Decarbonisation: A doubter’s guide for conservative investors

In December of last year, Livewire “surveyed more than 4,000 investors and learned that 62% of them intend to invest in decarbonisation in 2022. That was double the level of interest of any other megatrend.” Its latest Megatrends Series, Decarbonisation 2022, “unearths the funds, ETFs, and experts leading the charge to Net-Zero.” One contributor asserts: “climate represents a significant long term investment opportunity.”

Conservative investors beware: these opinions and survey results reflect disregard of history and overconfidence about the future – and thus presage trouble. Advocates of “the world’s biggest thematic right now” will, if past is prelude, likely generate disappointment and perhaps hefty losses. As Benjamin Graham warned in The Intelligent Investor: “… on Wall Street, (enthusiasm) almost invariably leads to disaster” (see also Why you’re probably overconfident – and what you can do about it). Are crypto-currencies and FAANG stocks the latest examples? Will decarbonisation suffer a similar fate?

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Why you’re probably overconfident – and what you can do about it

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Four Doubts

In this article, I make four sets of points:

1. Proponents of decarbonisation are adamant that it’s a megatrend. In contrast, I show that (a) current attitudes towards decarbonisation may be a fad; (b) decarbonisation of electricity generation in Australia and elsewhere is clearly a trend; (c) decarbonisation of total consumption of energy isn’t clearly a megatrend.
2. Decarbonisation advocates regard it as inevitable. Yet megatrends have often been “predictable” only in retrospect. Moreover, only two things in life are certain – and one (mega)trend can delay, divert or even extinguish another.
3. Boosters strongly imply – and sometimes boldly assert – that decarbonisation will enhance investors’ returns. This, too, is doubtful. Megatrends’ results have often fallen well short of proponents’ hype – and have sometimes become megabusts. Remember the collapse of the Dot Com bubble?
4. The world’s greatest investor, Warren Buffett, hasn’t boarded the decarbonisation bandwagon. What do its boosters purport to know that he allegedly doesn’t?

Let’s Clarify Our Terms

It’s important to distinguish a megatrend from a fad, micro- and macro-trend (Michael Haberman, “Can You Tell the Difference between Fads, Micro Trends, Macro Trends and Megatrends?” 5 February 2016).

Fads

A fad is anything whose attractiveness or prominence rises and falls quickly and often unexpectedly. Fads typically attract relatively small groups, particularly of young and impressionable people, but sometimes affect significant swathes of society. Clothing and hairstyles, foods, exercises and dances and music are particularly prone to fads. They may last as long as a couple of years, but usually leave no lasting effects. Is decarbonisation a fad? Attitudes – including those of financial market participants – are often shallow, fickle and ephemeral. In this subjective sense, today’s interest in decarbonisation (as opposed to its objective extent in the real world) may be a fad: time will tell.

Micro- and macro-trends

Trends develop more slowly than fads, but affect many (or most) people or occur on a much wider scale. A micro-trend seems to last roughly 3-5 years; a macro-trend perhaps 5-10. It takes longer to develop, but once it does its presence is generally durable. The popularity of specific social media applications (Instagram versus Snapchat, Yelp versus Zomato, etc.) may tend towards the “fad” end of the spectrum, whereas social media as a whole (IT applications that enable users to create and share content or to participate in social networking) is clearly a macro-trend. But is it a megatrend?

Megatrends

If trends develop more slowly than fads, megatrends take even longer to develop (or become noticeable). If trends and their effects last for years, megatrends’ endure for decades. And if fads are superficial, megatrends are subterranean; for this reason, although they profoundly influence entire populations, many people can long fail to notice them. As an analogy, fads come and go quickly, like thunderstorms; trends’ effects last much longer, like droughts; and megatrends, like climates, evolve most slowly but pack the most powerful punches. The Copenhagen Institute for Future Studies’ definition is oft-cited but contradictory: “megatrends are the probable future – or express what we know with great confidence about the future. Megatrends are certainties.”

