The rules of the game have changed

One weekly investment blog I read religiously is from Evergreen Gavekal. Last week, it had a great opening:

For the past 10 years, investors haven’t had much to worry about. You could essentially buy anything, with a few exceptions, and do between ok and great. That has changed for the foreseeable future.

That sums up what I want to say. I do believe we should be more cautious than before. But that doesn’t mean we can’t include some optimism or caution. But it does mean that it’s imperative we are more selective than before. And that’s going to be our subject all week.

Could this mean the end of the passive boom? I wonder… The ability to select your favourite investment is lost in a passive ETF, after all, and now, being selective is crucial.

There are two primary risks in investing: losing money, or not making money.

So the ultimate question really is defence vs attack. Which should reign supreme?

And remember, keep it balanced because we never really know the answer.

You want to be a maximum of 40-60% confident in either direction.

And you don’t want to swing aggressively from one direction to another – like a kid in a car racing game. Set your speed and your trajectory, and sway slightly from side to side, as need dictates.

Don’t be the oak tree from Aesop’s fable, that staunchly resists the wind’s force, and ultimately capitulates. Better to be the reeds – softer, more pliant, gently rolling with it, whichever way the wind blows.

So while I feel that exuberance and relief are far too widespread…

… and that share prices are way ahead of the economy and corporate earnings:

Source: Tim Brackshall in Twitter

… I don’t ever think that it’s right to have nothing attacking in the mix. As ever, I’m talking about the equity market here. I’m no crypto expert, nor a bond specialist.

For me, long-term investing is preferable with companies, and not just because it’s a hell of a lot more relaxing in times like these. It allows for the magic of compounding in great businesses, not only of your dividends but from their own profits and retained earnings. Double compounding!

I am also very uncertain about the ability of investors to pick what will happen this week or next month, except in very particular circumstances. I’m certainly not foolish enough to try.

And to me, investing in FTSE 100 shares is a tough game, unless you’ve spotted an extreme undervaluation – like what we possibly have in oil right now.

On that – I notice that Brent crude futures are rising back into the $40+ region if you look into the early/mid 2020s, even as WTI crashes 40% today – if you can think long term, be aggressive when others are fearful and have patience, there is surely opportunity in that space.

Given that this is a piece about investing in the future of energy, you might be surprised that I’ve dropped in a couple of paragraphs on the undervaluation of, and opportunity in, oil and gas stocks. I include it though for two reasons. Firstly, to show that I am not some idealist, a nagging climate evangelist, here to save you from your immoral plastic usage.

It’s also a good reminder not to be dogmatic in one’s approach to investing. All strategies offer merit, one way or another. There is no silver bullet – every time one begins to emerge, others follow its strategy and erode its relative performance.

The oil sector is also one of the greatest exponents of the energy transition.

Most are not these dinosaurs and climate science deniers. They know better than anyone that the social, political and investment mood is against them, and that they will need to completely overhaul their businesses in the next decade or two. The lessons are stark. The most advanced transition play of the oil majors is Equinor, which outperformed its peers comfortably in recent years for exactly that reason.

Shell, reeling from the biggest left-right combo in the history of the oil industry, took the time to upgrade its net-zero ambitions last week. Its CEO echoed my exact sentiment when he said that even during this crisis, long-term thinking is paramount.

Here are the new commitments. The carbon emitted from its products will be cut by 30% by 2035 (up from 20%) and by 65% by 2050 (up from 50%), and it will cut emissions from its own operations, to become a net-zero Shell by 2050 or sooner. Shell is one of the most aggressive investors in clean energy, possibly in the world given its size and available cash pile.

Of the 70 odd clean energy deals struck by the top ten oil companies up until September 2019, Shell had made 22 – almost a third of them. It is second only to Total of France in terms of the most clean-energy deals done since 2010.

Make no mistake, these companies know better than anyone which direction the energy markets are going. And they are starting to really scramble for electricity assets: gas and renewables. Yes, gas too will have an enormous part to play in the transition.

The oil majors are in a phenomenal position to drive the energy transition because they have more capital than anyone, ripe for investing in future technologies. And they are. From wind turbine kites hundreds of metres in the air, to solar farms floating on lakes, the oil majors are ploughing cash into some truly remarkable technologies.

They are signalling the direction of travel very clearly. But while they may survive and drive parts of the transition, from a green investment perspective I don’t believe they will see any of the fastest or most exciting gains. Those will come, as always, from smaller, growth-orientated technology stocks.

Maybe they’ll have a brilliant new technology making electric motors more efficient, a new business model in the solar industry or the next generation of electric vehicle designs.

It’s new. It’s understudied. It’s small enough. Smaller companies offer better chances for growth. These companies will be the energy majors of the 2030s. If you get in now, there is a chance that some of your picks, if held patiently for the long term, will make ridiculous money in ten or 20 years.

There are so many great companies, but very few ETFs or funds. That suggests that institutions haven’t yet got in on the action properly. You very rarely see big names on top shareholder lists.

Many have carved out niches, or dominate small sub-sectors. Many have incredible new technologies. They might have new business models, or some patents which guarantee their durability.

This is where you should you devote some of your investing aggression and optimism, and on Wednesday I’ll carry on investigating why, through the lens of one of my favourite investing books.

For now, all the very best in week five of lock-in. Or is it week six?

I feel like a locust in the swarm – passively doing what everyone else is. The date doesn’t matter, the day doesn’t matter. Just eating, sleeping, working and repeating. What’s the limit on how long we will all calmly follow isolation orders like this – two months? Three? Or is it temperature that matters, not time – when it gets to 30 degrees and our fans break, and no one’s allowed in to fix them…?

It’s quite a simple existence for the time being though, and I don’t mind it. Not when there’s such interesting things to be reading and writing about.

Lucky me!


Kit Winder
Editor, UK Uncensored

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