The three most powerful natural forces in the global economy are aging-demographics, technology and climate change. While most recognize the first two, many deny the third. Most people don't invest based on any of the three or just touch on tech.
What I will jump start you on this year is that a massive new trend, based around all three factors, is developing. And it is developing very fast. There is an emerging intersection between sustainable investing and what I dubbed in the press "the smart everything world."
Sustainable economics and sustainable investing will go hand in hand in coming decades. Those who ignore or deny this secular mega trend will fall behind or outright lose.
Ignore Ideology To Invest Wisely
In 1999, at the height of the tech mania, I sold most of my tech holdings, which back then was about half my portfolios. I replaced those holdings with some zero coupon bonds after I read Warren Buffett was doing it. I held some cash until spring 2000 that I eventually invested in the Gabelli Capital Value Fund (CPCRX), which made bearish bets, and a couple oil stocks.
My two stock picks in 2000 were Occidental Petroleum (OXY) and a bit later, just after its IPO, Petrobras (PBR). My reasoning was that the supply and demand equation was tightening (way before shale) while valuations were cheap, as most investors had pounded into tech in a huge FOMO rush and still hadn't rotated out into other assets.
I didn't buy oil stocks because of ideology, anymore than I sold tech stocks and positioned for a downturn based on ideology. I made those trades because the markets and economy were telling me to.
Today, the markets are telling me to stop investing in fossil fuel stocks (I trade them instead), and begin the process of investing in stocks that will benefit from the fast developing trend towards sustainability.
The Fossil Fuel Divestment Movement
The movement to divest oil stocks has accelerated in the past few years. Over 1000 institutions have now divested their fossil fuel investments or are actively doing so.
Taking the biggest hits from divestitures are the biggest players in fossil fuels, in particular Exxon (XOM) and Chevron (CVX). It seems both stocks have already suffered, Exxon quite a bit.
There is no stopping the trend of fossil fuel divestitures. Even in Norway, their Government Pension Fund, formerly known as "the oil fund" has started to divest.
Smart investors will take the cue and start to unwind fossil fuel stock exposure on rallies. Starting with the biggest most vulnerable companies like Exxon and Chevron which I discussed last year:
What Is Sustainable Investing Really
"Sustainable investing" is an old idea that has become a massive secular new trend. Native Americans believed in leaving the world with as small of a human footprint as possible. The industrial world has had no such construct. Until now.
What is sustainable investing though? There are many people who will give you a definition. Some will focus strictly on climate change. Others use a broader socially responsible investing (SRI) approach. While those are part of the idea, I have a definition for investors that is both simple and broadly inclusive.
Sustainable investing is at the intersection where sustainable economics and the "smart everything world" meet.
I have chosen this combined investment thesis because we have seen how tech has led the economy for decades and because I believe that most of the solutions to climate change and dealing with aging-demographics will be tech based.
Alternative energy, smart buildings and the smart grid will be largely responsible for dealing with climate change.
Smart healthcare to treat people and smart manufacturing to move supply chains will be the norm in the not too distant future. Consider AI helping to treat patients and automotive manufacturers adding more robots to build EVs.
There will be plenty of overlap as well.
Think about companies like Newlight Technologies (private unfortunately for us) that can turn waste CO2 and methane into plastic. This isn't just in the lab. Coke (KO) is already using the tech to produce bottles.
Consider how we will feed people in a world with fewer and fewer farmers, as super investor Jim Rogers points out. Could AI, drones and self-driving tractors be part of the solution. In actuality, that's already becoming the case. What about greenhouse technology and automated vertical farming or aquaponics?
Many of the tech solutions behind sustainability will be huge winners. Many others will simply be among the winners group in a world that is rapidly changing.
The Smart Rotation Will Begin Soon
Sustainable investing does not mean you need to be a tree-hugging, Vegan, socialist leaning hippie. You can be, this is America, but it's not required. You could simply just be somebody who keeps an eye on the big trends, like me.
Here's a trend that is emerging. After years of trailing, sustainable investments are starting to win.
The green, red and purple lines don't look too appealing.
What about the past year? There's quite a closing of the gap. I expect that gap to stay narrow short-term, but for "clean" and "sustainable" investments to vastly outperform in the next decade and probably two.
Simple Investment Thoughts
I am not telling people to completely flip their portfolio today, but, for whatever is left of this bull market, it is time to start trimming and eliminating investments that do not have sustainable futures.
Dirty companies can be traded, both long and short, but increasingly short. Capital intensive companies that rely on increasing sales to improve EPS need to be jettisoned as the global population ages. Companies with tight balance sheets that cannot return money to shareholders have to be sold.
My money will slowly go into companies turning the corner on profitability or already profitable, that benefit from this massive secular shift. I want companies that can help sustain standard of living, fight climate change and impact supply chains. Automation, AI, 5G, AR, VR and more, will all have roles to play. I want those "pick and shovel" companies - maybe the most.
What do you think? Join me in the discussion.