That’s the crucial problem: given human beings’ abject inability to predict the future (as well as their repeatedly demonstrated talent to “mispredict” it), investors shouldn’t uncritically accept the assertion that decarbonisation is a megatrend. More generally, the greater is boosters’ and alleged experts’ confidence, the stronger should be investors’ scepticism (see also Experts can’t predict yet investors must plan: What, then, to do?).

Megatrends in the 20^th century and beyond

A megatrend is a development (or cluster or series of events) that over years and decades change countries and the world fundamentally and irreversibly. During the 20^th century in Australia, my list includes (in no particular order of importance):

• The eclipse (in economic and military terms) of Britain and the ascent of the U.S.;
• The rise of the welfare-warfare state (and the associated rise of central banks and fiat currencies, demonetisation of gold and explosion of debt);
• Mass immigration from non-English-speaking countries;
• (Sub)urbanisation;
• The revolution of personal transport (from horse to motor car and aeroplane) and communications (from local newspapers to national radio and television to the global Internet) and
• The decline of manual labour and advent of leisure.

Buttressing these megatrends were others, such as the rise of mass affluence (see, however, America’s permanent recession: Is it coming to Australia?). Underwriting greatly rising standards of living, which spread to many parts of the world by the last quarter of the 20^th century, were revolutions in agriculture, public hygiene and personal health (which reduced morbidity and extended lifespan, and thus created ageing populations). And underpinning all of these and more was the unceasing advance of technology – in recent decades, particularly of digitisation.

Megatrends are predictable, or become clear, mostly in retrospect. They can take years to germinate from trends into megatrends, but only a few trends become megatrends. And the boundary between trends and megatrends isn’t hard and fast: was the secular decline of CPI and rates of interest (and related rise of asset values) from the late-1970s until very recently a megatrend? Has it concluded, and are we now witnessing the birth of a trend (or perhaps even megatrend) towards higher CPI and rates – and lower asset prices? If so, how will these developments affect decarbonisation?

It’s important to emphasise that one megatrend can blunt another. Decades ago, some people identified China’s rise as a megatrend. Today, however, it’s hardly obvious that it will continue – at least along the same path as hitherto. It’s widely accepted, not least by the Chinese, that China soon faces a demographic crisis. As a result, it’s increasingly likely that the country as a whole will grow old before it gets rich. If so, then the Communist Party must resort to increasingly authoritarian rule to protect anointed insiders against benighted outsiders – and perhaps take a leaf out of America’s book by using foreign policy adventures as distractions from domestic difficulties.

In China and elsewhere, it seems likely that one megatrend (ageing population) will to some extent counter another (economic expansion). Might decarbonsation – assuming that it’s a megatrend – experience the same fate?

In the West as well as China, will the explosive rise of debt slow or halt the megatrend towards mass affluence? Similarly, the globalisation of trade has been closely related to China’s rise. But in the wake of COVID-19 and the Russo-Ukrainian war, it’s reasonable to wonder whether it, too, will abate or alter its course. If so, and if rising CPI and interest rates, “partial deglobalisation” and demand for energy security become trends, will they delay, retard or even reverse decarbonisation? 

Surfing megatrends doesn’t guarantee great returns

Few people would disagree: China’s rise, first in economic-financial and subsequently in diplomatic-military respects, qualifies as a megatrend. Its ascent has clearly been multi-faceted. Hence the crucial question: might the risks to investors arising from China’s growing use of its diplomatic and military clout alter, hinder or even extinguish other megatrends (such as globalisation and decarbonisation)? Apart from sheer speculation, these questions are currently unanswerable. Moreover, answers won’t be evident for years. However, what’s presently known are the long-term returns from investments in China’s major market indexes.

Figure 1 plots that country’s two main stock market indexes from their starting dates in 1997 until April of this year. It compares them to the S&P 500, and to facilitate the comparison it gives to each index a common base (August 1997=100). Consider the investor who in that month purchased a portfolio of securities that perfectly reflected a Chinese index, rebalanced every month and ignored the costs of these transactions. She did extremely well for a time: the investments of $100 in August 1997 peaked at $497 (Shenzhen) and $499 (Shanghai) in October 2007. Those are clearly excellent long-term results.  

