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Investing’s big blindspot

Here’s the biggest challenge with investing: the longer that something has worked the more likely it is to stop working. As more and more people embrace a style of investing, the likelihood of outperformance goes away. We see this with investment strategies - Benjamin Graham’s deep value of the 1930’s and the Nifty Fifty of the 1960’s - and with asset classes - venture capital of the 2010’s and, we would suggest, likely to be private equity in the 2020’s.

The mechanism here is simple. Pioneers of a strategy find a new way to make money, early adopters follow them and confirm there is money to be made. Word spreads and more and more people enter the market. Given there is only a finite number of opportunities for any strategy (for example only a certain number of net-net value stocks or a certain number of venture-scale startups), as more and more people enter the market or adopt a strategy they are forced to settle for worse opportunities. At the same time, the strategy has become so popular and early adopters have made so much money that these worse opportunities are justified (often as ‘a new paradigm’ or ‘new normal’ or with those four dangerous words ‘this time is different’). Then, as has happened so often before and will happen again, the world wakes up to the excesses of the strategy and we see a market correction.

This article from Sapient Capital makes the case that the best investors throw out any rules or universal principles when it comes to investing. They argue that reasoning from first principles, so valuable in engineering and scientific fields, is dangerous when it comes to investing because there are no universal, fixed principles. Instead, they argue that markets are complex, adaptive systems driven by human psychology and the best investors should prioritise openness. Openness to new ideas, to new strategies and new information rather than fixating on any permanent principles.

It is an interesting article and one that we probably need some more time to digest. We are used to hearing investment experts discuss universal principles of investing. So our gut reaction was to push back on the ideas in this article. But beyond that initial reaction, we decided to internalise what this article was promoting: openness. Openness to new ideas, even if they challenge our preconceived notions about a topic. That’s what makes us all better learners. And hopefully that is what will make us all better investors.

Are carbon offsets all they’re cracked up to be? We tracked one from Kenya to England to find out.

The market for carbon credits has absolutely exploded over the past few years. In theory, that is a great thing. There are plenty of renewable energy or carbon abatement projects that may not stack up economically. Their ability to generate and sell carbon credits may be the difference between the project getting off the ground or not. On the other hand, companies may have hard to abate emissions. Carbon credits are a great option for them to offset emissions they cannot otherwise reduce.

That is the theory. In practice, carbon credits have been a forum for greenwashing. Plenty of projects with marginal climate benefits have received credits. And a growing list of companies have ‘achieved’ net zero by buying carbon credits rather than changing their operations to reduce their emissions.

This article from Vox has tracked a carbon credit as it moves around the world as a way to explain many of the pitfalls in today’s carbon market.

Investors have sensed their is money to be made in global carbon markets and have piled in. Everyday investors have been able to invest via ETFs. In Australia, VanEck and GlobalX have launched carbon credit ETFs. In the United States, there are 7 carbon credit ETFs managing just shy of $1 billion according to ETF.com.

But investors should be wary, because there is increasing scrutiny on the carbon market. Earlier this year, German newspaper Die Zeit and the Guardian reported that over 90% of the rainforest carbon credits issued by the world’s largest carbon credit certifier, Verra, had claimed reductions in deforestation that didn’t actually exist. Similarly, the gold standard in carbon credits require “additionallity” - i.e. the project would not have happened but for the money from the carbon credits. As prices for renewable energy falls so sharply, many are questioning whether renewable energy projects continue to meet this standard of “additionallity”

All of this is to say, change is likely coming to the carbon credit market. And for those of us wanting to see more urgent action on climate and interested in the investing opportunities that may arise from a fast-decarbonising world, the changes in the carbon credit market are worth paying attention to.

The land beyond the drug war

The war on drugs has been a spectacular policy failure. By any measure: the lives ruined, the amount spent, the size and number of drug cartels, or most simply, the amount of drug use in society. We fought a war on drugs and the drugs won.

That line of thinking has become more and more accepted wisdom. The challenge is, what comes next?

For ‘softer’ drugs like marijuana, legalisation is an obvious answer. The growing body of evidence from the United States and Canada is testament to that fact. But legalisation isn’t an answer for all drugs. The United States’ experience with opiates over the past 15 years has shown us what widespread availability of these drugs can look like. So the question is: as we shift from a criminalisation focus to a harm-minimisation approach, what does our post-war on drugs policy look like?

This article looks at the American state of Oregon as one possible solution. It has followed Portugal’s lead in treating drug abuse as a behavioral-health disorder, not a crime. Oregon legalised recreational marijuana in 2015. Then, in 2020, it followed up by decrimininalising possession of all drugs and directing most of the tax proceeds from legal marijuana sales to treatment for more-serious substance abuse. It has effectively tried to take drug addiction out of the realm of criminal justice and into public health.

Since the law was implemented, almost $300 million in tax revenue has gone to drug treatment groups across Oregon. At the same time an Oregon State Government report has found the state has also saved $37 million by not locking up drug users on possession charges. But it has created its own raft of costly problems.

Property crimes like burglary and vandalism have skyrocketed and police have been forced to break up open air drug markets. To say it has been controversial is an understatement. Or, as this article neatly sums up, “there’s no sense beating around it: Downtown Portland is a shit show”.

Oregon is a case study in the challenges of wrapping up the war on drugs. At this stage, there is no good solution to replace it. And until we see a workable post-war on drugs policy, the lack of an alternative will likely perpetuate the war on drugs for years to come.

Did plastic straw bans work? Yes, but not in the way you’d think

Not too long ago, plastic straws were enemy number 1 of the environmental movement. And the movement was successful. Large fast food chains like McDonalds moved to paper straws. Supermarkets such as Woolworths stopped selling single-use plastic straws. Some of the ‘solutions’ to the plastics straw challenge were comical. None more so than Starbuck’s announcement in 2018 that they would be replacing plastic straws with plastic ‘sippy’ lids. This article looks back at the movement to ban plastic straws and wonders how we lost sight of the forest for the trees. If plastic straws are only 0.025% of the plastic waste ending up in the ocean, why is it we became fixated on it.

The world has moved on from plastic straws and is now focused on all single use plastic. Last year, Canada announced a single-use plastics ban that included bags, cutlery, food service ware, and stir sticks. A year earlier, in 2021, the European Union announced a similar single-use plastic ban that captured plates, cutlery, straws, balloon sticks and cotton buds. These feel like great steps, but we should take a lesson from our experience with plastic straws.

The amount of plastic we’re using is still growing. Global plastics production doubled from 2000 to 2019. Twiggy Forest’s Minderoo Foundation publishes the Plastic Waste Makers Index and found the world generated 139 million metric tons of single-use plastic waste in 2021, which was 6 million metric tons more than in 2019, when the first index was released. The OECD have predicted that the amount of plastic waste produced globally will triple by 2060.

These numbers are a reminder that there is still a long way to go to address the volume of plastic waste we create. And while announcements of bans on single-use plastic are a great step, they are only slowing the growth. We still have a long way to actually reduce the volume of plastic waste we’re creating.

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