You may recall a Grinch stole the year-end rally. That was all over the news. Media have since turned their attention to other things including a tragic house fire in Halifax, our federal government twisting on matters of SNC Lavalin, and another crash of a Boeing 737. Good news isn’t the forte of our news media so you could easily be unaware that investment accounts have risen so strongly already this year that they are generally higher now than they were at any point of 2018 (net returns). Twelve-month returns are especially solid. You and I can review the specifics in regard to your own account holdings.
Main focus of this letter is the environmental impact of world growth, and specifically the rising numbers of middle-class around the world and what this means for our home on Mother Earth. We’ll see, this is a vital theme in our investment planning, not least in order to avoid brooding litigation that will follow environmental hazards. We actively and intentionally position ourselves (with or without ESG funds) to reduce our footprint, support safe and sustainable growth, and ease potential future impacts of legislative changes and court-assessed penalties both in Canada and worldwide. It was a new subject in the 1990s and we’ve kept an eye on this for the years since, but the point bears repeating with even greater clarity. “We do not inherit the earth from our ancestors; we borrow it from our children” …also from our grandchildren.
First we ponder Two Wise Phrases.
There are countless “wise phrases” coined through investment history. Let’s look at two of them. One has always struck me as gratuitous while the other is genuinely valuable for our peace of mind and financial success.
“Miss the ten best days, and you miss the entire growth of investment markets.” This phrase appears in many forms, a favourite of the investment industry. It’s not my favourite for two simple reasons. (a) First off, it is a fallacy if people take it as a reason to do nothing. You and I continue to update portfolios to reduce risk and sustain growth so doing nothing would be a cop-out. Secondly, the phrase doesn’t sit well because the ten worst days usually occur close to the ten best days. For instance if we deleted mid-November to the end of January, we could have missed the worst and the best. Same thing in January a year ago. Some may say then, let’s simply miss the most volatile times, selling in advance and buying afterward. That works better in theory than practice: this is where we come to the second wise phrase which is actually true.
“It’s time in the markets, not timing the markets.” Every serious investment professional has initialed and signed off on this statement coined 30+ years ago by Nick Murray. We set our investment allocations for a specific view of potential risk and return. It’s like buying a sailboat which has been handcrafted and fit with the appropriate equipment and sails for a specific range of weather patterns, distance and average speed. The long distance sailor cannot jump in and out of bad weather but is prepared to journey through all possible conditions. Similarly no one (except by random, lottery luck) can effectively time selling to cash before a meltdown and then re-purchasing at the bottom to maximize theoretical gain. In the 1980s I believed it was possible; through the 1990s I learned it was impossible. It has been exhaustively proven: timing does not work but time-in does work.
Results prove this time and again. Our investment allocations remain far safer than roller coaster markets or stormy seas. Our net results have thus outdone raw market benchmarks.
Environmental Impact of Emerging Markets and a rising Middle Class.
As citizens of earth, also as investors, we realize the value of higher growth “Emerging Markets” (EMs) and yet also their hazards for climate change. It’s worth celebrating when some nations have moved millions from hunger, disease and poverty. (That is a plus in every respect) EMs have significantly higher growth rates than the developed world so have a dynamic position within our investment plans. These economies are leapfrogging from no-tech to high-tech in one generation. Even as growth slows (eg. China now at 6% down from 15% p.a.) these economies produce more, trade more, and impact the environment more than they have ever done before. (Credit to Krzysztof Musialik of Franklin Templeton for contributions to this discussion.)
Ponder what we collectively call the “middle class” – an idea that emerged over the past few centuries. Even in recent generations our ancestors lived close to the ground and on the edge of poverty. Today among poorer nations there is a historic shift as hundreds of millions enter the middle class. With TVs and mobile technology these have seen the lifestyle they want, including transportation, energy, meat protein, world travel, financial savings and shiny consumer goods.
Consider the scale of this. In the past 40 years airline passenger-trips increased 10-fold worldwide (from 378 Million to 4 Billion annually). China’s increase was 37-fold from 1.5 Million to 551 Million airline trips per year. More travel means more fuel burned and more greenhouse gasses emitted. Similarly in clothing, Americans buy five times more clothes than they did forty years ago with emphasis on fashion rather than durability, and the new middle class of developing nations want to echo the same lifestyle and consumption. Environmental impact is mounting as textile production needs enormous amounts of water and generates tremendous waste and pollution.
My family’s use of coal ended by the 1940s but in much of the world it remains the cheapest form of energy. In some countries it remains critical to generating electric power. Coal use is now double what it was in 1980 – eight billion tons a year. Natural gas is a clean alternative but more pricey. Solar and wind energy are increasing against all fossil fuels but these are not yet fully reliable and lack sufficient storage. In developing regions, nothing is cheaper than coal to sustain heat and power in the rush to lift peoples’ lifestyles.
Consequences of climate change: (1) The World Bank sees 143 Million people having to depart low-lying coastlines to escape the intense storms of climate change. (2) Agriculture will shift dramatically due to heat and drought in former bread-baskets while other areas get flooded as never before. Peru’s fisheries will suffer. Argentina’s soy production will expand. Worldwide agriculture will face vast consequences. (3) Company profits will rise or fall with weather patterns, for example German manufacturers facing higher transportation costs with their barges grounded on the now-shallow Rhine River. Textile firms face lower revenues because consumers delay purchases due to milder, shorter winters, forcing firms to write down their inventories. (4) New and escalating liabilities will hit mining, transportation, and the highly profitable cement industry which is one of the foremost emitters of CO2 and other noxious substances.
As investors we find no perfect world but can invest with a better world at heart. We can avoid owning the worst polluters in favour of greener and sustainable alternatives. There are newer ways to create cement to absorb rather than generate CO2. There are newer materials to construct tall buildings that can absorb CO2 rather than create it. We’re creating newer technologies for air travel, newer solutions for electrical storage, and newer developments in communications and the “internet-of-things” to track and optimize the use of natural resources, and to reduce waste products from homes and industry. These developments are leapfrogging forward in emerging and developed nations. In some respects even China is on the cutting edge, not just taking technologies from elsewhere but innovating and issuing more patents than any other country in the world.
Ethical standards at Home and Abroad.
Our portfolio teams are well aware that investors will punish stocks and industries for environmental and human devastation. Think of spillage from heap leaching and tailing ponds in the gold and base metals industries. Think of the impact on SNC Lavalin or Bombardier for lapses of moral discipline, or Boeing with recent crashes, or PG&E now implicated in sparking the worst California wildfires, or any firm that bribes or takes the easy road to temporary profits. Our funds shun such risks in favour of genuine and lasting profits consistent with a sustainable global future.
“After the Deluge” (The Economist, Feb 23/19): in 2017 just 15% of companies in the S&P500 disclosed how weather-related events could affect earnings. Less than 5% attempted to quantify the risk and found an average 6% damage to future corporate profits. That is a material risk – a risk you and I don’t want for all kinds of personal and ecological reasons.
This discussion isn’t new, yet with greater force it is now working through all investment decisions that impact our accounts. If some investor wants to own the whole market or a market-hugging investment fund then they are taking on liabilities that will certainly and inevitably hit and with inestimable cost to the earth and for our grandchildren.
Our managers have been cultivating a clearer and narrower group of holdings, often less than 70 in a fund, or even below 30 in a given fund, bringing the most intense insight to each asset. This includes environmental and social impact, and is part of our ongoing discipline to weather the future safely while optimizing personal growth and net wealth.
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Yours in Financial Security for LIFE!
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500