Figure 1: Three Indexes (Shanghai, Shenzhen and S&P 500), August 1997=100

Yet it’s unlikely that many investors received such returns. Over their first nine years of existence, the Shanghai index rose just 1.2% per year and the Shenzhen index 4.7% – and from 2000 to 2005 generated compounded losses of almost 9% per year.

How many would have held throughout the nine dry years in order to reap the spectacular harvest in the tenth? Probably just a few – but many, goaded by “experts” and the specialist managed funds that grew like mushrooms in 2006-2008, enthusiastically boarded the China bandwagon. Alas, those who did so suffered gut-wrenching losses of 70% from the peak in October 2007 to the trough in October 2008.

Those who bought at the nadir and held until May 2015 did very well; but those who bought at that time lost ca. 50% of their investment during the next three years. Those who bought at the pre-GFC peak lost over 40% over the next 13 years.

Over selected long intervals, a few “outside” investors in China funds have no doubt reaped huge rewards – and many more, egged by “experts” and buying at the peak, have suffered large losses. The key point, however, is that over the past quarter-century investors in the Shenzhen index have generated a compound rate of return of 3.9% per year; those in the Shanghai index received 4.8% per year. Investors in index funds that perfectly mimicked the S&P 500, on the other hand, would have comfortably outpaced them (6.6% per year).

Those are slim pickings from a megatrend! Similarly, will investors in decarbonisation – assuming that it’s a megatrend – will receive returns that fall far short of their current expectations?

Decarbonisation: Fad, trend or megatrend?

“Decarbonisation,” says TWI Global, a British consultancy firm, “is the reduction of carbon dioxide emissions through the use of low-carbon power sources.” It “involves increasing the prominence of low-carbon power generation, and a corresponding reduction in the use of fossil fuels. This involves in particular a use of renewable energy sources like wind power, solar power, and biomass. The use of [CO₂] can also be reduced through large-scale use of electric vehicles alongside ‘cleaner’ technologies. Decreasing carbon intensity in the power and transport sectors will allow for net zero emission targets to be met sooner and in line with government standards.”

By this conception, which exaggerates the importance of renewables (see below), since the early-2000s the generation of electricity in Australia has been decarbonising. Moreover, it’s occurring at an accelerating pace.

Figure 2: Generation of Electricity in Australia, by Source as a Percentage of Total, 1980-2020

Using data compiled by the Energy Information Administration, an agency of the U.S. Department of Energy, Figure 2 disaggregates the production of electricity in Australia into two categories: fossil fuels (i.e., coal and gas), hydro and non-hydro intermittent (i.e., solar and wind). The percentage of total output generated by burning fossil fuels rose from 85% of the total in 1980 to 92% in 2002. This percentage rose because hydro power’s share halved from 15% in 1980 to 7% in 2002 (in that year, non-hydro intermittent output was just 1% of the total). Since the early-2000s, in contrast, fossil fuels’ share of power production has dropped steadily – to 75% in 2020. In that year, hydro produced 6% and solar-wind 18%; collectively, then, these renewables’ share of total output of electricity rose from 8% in 2002 to 25% in 2020.

How does this definition of decarbonisation overstate renewables’ importance? “Electricity” and “energy” aren’t synonyms. All electricity is energy, but not all energy is electricity; electrical power, in other words is or subset of – and but one form of – energy. 

In 2020, intermittent sources provided one-quarter of Australia’s electricity but much less of the country’s total consumption of energy. That’s because coal, gas and oil enable transport via air, rail, road and sea; they also heat homes and offices, and are essential inputs for agricultural and mining production and the manufacture of countless things. Many and various activities, which are essential to modern life, consume vast quantities of energy – of which intermittent sources supply little.

