No one really knew what to expect when Sid Bass took over the family oil business in 1968. Sid’s father and uncle were wildcatters who struck it rich in the 1930’s. The two built an oil company with 120 wells and a combined fortune of $50 million over the next three decades.
In 1968, the family fortune was handed over to Sid. Once at the helm, Sid hired Richard, one of his old college buddies, away from Goldman Sachs to help him invest the family’s fortune.
They couldn’t have gotten off to a worse start. The pair thought a more “aggressive” strategy was needed. Remember, this was 1968 and a bull market in stocks was alive and well. Naturally, an aggressive approach would have suited the two young investors.
Their first couple of years were plagued by bad investments. But the pair didn’t give up. They sought out Warren Buffett for advice and also studied the bible of value investing, Benjamin Graham’s Security Analysis.
The pair would go on to make billions over the next two decades. But the biggest profits of all could come from the next big move one of these men is making. Last time he saw this opportunity, he turned $300 million into $2 billion in 10 years. Now, he’s making the same move.
All the Right Moves
As the two applied their refined value investing approach, they would come across some very lucrative investments. After successfully navigating the oil bull market of the 70’s the pair was to take the Bass family fortune to new heights.
They bet big on Marathon Oil in 1981 (that was the last time the world was running out of oil). A bidding war erupted for Marathon between U.S. Steel and Mobil Oil. The two walked away with a $165 million profit from a $160 million investment.
The pair’s next big win came from Texaco. At the time, Texaco was trying to takeover Getty Oil. The pair didn’t like the deal at all and managed to sell their entire 10% stake in the company to Texaco’s CEO for $450 million profit.
The pair’s biggest win would come next. Embattled Disney was in a rut. Years of mismanagement placed the mighty entertainment company in some tough spots. Vultures were eyeing it up. Through a real estate transaction, the pair would cut a deal which would allow them to sell $400 million worth of real estate into a 25% stake in Disney. Over the next 10 years or so, the $400 million investment would grow to be worth $8 billion.
After that, the pair split up. Sid Bass continued to run the Bass family money and Richard Rainwater would go on to create a $3 billion fortune. (Rainwater is one of the investors on the short list of Prosperity Dispatch’s under the radar investor legends, like John Calamos or Jeremy Grantham)
Playing it Right
Rainwater has been called the “best kept secret in finance.” With the track record he has, it’s no surprise. After Bass and Rainwater split, Rainwater would go on to have quite a few more very, very public wins.
Rainwater made hundreds of millions of dollars in numerous real estate deals. The biggest one was the Columbia/HCA Healthcare Corporation deal which formed the largest chain of hospitals in the country.
In 1999, Rainwater’s fortune was estimated at $1.2 billion. Not bad, but it wasn’t much compared to his next big move.
In 1997, Rainwater was picking up on what would be his biggest win of all. Oil was trading for less than $20 a barrel and it was one of the most hated investments in the world. The tech bubble was still in the relatively early stages and the Asian Tigers were where the hot money was going.
Oil? Who wanted oil back then?
Rainwater did. And he wanted a lot of it. Rainwater put $300 million into oil. He bought $200 million worth of oil futures contracts. He took the remaining $100 million and put it into oil stocks.
It would take a while to pay off, but it was worth the wait. Rainwater turned $300 million into $2 billion when oil prices started really moving up in the first part of 2008.
Get While the Getting is Good
I realize Rainwater wasn’t the only investor betting big on oil back in the late 90’s. Boone Pickens also started his energy-centric hedge fund in 1997 as well. And there are a lot of investors who got in early on oil.
There is, however, one big difference between Rainwater and many other investors who rode the oil wave to 9 and 10 figure fortunes – he sold. He didn’t just take some profits though, he sold out…completely.
In May of 2008 when oil passed $120 a barrel and gasoline was $4 at the pump, Rainwater dumped it all. The hot money was flowing into the sector, a bubble had formed, and Rainwater took action. As a result, avoided riding oil stocks right back down and banked about $1.7 billion in profits. That’s good for a 566% return in about 10 years.
Not bad at all. And it’s just one more successful move in a very long line of them. Before we look at what he’s buying now, I want to warn you Rainwater isn’t perfect. No investor is.
Back in 2007 he invested $100 million into Thornburg Mortgage, a mortgage REIT. Since then, Thornburg has imploded and its shares now fetch 9 cents each.
When asked about his failed investment in now bankrupt Thornburg, Rainwater said:
“Oil I understand. Interest rates…?”
Now Rainwater is back in what he “understands” and where he has been most successful. He’s buying oil again.
In October Rainwater said:
“I think we’ll have a run on raw materials of all kinds because we’ve taught people all around the world how to play capitalism…when you look at the U.S. making up 4.5% of the population and using 25% of the resource base, that can’t go on. You can’t extrapolate that out around the globe without there being price pressures on the upside.”
Although we’ve been quite negative on oil in the short-term (OPEC ineffectiveness, etc.), it’s tough to see a world where oil is under $40 for more than a year or two. And you’ve got to stop and think for a moment when Rainwater makes a big move.
I wouldn’t recommend going “all in” on anything right now though, including oil. As we’ve seen, Rainwater has been a bit early when it comes to oil. He started in 1997 when oil was at $20 a barrel and had to suffer through oil dropping to $10 a barrel over the next couple of years. And last May, he got out a bit too early, but I give him a lot of credit for getting out.
I’m a buyer when oil prices dip under $40. I’ve been an even bigger buyer when oil dropped below $35. I’m hoping – and patiently waiting – for oil to drop below $30 a barrel. That’ll be the time to really load up.
Until then, nibbling is the best move to make when it comes to oil and wait for a genuine opportunity to move into oil in a big way. Remember, the last time Rainwater bet on oil he turned $300 million into $2 billion in about 10 years. Now he’s doing it all over again.
A rebound in oil is inevitable. Playing it right is the difference between doubling and quadrupling your money from this point. Right now, patience is still the right way to play oil.
By Andrew Mickey