CHAPTER 1

An economic crisis is near at hand in America today, the kind of dramatic, earth-shattering crisis that periodically threatens the very survival of civilization. More specifically, it is an energy crisis brought about by the conflict between rising global demand for energy and our growing inability to increase energy production.

I first drew attention to this crisis in my 2004 book, The Oil Factor. The book was controversial, particularly because of its prediction that oil prices would reach $100 a barrel by the end of this decade. Since its publication, oil, gasoline, and natural gas prices have hit historic highs. Meanwhile, energy supply/demand fundamentals have worsened to the point that it now appears $200 a barrel by the end of the decade is entirely probable. Naturally, the negative impact this will have on our economy, not to mention your pocketbook, will be considerable.

However, what alarms us most about this crisis is the extent to which our nation's leaders and experts remain in denial concerning it. Most authorities continue to reassure the public that today's soaring energy prices are temporary, that oil reserves are virtually limitless, and that production will outpace demand for the remainder of our lives. This is an outright contradiction of the facts. The trends in place for the last thirty years show declining returns from oil exploration, peaking or declining oil production everywhere but in a few OPEC nations, and increasing demand for energy, especially among the world's largest developing nations.

You may find it hard to believe the experts could be so wrong. Naturally, most of us are inclined to trust in the wisdom and honesty of our leaders. We ourselves are horrified that so few are raising the alarm. Why is such a serious threat not on the front pages of every newspaper? Why are government and industry not taking steps right now to prevent the crisis?

Unfortunately, this is not the first time in recent years that a major economic threat has gone unacknowledged by our leaders. In the most significant example, until the moment when the ax fell, everyone, including corporate executives, Wall Street analysts, and the media, portrayed the situation in glowingly optimistic terms. Rather than try to prevent a crisis, most authorities actually encouraged people to act in a way that brought them greater financial loss and made the economic impact worse. We are speaking of the rise and fall of the technology bubble.

In that brush with disaster, which came much closer to destroying our economy than most people realize, we see a mirror image of what is happening today with energy. If we are to weather the energy crisis successfully, both as investors and as a society, we need to understand why similar errors in judgment are occurring, and what we must do to correct them in time.

It is no exaggeration to say that in the late 1990s the investment world went mad. Millions upon millions of investors ignored time-honored principles for investing in stocks, such as due diligence and fundamental analysis, and began to buy and sell purely out of emotion. Believing in the wonders of technology, they rushed to buy technology and Internet stocks like rats following a Wall Street pied piper.

The result was a financial and economic crisis that destroyed the financial security of millions of investors. However, what few people realize is how close the technology crash came to destroying our economy and even our society as a whole.

I recall one client who phoned me near the height of the bubble, in 1999. I knew him personally. We had been managing his portfolio for some time, and it had been doing quite well by typical investment standards—gaining roughly 20 percent annually.

But on this day, he announced that he wanted to handle his own investments from then on. When I asked him why, he said he wanted more technology shares in his portfolio. Clearly, he had been bitten by the high-tech mania that was spreading through the markets at the time.

Of course, there is nothing wrong with someone making his own investment decisions. However, as a professional money manager, I can tell you that it is not an easy job, especially if you are trying to make returns that are well above average. Anyone can get lucky enough to beat the market for a short time. But most of the people who do so find their luck lasts only a brief while. To beat the long-term returns of the market, without taking on excessive risk of loss, and to do so consistently, is extremely difficult.

Like many firms, we have a full-time staff that studies the markets and the economies around the world, applying detailed analytic methods, in order to stay on top of trends and spot opportunities. The result is that our model portfolios have been able to outperform the market—which means outperforming not only the average investor, but also the average professional—much of the time. However, that is the result of in-depth knowledge, long hours of hard work, and a good deal of experience. It would be nearly impossible for someone with a full-time job to duplicate single-handedly the work we do.

Now, this man had a full-time job. He owned his own business. While he was highly educated and intelligent, he did not have time to gain more than a superficial knowledge of stocks. Instead, his method of managing his portfolio was literally to run over to a television set between clients and turn on CNBC to get the latest tech tip, which he would then follow. Over the next few months, he sold every stock in his portfolio that was not technology-related, and put all his retirement savings into tech stocks. Many of his new holdings were companies he knew nothing about. He just saw them on television.

Copyright © 2006 by Stephen Leeb.