Solar panels and wind turbines currently generate a growing, significant but still minor percentage of Australia’s electricity, but little of its total supply of energy. During the next decade or more, that’s likely to remain the case – and thus significant decarbonisation in this broader and more fundamental sense is hardly certain to occur. If so, can it qualify as a megatrend?

Figure 3a: Australia’s Total Consumption of Energy, by Source as a Percentage of Total, 1965-2020

Figure 3a quantifies this critical reality. In 2020, renewables supplied just 10% of Australia’s total consumption of energy – and fossil fuels 90%. Fossil fuels provided nine times more than intermittent sources of this country’s total energy needs. Figure 3b disaggregates these sources. Coal’s and oil’s shares have fallen from 48% each to 30-35% each; gas’s has zoomed from nothing to almost 30%; and more recently, solar and wind’s has risen from nothing to ca. 7% (hydro comprises another 3%).

Figure 3b: Australia’s Total Consumption of Energy, by Components, 1965-2020

Many of decarbonisation’s boosters disparage Australia as a laggard and laud Germany as a leader. Over the past half-century, fossil fuels have comprised a steadily-falling and renewables (importantly, including nuclear) a steadily-rising percentage of Germany’s total consumption of energy (Figure 4a).

Figure 4a: Germany’s Total Consumption of Energy, by Source as a Percentage of Total, 1965-2020

Yet in 2020 fossil fuels provided a large majority of its energy. Indeed, they supplied three times as much (75%) as renewables (25%). “Green leadership,” it seems, includes nuclear power and necessitates continued heavy reliance upon fossil fuels.

Figure 4b disaggregates 4a’s data. Coal’s share has collapsed from more than 60% in 1965 to less than 20% in 2020. The bulk of this decrease occurred before 2000; since then, its pace has greatly abated. Oil’s share, in contrast, has fluctuated but not budged: it was 35% in both 1965 and 2020. And gas’s share has risen from virtually nothing in 1965 to more than 25% in 2020. Nuclear’s share rose from 0% in 1965 to more than 10% by the early-2000s; since then, however, it’s halved. Finally, solar’s and wind’s combined share has increased from virtually nothing in 2000 to 13% in 2020.

Figure 4b: Germany’s Total Consumption of Energy, by Components, 1965-2020

Solar and wind provide little more than one-tenth of Germany’s total consumption of energy. And that percentage presupposes backup from gas (whose share has always been much bigger than intermittent sources’) when the sun doesn’t shine and the wind doesn’t blow. So much for its much-vaunted – and colossally expensive – energiewende (energy transition)!

One of the world’s most aggressive and costly energy transitions – Germany’s since 2000 – has managed to boost wind’s and solar’s share of power generation to about 40%. Yet that’s merely dented fossil fuels’ predominant share of total energy consumption (from 84% to 76%). Given these trends, how can anyone credibly assert that Germany can “go net zero” by 2030? Or even by 2050? And if it’s very unlikely that Germany can, then which major nation could? Even among the alleged leaders of the transition – not to mention China and India – fossil fuels rule. Indeed, according to Distinguished Emeritus Professor Vaclav Smil (one of Bill Gates’s favourite authors), a “green revolution” has always been, is now and in the years and even decades to come will remain a mirage. In How the World Really Works: a Scientist’s Guide to Our Past, Present, and Future (Viking, 2022), Smil concludes

We are a fossil-fuelled civilisation whose technical and scientific advances, quality of life, and prosperity rest on the combustion of huge quantities of fossil carbon, and we cannot simply walk away from this critical determinant of our fortunes in a few decades, never mind years.

The decarbonisation of power generation in Australia and elsewhere is clearly more than a fad: it’s a trend. Yet intermittent sources of electricity certainly don’t power entire societies today; and it’s reasonably clear – even in “leading” nations like Germany – that they’re not going to do so anytime soon.

If megatrends are profound changes predictable mostly in retrospect, and bearing in mind that one can blunt another, as well as today’s reality in Australia, Germany and elsewhere, then on a global basis decarbonisation might one day be – but today isn’t – a megatrend.

