of our portfolio a year.

The question is will you be able to live frugally enough to let your investments grow and have excess savings to weather times of inflation or times of low investment returns. Unless you have a guaranteed pension, the most important thing to focus on is improving your skills at investing and learning to reduce your cost of living so you can live happy lives with less money. The sooner you start practicing investing and measuring your resulting returns, preferably long before you retire or lose your job, the greater your understanding and realistic view of income from your investments will be.

After studying investing with an AAII group in Silicon Valley and switching to making investment decisions ourselves, we have improved our returns by 20 times, to 20% per year and reduced our brokerage costs to less than 1%. At the same time we have lowered the risk of losing all of our savings by not being at the effect of mutual fund managers controlling when to buy and sell and by not being impacted by massive numbers of Boomers cashing out of their mutual funds to get to their money or being forced to roll their 401K after being laid off. We have minimized the risk to our portfolio by investing in a highly diversified group of well managed, growing companies that we really believe in and feel good about owning.

Thursday, May 1, 2008


The key to creating wealth, with the ultimate purpose to live off your investments, is to achieve far better returns from stock than the S&P500 without a corresponding increase in risk. This might seem obvious but we live in culture of extreme risk taking that has blurred the distinction between investment and speculation so much that high risk stock speculations have become the norm for many individual stock investors.

Gambling and speculation are characterized by taking large risks of a total loss in return for the low potential of a very large gain. Investing is really the opposite; it is finding the lowest risk of any loss with the most likely outcome of a modest gain or better. The central focus in investing is finding the lowest risk stocks with the best odds of outperforming the market. It certainly is not as exciting as a night in the casino but it is easy to sleep at night.

Let’s look at two different companies, one that we consider a high risk speculation and another with very low risk of a total loss and a good chance of outperforming the market over the next few years.

The first company, GBRC has a market cap of $105M and share price of $3.05. They have $780,000 in the bank and have never made any revenue or had a sale of any kind. Their return on equity is -744%. They are developing technology to decompose petroleum related products (like used tires). Hopefully they will make the technology work and be a fantastic financial success but the risks of a complete loss look too high for us. I am sure that the person that recommended this stock feels that they have some good insight into the likelihood of the technology working and are expecting a great result for it. But getting an exotic technology to work is only the first step; there must also be an adequate market size and an excellent management team to take advantage of the opportunity.

Contrast this with another company, Range Resources Company (RRC), which has a market cap of $9.81B and a share price of $65.45. They have $4M in the bank, a revenue stream of $868M/year, net profits of $166M/year, and they pay a quarterly dividend of 4 cents a share. Their last quarterly earnings were up 59.50%. RRC is an independent natural gas producer with properties in Appalachia and the Gulf coast with 5100 miles of gas gathering pipe lines that are delivered to interstate pipe lines which deliver the gas to utilities and large industrial consumers. Last year they increased their new reserves of natural gas for future production by 27%. The risk of the company going out of business and our stock becoming worthless are very low and the upside for reasonable profit and growth is high. RRC is an investment that we have included in our portfolio, and we never lose sleep over it. We have no doubt that people will continue to need natural gas for heat and electricity.

As good as RRC looks to us and as good as the natural gas industry as a whole looks, we still put only a small percentage (2%) of our portfolio in this stock and only 6% of our portfolio into the overall natural gas industry. This is our way of reducing the risk of loss of our capitol by having a highly diversified portfolio. We do not invest more than 2% of our portfolio in any given company no matter how compelling the company looks. It is far safer to have 50 very amazing companies across all industries than to have all of our assets in a few companies or in a few sectors of the market. This also allows us to focus on the quality of the company instead of the latest buzz about a particular sector. We find the best companies to invest in are the better run companies in sectors that are out of favor with investors.

I have met with mutual fund managers that strongly object to people like us investing this way. They say that they can invest better than an individual and that the trading fees are prohibitive for the individual to make it work. We feel that mutual funds have proven the value of this method of investing, especially for individual investors with the time, interest and aptitude. We have also found that being able to control the timing of when we take profits and losses to maximize our tax benefit far outweighs the cost of our broker fees, and we use a full service broker! We think that it is far more profitable to run our own micro mutual fund instead of giving up profits to the managers in the form of outrageous salaries and bonuses.

Our investing approach has led us to own a large collection of unexciting stocks of stalwart companies selling products such as soap and toothpaste (CHD), pumps and motors (SHS), aerospace components (PCP, COL), pipes (SYNL), utility poles (VMI), natural gas (RRC, EGN), and welding equipment (LECO) Though the potential for an out of scale return may be very low, our portfolio is stable and growing at a reasonable rate (16% to 32%) every year. Most of our portfolio companies pay a dividend, giving us additional tax advantaged income. We have never lost sleep over any of our stocks nor felt the need to check on them constantly in fear that some catastrophe will occur that will wipe us out. We check on their status once a week to verify that they are on track and no major changes have occurred. If we get really upset at the management team, like we did at MCO last year, we sell them off. If the management team makes a move we like, as did the RRC team with their willingness to step out and acquire more natural gas properties long before the oil crisis came into view, we buy more.

We avoid investing in overseas stocks as they have no SEC oversight and no way for us to validate their accounting. We also feel that foreign based companies have much greater risks than US based companies due to the many uncertainties of foreign governments and currencies. We gain access to the growth in overseas markets through US companies that own operations and sell to customer bases overseas.

We have found that focusing on lowering the risks of our investment portfolio and finding the best values in well managed companies, rather than focusing on the huge potential upside of high risk speculative stocks serves us well. It has allowed us to create a portfolio of stable yet steadily growing stocks at a time when the stock market has had unprecedented instability and many mutual funds are struggling.

By moving to Hilo, Hawaii we have dramatically reduced our cost of living so that we can live without touching our stock portfolio allowing it to maximize its growth. At a rate of 20% a year, we will have more than doubled the portfolio value in 5 years, a reasonable gain for minimal risk, allowing us to stay as long as we want in this wonderful paradise of Hawaii.