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When to Forget Diversification

By Stansberry Research Interview Series
Monday, August 13, 2007

Screw diversification.
 
Sixty-one-year-old William Macaulay probably didn't say this, but he must have been thinking it when he bought $4 million worth of his company's stock last March.
 
Four million dollars is a lot of money any way you look at it. As far as how it compares to Macaulay's personal wealth, I couldn't tell you. But I can tell you the purchase increased his holdings in this company by more than 4,000%.
 
I can also tell you it's the largest investment Macaulay has made in a publicly traded company in the last two years by a factor of 41. And it established him as the second-largest shareholder out of the 18 people who comprise this company's management and board of directors.
 
In one purchase, William Macaulay increased his stake to represent nearly one-third of management's entire holdings in this company.
 
Every fundamental investing book or seminar lists diversification as an essential activity for investors. You're simply not supposed to put all of your eggs in one basket. Particularly not if you're 61, like Macaulay, and nearing retirement.
 
However, Macaulay is not your average investor. You see, he currently serves as chairman on this company's board of directors. He's served in that capacity since October 2004. Yet it was only this year that he bought big.
 
Before becoming chairman, Macaulay was CEO and chairman of First Reserve, a private-equity firm he bought for $1 in 1983. At that time, First Reserve was a near-bankrupt, small-time moneylender to oil and gas companies. Macaulay stepped in, and by 1992 converted the firm to a private-equity leveraged buyout (LBO) fund.
 
Macaulay specializes in the energy sector. And he's ridden the increase in oil prices and cheap debt to some truly unbelievable gains: One of his funds has returned 85% a year since inception. On average, he's shown investors annual returns of 26% since 1992.
 
In fact, Macaulay is so successful that the California State Teachers' Retirement System has invested in all five of his LBO funds. California teachers are funding oil buyouts and making a killing.
 
In 2004, Macaulay staged a buyout for Dress-Rand (DRC), the largest maker of gas compressors and oil turbines in the U.S. Macaulay's fund put in $430 million worth of equity, and borrowed an additional $800 million. Macaulay stepped in as chairman of the board.
 
And in March 2007, he bought $4 million worth of stock in DRC… in the transaction I referred to above. So Macaulay's decision to ignore diversification isn't a new development. He's been doing it for more than 20 years, focusing almost exclusively on energy stocks.  
 
So how's he doing with DRC?
 
Since his purchase, DRC is up 25%. Macaulay has made $1 million in less than six months. And given his track record, this is an oil-services stock worth looking at.
 
Good trading,
 
Graham




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Market Watch
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52-Wk
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Big Pharma 64.14 +0.0% -3.2%
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Semis 16.22 +1.2% +29.4%
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Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
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