Even if it occurs – which, it’s important to emphasise, is hardly certain – will it create a major growth industry from which retail investors will benefit? I doubt it: since the Industrial Revolution, technology has delivered immense benefits to humanity – but in virtually every instance, its boosters initially promised even more. As a rule, they’ve over-promised and under-delivered. Most importantly, consumers have received the lion’s share of technology’s benefits. In recent decades, early investors have shared these spoils; but throughout history, the mass of investors and shareholders have generally stood towards (or, by buying near the peak and selling near the trough, placed themselves at) the back of the queue.

Accordingly and crucially, even if decarbonisation is (or becomes) a megatrend and triggers growth industries, and other megatrends don’t thwart it, investors worthy of the name shouldn’t base their portfolios’ returns upon it.

“Growth Industry” and “Growth Stocks” aren’t synonyms

“It has long been the prevalent view,” wrote Benjamin Graham in The Intelligent Investor, “that the art of successful investment lies first in the choice of those industries that are most likely to grow in the future and then in identifying the most promising companies in these industries. For example, smart investors – or their smart advisers – would long ago have recognized the great growth possibilities of the computer industry as a whole and of International Business Machines in particular. And similarly for a number of other growth industries and growth companies.”

Advocates of “growth stocks” in general and decarbonisation in particular – many of whom probably haven’t read Graham – would surely agree. They should (re)read him: he cautioned that this prevalent view is never as easy in prospect “as it always looks in retrospect.” People in general and investors in particular, in Jason Zweig’s phrase, possess “a remarkable ability to make rear-view mirrors out of rose-coloured glass.” To emphasise this point, Graham reinserted into the book’s 1973 edition a paragraph that he included in the first (1949) edition:

Such an investor may for example be a buyer of air-transport stocks because he believes their future is even more brilliant than the trend the market already reflects. For this class of investor the value of [The Intelligent Investor] will lie more in its warnings against the pitfalls lurking in this favorite investment approach than in any positive technique that will help him along his path.

In his Comments in the book’s revised (2008) edition, Jason Zweig elaborated:

“Air-transport stocks” … generated as much excitement in the late 1940s and early 1950s as Internet stocks did a half century later. Among the hottest mutual funds of that era were Aeronautical Securities and the Missiles-Rockets-Jets & Automation Fund. They, like the stocks they owned, turned out to be an investing disaster … The lesson Graham is driving at is not that you should avoid buying airline stocks, but that you should never succumb to the “certainty” that any industry will outperform all others in the future.

Just as decarbonisation is today, to many people shortly after the Second World War, commercial aviation was an obvious trend and probably even a megatrend. Whether it was one or the other, at best it’s been only intermittently profitable – and in long-term aggregate has been profitless. As Graham recounted in the early-1970s, commercial aviation’s investment “pitfalls … proved particularly dangerous.”

It was, of course, easy to forecast that the volume of air traffic would grow spectacularly over the years. Because of this factor, became a favourite choice of investment funds. But despite the expansion of revenues – at a pace even greater than in the computer industry – a combination of technological problems and overexpansion of capacity made for fluctuating and even disastrous profit figures … The record shows that even the highly paid full-time experts of the mutual funds were completely wrong about the fairly short-term future of major industry.

Are today’s “experts” as overoptimistic about decarbonisation as their forebears were about aviation? Will a combination of technological problems and overexpansion of capacity vex the profitability of renewable energy and related entities?

In a speech delivered in 1999, Graham’s most talented pupil and one-time employee, Warren Buffett, updated and reiterated his mentor’s assessment. Buffett observed:

Now the other great invention of the first half of the century was the airplane. In this period from 1919 to 1939, there were about two hundred companies. Imagine if you could have seen the future of the airline industry back there at Kitty Hawk [North Carolina, where Orville and Wilbur Wright successfully flew what’s generally regarded as the world’s first motor-powered aeroplane in 1903] …, and you decided this was the place to be. As of a couple of years ago, there had been zero money made from the aggregate of all stock investments in the airline industry in history.

