Why you shouldn't invest in "sustainability"
Happy Friday everyone!
There are really 2 reasons why Al Gore is famous.
The first one is that he lost a hotly contested US Presidential election to George Bush in 2000.
The second is that - roughly half a decade later - he made every school kid in the developed world sit through a screening of An Inconvenient Truth (I was one of those).
I’m certainly not qualified enough to assess whether Al Gore’s predictions around the environment were correct.
(I have, however, checked for myself that there’s still snow on top of Mt. Kilimanjaro.)
But what’s fascinating is what happened after he faded from the public eye: he got very rich.
Like - $400 million rich.
You see, after his political career, Al Gore started an investment firm called Generation Investment Management.
And it’s done extremely well.
Their mission is to invest “based on an investment process that fully integrates sustainability analysis into our decision-making.”
Their website is littered with pictures of solar panels and shots of outer space. “Invest with us, and we’ll invest in a greener future”-type thing.
Yeah, hold your horses.
You see, how you define “sustainability” is very subjective.
But there’s one thing everyone seems to agree on: a company is more sustainable if it doesn’t emit too much CO2 into the air.
Luckily for him, Al Gore agreed on that too.
So here’s how Al Gore made a fortune investing “sustainably” - and how you can too:
Al Gore picked a selection of businesses to invest in that didn’t emit much CO2.
It turns out, however, that the only businesses that don’t actually emit much CO2 are software and service businesses.
Microsoft, Google, Facebook, Visa, etc.
And it just so happens that software businesses are vastly superior businesses to their non-software counterparts.
Remember, the average return on equity of a software business is roughly 25% per year. But non-software businesses return just 7% per year.
As a result, Al Gore made a fortune investing in…software businesses, under the disguise of sustainability.
And he isn’t the only one.
In the last decade, investment managers around the world have been very busy selling “sustainable investment funds” to their clients.
But it is all a marketing trap.
“Sustainability investing” preys on the desire of individuals like you and me to invest in a better future.
But 90% of these funds just end up owning the same service businesses as everyone else.
They’ll present you with fancy marketing, beautiful PDFs, appealing words, pictures of solar panels, but contain nothing but software businesses.
And you’ll pay much higher fees than in passive funds that own the same software stocks.
Don’t fall for it.
Like I’ve said before, technology is the driving force of history.
And software businesses generate superior returns. So yes, you should own them.
But do not let yourself be deceived by the illusion of “sustainability.”
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This week, the prime minister of Singapore was interviewed on the BBC - and although I am not a fan of politicians in general, I highly admire this man.
(He is also the son of Lee Kuan Yew - the founding father of the modern-day Singapore, whose book is one of my all-time favorites).
I recommend you watch the interview, where he talks about the possible conflict between the US and China.
I believe that China’s rise to power - and the subsequent reaction of the US - will be one of the most dominant geopolitical events of the next decade.
Yesterday, China took a firm stance by telling the Americans at the first US-China summit since Biden took office that they don't have the qualification to say they speak to China "from a position of strength."
Next week, I will dive more into what this means for you in terms of investment opportunities in the region, and give you a framework about how to think about the situation.
Anything else I think you should know: I want to get to know you!
Earlier this week, I sent you an email with 9 questions to get to know you better. To those of you who answered already - thank you.
If you haven’t had a chance to answer yet, it will take you less than 3 minutes and it will help me better tailor what I do to who you are and what you need.
Thanks again. Until next week.