Tuesday , October 4 2022
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Three Things I Think I Think – Bad Ideas

Summary:
1) ESG – Still a Convoluted Mess. My long standing position on ESG (Environmental, Social & Governance) investing is that secondary markets are a not a great place to try to enact change. In short, it’s another form of active stock picking except now you’re letting your emotions get in the way. For instance, I might hate Exxon Mobil because they pollute the environment, but XOM also invests huge amounts of money into renewables. In fact, the only way they’ll survive in the future is if they adapt to the changing world and more renewable energies. You wouldn’t want to remove XOM from your portfolio because that’s making a bet that XOM won’t adapt or survive. Worse, it is an explicit prediction that the world will change to renewables faster than you or XOM might think. And that’s

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1) ESG – Still a Convoluted Mess.

My long standing position on ESG (Environmental, Social & Governance) investing is that secondary markets are a not a great place to try to enact change. In short, it’s another form of active stock picking except now you’re letting your emotions get in the way. For instance, I might hate Exxon Mobil because they pollute the environment, but XOM also invests huge amounts of money into renewables. In fact, the only way they’ll survive in the future is if they adapt to the changing world and more renewable energies. You wouldn’t want to remove XOM from your portfolio because that’s making a bet that XOM won’t adapt or survive. Worse, it is an explicit prediction that the world will change to renewables faster than you or XOM might think. And that’s where this has become a disaster at both a portfolio level and a real world level.

Many countries in Europe adopted hardline ESG style policies and now find themselves without easier access to even remotely controversial power sources like natural gas and nuclear. And so now they’re excessively reliant on the kindness of Vladimir Putin to provide oil. Not great.

At a portfolio level it’s also been harmful. If you removed oil from your portfolio last year you removed one of the only good performing sectors in the stock market in 2022. Which, interestingly, is exactly why the University of Texas is on the verge of becoming a bigger endowment than Harvard.

Anyhow, I am not trying to ruffle political feathers or anything like that. But there are mountains of evidence showing that active stock picking and bad behavior result in bad investment returns. There are no free lunches in the world of investing and while we want to push for positive change we have to also acknowledge that the future is hard to predict AND that future requires us to diversify our portfolios precisely because it’s so hard to predict what’s coming.

2) Time as an Investment Factor.

Speaking of ESG and factor investing (which I generally don’t love) – I’ve gotten a ton of great feedback on my new investing framework – All Duration Investing. I’ve always struggled with how we should use specific asset classes across specific time horizons and formalizing this paper and the underlying duration model is the first time where I have real clarity on the topic. For instance, in this model gold and commodities are super long duration instruments that offers returns that are similar to insurance. That is, in very specific environments they operate in a very specific way. So, in a high inflation environment they surge in price in a very acute or asymmetric manner (like insurance). In other words, you could hold a slice of this in your portfolio knowing that it won’t perform great most of the time, but hedges you from a very specific type of event. But it has a very specific short-term role in your portfolio over long time horizons.

This is the basic premise of All Weather investing, but the thing that always bothered me about All Weather portfolios was that there was no formal method to the allocations. Harry Browne’s All Weather, for instance, was just 4 quadrants slapped together without any formal quantified financial planning foundation. The All Duration approach can be fully customized around someone’s planning needs. I’ve always implemented some version of this in my own portfolio, but now I’ve quantified it in a very specific manner that matches my financial needs and creates more sensible time horizons over which to own specific asset classes. I love it.


Three Things I Think I Think – Bad Ideas

But the most interesting thing I realized from all the feedback was something from Jason Branning, a CFP in Mississippi. Jason said that he views this approach as an alternative form of factor investing where time is the factor. I love that. I’ve always been somewhat skeptical of traditional factor investing because it always struck me as active stock picking (like ESG), but time explains all investing returns. It really is the factor that matters most to us all.

Anyhow, if you missed the paper please have a read and feel free to reach out.

3) More Bad Student Loan Policy.

Boy, I am really stepping into the political dog doo today. My hate mail is going to be super. But seriously – what in the world are we doing with student loans?

First, we have a pretty serious inflation problem so forgiving debts and stimulating demand is not a great idea at this time.

Second, why are we forgiving student loans at all when the actual problem is the cost of college? I’ve written a lot about this in the past and the root problem here isn’t student loans. It’s the cost of college. If you don’t simultaneously work to reduce the cost of college then forgiving student loans does nothing. In fact, it should incentivize other people to take out student loans with the hope of forgiveness which should increase the demand for college and put MORE pricing power in the hands of colleges. This should drive college costs UP. So this policy does the exact opposite of what we’d hope to do if we were actually trying to solve the issue.

Cullen Roche
Former mail delivery boy turned multi-asset investment manager, author, Ironman & chicken farmer. Probably should have stayed with mail delivery....

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