DALLAS — “Do you enjoy risk?” I asked T. Boone Pickens Jr.
On one level, this was the silliest of questions. Mr. Pickens, after all, is a man who abruptly quit his corporate job at 25, with $1,500 in the bank, to start his own company, which he called Mesa Petroleum. He spent the next four decades poking holes in the ground, searching for oil and natural gas — without question one of the activities with the highest risk in all of business.
In the 1980s, he famously made a series of audacious takeover attempts aimed at companies — Gulf Oil, Phillips, Unocal — that were 10, 20, 30 times the size of Mesa. For years he covered his company’s general overhead budget by playing the commodities market.
In the 1990s, he bet big, and bet wrong, on the price of natural gas. That, and a lengthy bout with depression, which was undiagnosed for years, caused him to lose his company in 1996 at the age of 67.
Rather than retire, Mr. Pickens decided to start a hedge fund to trade commodities, primarily natural gas futures. In the of 1997, he raised $37 million — $8 million of which was his money. By early 1999, however, the fund had lost more than 90 percent, and was under $3 million.
So yes, it’s pretty obvious that T. Boone Pickens enjoys risk. But as it turns out, that’s not the whole answer.
I’ve known Mr. Pickens for more than three decades, ever since I was working for Texas Monthly and wrote about his first takeover attempt in 1982. Over the years, we’ve stayed in touch, and I’ve written about him or quoted him any number of times, including in several of my old “Talking Business” columns for The New York Times.
But even though I’ve always known about his adventures as a commodities trader, I realized recently that I had never talked to him about risk — about how he thinks about it, and why his tolerance for it is so high. And whether ordinary investors can learn something from the way he invests, just as they do when they pay attention to Warren Buffett.
Thus it was that on a recent morning in Dallas, I found myself in a large conference room in the offices of Mr. Pickens’s investment firm, BP Capital. One wall was dominated by a large screen — as big as anything you’d see on Wall Street, blinking instantaneous prices for crude oil, natural gas, some energy-related stocks (BP Capital also now manages an energy stock fund) and a handful of other things Mr. Pickens likes to keep track of. CNBC and Fox News were on but muted.
Mr. Pickens’s wealth has dropped to $500 million, in no small part because he had chosen to give much of it away. At 88, his most serious physical problem is his hearing. As he sat down, he pulled out a small amplification device and placed it on the table. Even so, he often had to ask the others in the room — there were five of us — to repeat things.
Which is not the same as saying he didn’t ultimately understand what was being said. He has always had a voracious appetite for information, and he is the unquestioned decision-maker at BP Capital. His team’s role, in no small part, is to help supply the information he needs to make decisions.
All year long, Mr. Pickens’s funds — there are now a half-dozen, managing around $1 billion — had been “long” on oil, meaning that they had been betting that the price, which is currently in the mid-$40 range, was going to rise. Less than two years ago, the price of oil was as high as $120 a barrel.
As the price dropped, big, expensive exploration projects had been canceled, and the number of wells being drilled had dropped sharply. Pickens’s thesis was that this drop in supply was bound to make demand tight — which, in turn, would cause the price of oil to rise. He had put on his long position eight months early, and was completely unruffled by the market’s daily ups and downs.
Which is one thing that you quickly learn about him as an investor. As he puts it, “We’re not traders.”
If he has looked at all the available information, studied the fundamentals and believes his thesis is still right, he’ll stick with it even if the price isn’t going in his direction. If he believes strongly enough, he’ll use the drop in price as a buying opportunity. That is one of those attributes that separates great investors — Mr. Buffett does the same thing — from the rest of us.
And then there is the information itself. I saw Mr. Pickens speak a few months ago in Texas and was thunderstruck at how much information about the current state of the oil and gas industry he had at his fingertips. In the conference room at BP Capital, I got a strong sense of how that information is accumulated and used.
They talked about when the weather was supposed to turn cold, which generally pushes natural gas prices higher, and why Exxon Mobil’s stock had been rising lately. They dissected a few of the big exploration projects that had been canceled. One member of the Pickens team put up some charts showing vehicle miles driven against the price of gasoline. “Does a 10 percent rise in price impact demand?” he said. “So far, the answer has been no.”
“We’re seeing supply coming down,” someone else said. “That was predictable,” replied Mr. Pickens, “because there aren’t any rigs.”
And then there were the Saudis and the other oil-producing nations. An important part of Pickens’s investing thesis is that OPEC, led by the Saudis, was going to have to lower production to get the price higher. Over and over again, they reviewed the logic: The oil-producing countries needed higher oil prices to fund their societies; they just couldn’t keep letting oil drop. Saudi debt had gone from $40 billion to $280 billion, someone said. “It’s killing them,” Mr. Pickens said.
“What we do is check, check, check,” he told me when the meeting had ended. “You are always checking to see if you have screwed up on your conclusions. The market doesn’t believe the Saudis will cut oil production to get the price up, and I can’t believe they haven’t done it so far. We’ll see by the end of the year.”
In the meantime, he had no intention of changing his position.
“Boone is an educated risk-taker,” said Michael Ross, who until 2010 was Mr. Pickens’s primary futures trader. “He takes a position and if it goes against him, he’ll start asking questions. And if he still thinks he’s right, he’ll double up. He bets on himself. When you have conviction, you can withstand risk.”
Gathering information, holding firm even if the market is going against you, these are things that the rest of us can do if we put our minds to it. But it’s the size of the risk Mr. Pickens takes — the willingness to bet it all if he thinks he’s right — that most investors will never be able to do. Risk has been a part of Mr. Pickens’s business life for so long, it barely causes him to blink.
Thus came his answer to my original question. “Do you enjoy risk?”
He thought for a minute and then chuckled. “I guess so,” he said.