Yet Buffett hasn’t been able to withstand this industry’s allure. For decades, he’s criticised the airline industry as a terrible place to invest – yet has occasionally violated his injunction. In his annual letter (2007), he summarised his view: 

The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.

If the rapid growth air transport was one of the 20^th century’s megatrends, the rise of computers in particular and information technology more generally were even bigger and more profound megatrends. And surely IT’s profits have outpaced aviation’s losses? Although I’ve not located a reliable source of valid data, that’s likely true. Yet Graham emphasises that “profitable industry” and “profitable investments” are not synonymous phrases: from the 1950s to the 1970s, “many – if not most – … investments in computer-industry companies other than IBM appear to have been unprofitable.”

Although I’ve not seen convincing research on this topic, I wouldn’t be much surprised if much the same result has occurred in the half-century since the 1970s: a handful of tech titans has amassed almost all of this sector’s profits, and the rest languish as profitless (or nearly so) also-rans.

Figures 5a and 5b, which plot the Tech Pulse Index compiled by the Federal Reserve Bank of San Francisco (FRBSF), substantiate this view. This Index was (the FRBSF discontinued it early in 2020) a coincidence index of activity in the U.S. IT sector. The Index’s components included “investment in IT goods, consumption of personal computers and software, employment in the IT sector, industrial production of the technology sector, and shipments by the technology sector.” The Index thereby quantified “the health of the tech sector.”

Figure 5a: FRBSF Tech Pulse Index, Monthly (January 2000 = 100)

Figure 5a will hardly surprise tech bulls: the Index skyrocketed 100-fold during the past half-century. IT has been a growth industry if there ever was one. Figure 5b, on the other hand, will dismay them: over the past half-century the Index’s 12-month rate of growth has been steadily declining; indeed, during the 21^st century it’s averaged 0.3%. That’s less than GDP’s annualised rate of growth.

Bluntly, IT in the U.S. is no longer a growth industry. Perhaps that’s why the FRBSF recently discontinued the Tech Pulse Index?

Figure 5b: FRBSF Tech Pulse Index, Annualised Percentage Change

From these two megatrends, aviation and IT, Graham drew two crucial lessons which conservative investors should never forget:

1. “Obvious prospects for physical growth in a business do not translate into obvious profits for investors.
2. The experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.”

Why has Berkshire invested so little in renewables? Why has it recently invested so much in fossil fuels (and AAPL)?

Warren Buffett is widely regarded as the 20^th century’s greatest investor, the most accomplished one alive and perhaps the best of all time. His vehicle, Berkshire Hathaway, Inc. (BRK), has handily outperformed the S&P 500 since he obtained control in the mid-1960s. Out of the scores of companies Berkshire presently owns (either as a 100% subsidiary or a majority shareholder), none can be reasonably regarded as a generator of intermittent (“renewable”) energy.

One of them, Berkshire Hathaway Energy (BHE), of which BRK owns 91%, is one of BRK’s “Big Four” (along with its insurance companies, the largest U.S. railroad by freight volume (BNSF), and its ca. 5% ownership of Apple Inc. (AAPL)). BHE’s assets exceed $100 billion; in 2020, they generated ca. $3.4 billion of net income. The vast bulk of these assets store and distribute gas. The other assets generate power: approximately half of its owned and contracted capacity comes from intermittent sources; the other half from coal and gas (BHE plans to retire its coal units by mid-century). BHE’s unreliables subsidiary, BHE Renewables (BHER), generated $936 million of revenue and $521 million of net income in 2020.

BHER has invested approximately $35 billion in intermittent power sources. That’s a large number but a small percentage (3.6%) of Berkshire’s ca. $960 billion of total assets. What prompted Berkshire to undertake this investment? Buffett’s rationale, which he outlined in 2014, remains true today:

“I will do anything that is basically covered by the law to reduce Berkshire’s tax rate. For example, on wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.”

