A Dry Well
Foolishly, it still yielded great benefit

by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (March 29, 1999) -- We began our oil study five months ago. We looked at the industry for several weeks, then we began to consider companies, and eventually we studied over one dozen corporations. After five months, we narrowed the list to three candidates. Finally, we decided not to buy any. We didn't reach this conclusion due to weaknesses in the companies, but because the industry is a question mark undergoing more changes of image and orchestration than Madonna in a typical year. So, that's the end of our five-month study. It results in no action. No purchase.

Did we just waste a tremendous amount of time and energy?

Fools on the message board don't seem to think so. Instead, they tend to agree with the Drip Port's conclusion of inaction. The oil industry is undergoing a competitive realignment that makes it much more difficult for our "spotlight of analysis" to swing over the possibilities, center, and then flood brightness on the most likely market beater. It's hard to discern which company will come out on top when all that the spotlight can uncover is a swarming, merging crowd of industry participants.

We realized that a realignment was taking place as we began our study, but in the last five months merger activity has increased so much that the largest potential merger in history (Exxon and Mobil) was announced smack in the middle of our study. And today our second oil contestant, BP Amoco (NYSE: BPA), threw us another surprise. As Brian reported in the Fool's Breakfast News, BP Amoco confirmed that it is in talks to link with U.S. integrated firm Atlantic Richfield (NYSE: ARC). This agreement could make the new and therefore already difficult to quantify quarterly statements from BP Amoco even more confusing in the near term, not to mention what it might mean for competitors.

So we confidently stand on the fence (we prefer not to sit).

Despite our lack of a purchase decision, we gained valuable insight and the iteration of an important point during this long study. The point: no matter how much work you put into an investment study, you don't need to act upon it with a purchase. In fact, an investor typically considers dozens of stocks for several years before building a full portfolio that suits him or her. Warren Buffett is no different. He might study hundreds of companies for ten years before finding a single investment. So we didn't just waste time. We just did our homework. The benefits from our decision are arguably as great as they'd been if we'd decided to buy two oil stocks last week.

How's that?

Knowledge. We learned extensively about the oil industry and, after the smoke clears, we'll be able to analyze the leaders much more easily when they arise for a second consideration. We also might have learned enough about the complications surrounding large mergers and realignments to keep us from similar industry situations in the future. Utilities are not experiencing as much realignment as oils, but the industry is uncertain enough that we might take oil's lead and avoid utilities, too, at least until we stop reading articles about uncertainties surrounding the field and begin to see steady earnings growth from recognized leaders.

We also might have derived enough "industry realignment" context to know to avoid the telecommunications market for now. It's rife with change. AT&T (NYSE: T) is finding creative ways to address local phone markets, the Internet is changing how the world communicates, connectivity technology is evolving quickly, and Baby Bells are scrambling to grow steadily in a very competitive environment. Many mergers and realignments are likely, and which companies will lead in ten years is anyone's guess. America Online (NYSE: AOL) could become a leading telecommunications company of sorts in ten years, batting with AT&T. AOL Phone and AOL Anywhere intimate this, and AOL already has a $132 billion market value compared to 100-year-old AT&T's $200 billion market value.

Financial Progress Was Not Lost. Throughout this study, we continued to save and invest regularly in the stock market, so opportunities were not lost. If you use direct investment plans (either DRPs or DSPs), the only time you shouldn't save and invest is before you have your first investment. Once you own at least one company that you believe in, you should save and invest as regularly as possible. This way, while you actively search for other investments, your financial situation doesn't stagnate. During this study, we continued to invest in Mellon Bank (NYSE: MEL), Johnson & Johnson (NYSE: JNJ), and Intel (Nasdaq: INTC) without thought or worry. All have been earning money for our future while we focused elsewhere.

We Avoided a Possible Mistake. We didn't invest capital before being absolutely comfortable doing so, and therefore we didn't invest at all. With direct investment plans, comfort regarding a ten or twenty year outlook is very important. Each plan that you begin is a commitment similar to marriage. If an investment marriage is going to succeed, you need to send money to the plan regularly for years, and you need the company to pull its weight by eventually appreciating in value. If you jump into an industry or company before reaching a reasonable level of confidence regarding its future, you can't blame the company when it comes up lame after you gave it "the best ten years of your life" -- and your money.

We'll consider our industry finalists BP Amoco, Exxon (NYSE: XON) and Mobil (NYSE: MOB), and Pennzoil-Quaker State (NYSE: PZL) as quarterly results stream out in the months ahead. That is, assuming that more mergers don't occur before then, which is a large assumption to make -- almost as large as assuming that Madonna won't change her hairstyle at least twice this year. Not to mention Brian and his personality changes (we refilled his prescription for J&J's antipsychotic drug, Risperdal, this weekend).

To discuss direct investing, we'll see you on the message boards linked in the top right of this page. And we'll see you tomorrow (we hope) right here. Fool on!

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