Energy's Hot, but Harnessing It Can Be Tricky

NEW YORK -- With higher prices at the pump unavoidable, many investors would no doubt love to put some of the money lost to $4-a-gallon gas back in their pockets.

But harnessing the gains in oil and gas can be harder than it might seem. Energy and other commodities are the latest investments investors are flocking to because of the great rewards they can bring -- although a look at history makes clear that these now-hot parts of the market could spell pain for those who aren't careful to diversify and who don't stop to ask whether an investment still holds merit.

Investors looking to tap the gains of the energy sector might be wise to consider mutual funds that are willing to give up on an investment even when it's popular. They also might see less volatility by investing in companies tied to commodities rather than actually investing in oil itself, for example.

Jerry Jordan, portfolio manager of Jordan Opportunity Fund, which has big holdings in companies that help extract oil, said it's important that investors and fund managers periodically re-evaluate the reasons they're invested. Failing to examine an investment with a skeptical eye can make it easy to miss a shift in the fundamentals that once might have made it a sound pick.

Jordan said that energy prices might pull back in the short term but that they would continue to rise in the coming years because of burgeoning worldwide demand and inadequate infrastructure in the United States for refining oil and generating and transmitting electricity. But he said he was willing to prune his investments in energy or other sectors when he determined they had become overextended.

"We sold almost all of our energy shares in spring 2006 and bought them all back six months later. Our theme hadn't changed, but sometimes stocks just go nuts," he said.

And trimming strong performers isn't a notion limited to commodities.

"I sold two-thirds of my Google and all of my Apple position because I had big long-term gains. As much as I love Google -- it was my single favorite technology stock, period -- valuation still mattered. So I started by buying back my [Google] position in the high 400s and low 500s," Jordan said. Google is now trading above $550.

He's done the same thing with housing stocks, which accounted for 20 percent of his holdings in mid-2003. As the market showed signs of becoming overheated, he retreated. By mid-2005, he'd sold most housing investments, and the firm exited housing stocks altogether by February 2006.

Of course even a devotion to re-evaluating investment ideas doesn't forestall every misstep.

"We rode Merck all the way up and rode it back down," Jordan said, referring to the drugmaker.

"Can I guarantee I'll never drink the Kool-Aid? Absolutely not. You can't be an investor and not occasionally go over the waterfall," he said, adding, "We're very quick to turn if we think we've made a mistake."