Renewable energy produces a minority (15%) share of BHE’s net income, and BHE comprises a minority percentage of BRK’s assets. By and large, BRK’s wholly- and majority-owned businesses ignore and exclude it. So does Berkshire's portfolio of publicly-traded companies. Table 1 summarises its largest holdings by market value according to CNBC’s Berkshire Hathaway Portfolio Tracker on 4 May.

Table 1: BRK’s Current (4 May 2022) Major Equity Holdings

None of its top-seven holdings – indeed, none of its equity holdings – is a producer of intermittent energy. But two of its top-seven (Chevron and Occidental Petroleum), comprising somewhat more than 10% of its portfolio, are major producers of oil and gas. Buffett’s favourite holding period is “forever.” What does the world’s greatest investor’s portfolio imply about the viability of renewables and the “sustainability” of fossil fuels? What, in short, do the boosters of decarbonisation purport to know that Buffett allegedly doesn’t?

Conclusions and implications

According to The Australian (27 April), Anne Collyer has more than 20 years’ experience advising governments and private institutions in the energy sector. She’s the first double-chair of the Australian Energy Market Commission (which acts as a rule-maker in the National Electricity Market, and advises governments how to develop energy markets over time) and the Energy Security Board (which was established by Australia’s energy ministers in 2017 to co-ordinate the implementation of recommendations from the Independent Review into the Future Security of the National Electricity Market).

Collyer “describes the transition to renewable energy as like a speeding car hurtling down a runway beside a ‘half-built aeroplane’ that we need to finish constructing and jump aboard before we run out of tarmac.”

Her imagery isn’t merely evocative: it’s revealing. What sane person attempts to construct an aeroplane not just whilst it’s in motion, but trying to become airborne? And who on earth, apart from a Hollywood stuntman, would attempt to jump from a speeding car into such a contraption? If she’s right, then decarbonisation is a high-risk – indeed, dangerous – stunt whose odds strongly favour not just a crash but fatalities.

Although Buffett repeatedly did, Graham never flatly declared “don’t buy air transport or tech stocks.” If he were alive today, it’s unlikely that he’d say “don’t buy ‘decarbonisation’ stocks.” Instead, he’d advise, in effect, “if you’re going to buy one or more of them, don’t do so from a top-down perspective; do it from a bottom-up point of view.”

Jason Zweig’s interpretation bears repetition: “the lesson Graham is driving at is not that you should avoid buying airline stocks, but that you should never succumb to the ‘certainty’ that any industry [and therefore its current ‘leaders’] will outperform all others in the future.”

Similarly, Graham doesn’t preclude the purchase of “growth” stocks. (But he is, in effect, advising against the purchase of “growth” funds, ETFs and the like). Don’t, however, buy these stocks on a “top down” basis; that is, merely because they operate in fashionable, exciting and apparently growing industries. Instead, he counsels, buy them on a “bottom up” basis: if and only if they possess long histories of profitable operation, possess durable competitive advantages (“moats”), etc., and are available at a price that’s lower than your conservative estimate of their value. These factors, in brief, explain BRK’s recent acquisition of its massive holding of AAPL.

In conclusion, the insuperable problem with “growth” themes and “growth” industries is that boosters exaggerate their prospects and speculators obligingly push the prices of their companies’ securities to excessive levels. As a result, when realism finally intrudes participants receive mediocre (if they’re lucky) or disastrous (if they’re not) returns. 

Ultimately, YOU must decide who’s more credible: Buffett and Graham, or enthusiasts of decarbonisation? Buffett and Graham offer logic, evidence, prudence and compelling track records; boosters offer implausible (and sometimes demonstrably false) assertions – often based upon faulty models and emotive appeals – and erratic (or worse) results. As in the past, so too today and (I believe) into the future: investors will choose timeless principles and receive reasonable returns; speculators will follow the herd and suffer the consequences.

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