The Internet Stock Bubble, Climate Science & Trusting The Experts

I found myself rather amused at the reaction on both my Twitter feed and my Facebook feed regarding President Trump’s decision to pull out of the Paris Climate Change Accord last week.  I will be the first to admit that I am not well versed on the science involved.  I neither subscribe wholeheartedly to the idea that climate change is real, nor to the idea that it is a complete hoax.  If anything, I lean slightly to the idea that it is real.  Yet I am not at all alarmed by the President’s decision.  I do not believe for a second that our withdrawal is some sort of “murdering the earth” or “flipping Mother Nature the middle finger” gesture.  Why not?  Simply put, I have seen this sort of thing before, and it does not end well for the experts.

In mulling this over, I recalled a terrific piece of advice I received about investments that translates well to human reaction to hysteria, a Bible verse, and my own experience with the wisdom of the experts.  The advice came from an old boss, Howard Jacobson, as I started my job as an Equity Analyst at UMB.  He told me to pay attention to the Wall Street analysts who said “Sell” when all others said “Buy” and vice versa.  In other words, do not follow the crowd, because you are likely to get stampeded on the way in and again on the way out.  This does not mean to blindly follow a contrarian viewpoint.  Instead, it points to the idea that we should use the brain God gave us to think things through.  Do the work in order to reach your own conclusions, instead of letting others do your thinking for you.  The Bible verse is Isaiah 29:14 “…the wisdom of the wise will perish, the intelligence of the intelligent will vanish.” (NIV)  This speaks to the idea that those who possess great wisdom often possess great arrogance to go with it, and that God will humble those who exalt themselves.  Finally, my own experience with experts is far less than stellar. 

My favorite argument put forth by the pro-climate change crowd is that “97% of the scientific community has concluded that climate change is real.”  No doubt that statement is true.  It is also true that I possess a large dose of that “healthy Midwestern skepticism,” and based on my experience, I have good reason to question the conclusions and recommendations of the scientists.  I go back to the Internet stock bubble of the late 1990’s for my guidance.  The internet stock bubble was one where 97% of the experts agreed that this was a once in a lifetime opportunity, a window of opportunity never to be repeated.  In fact, it was a great opportunity.  The Internet has completely changed the way we live our lives. But has it played out like we thought it would back in 1998?  I doubt it.  For if we had followed the recommended advice of the experts in 1998, chances are we would have all been broke by the end of 2001.  And this is where my skepticism comes full force.

The Internet stock bubble and climate change science seem completely different, so why compare these two?  First, my vantage point.  I was an Equity Analyst at UMB Investment Advisors covering the technology sector at that time.  I was talking to the experts and getting first-hand knowledge.  It was like watching a sporting event live in the arena versus watching it on TV.  You see things in the arena or stadium that the TV camera does not necessarily capture.  It was an exciting time, change was rapid, and there were many great leaps forward.  I saw, and heard, tidbits that were never meant for public consumption.  I remember being in possession of insider information once.  I got to see the formation of the asset bubble up close and in person.  What I saw were the experts proclaiming their infinite wisdom, and I saw their ridicule towards those who did not accept their thinking without question.  I saw first hand how people reacted to the hype and hysteria. I once got my head handed to me by a client who could not understand why I did not have his 70-year-old Mom 100% invested in technology stocks.  No joke!  This man bought into the hype, the experts and the hysteria hook, line and sinker.  And the meeting date?  March 9, 2000 - the very day the NASDAQ index peaked.  No doubt, those who work daily with the leading scientists and experts in the field see a completely different game than those of us who watch it on TV.

Second, similar methodologies.  The internet stock analysts were considered the best and the brightest, often quoted in the mainstream media regarding their analysis and recommendations.  They used sophisticated computer models, updated as new information became available.  They combined regular discussions with various company managements within the industry, discussions with sophisticated institutional investment clients, and with other analysts to supplement their models and make their recommendations. Today's climate scientists are also considered the best and the brightest in their chosen field.  How do climate scientists make their recommendations?  Relying on sophisticated computer models, updated as new information comes in, discussions with other climate scientists, and various industry, academic and government leaders.  Very similar indeed.

Despite the precise nature of computer models, they are far from precise and definitely not perfect.  I remember reading a research report in 1999 which argued the case that one of those internet stocks (I don’t remember which one) was a screaming buy, not just because of its potential growth, but also because it was a great value.  The stock, according to the analyst, was selling at 6x estimated 2010 cash flow.  It was all I could do to keep from falling out of my chair laughing.  Nobody can predict ten years into the future what a company’s cash flow will be with any kind of accuracy.  Today, I doubt the stock is even around.  I cannot imagine the analyst is still plying his trade either.  Climate scientists also use computer modeling, and even with the latest information, it still does not have perfect information to predict the future with certainty.

These models have many different moving parts, whether it is the stock analyst with his earnings estimates or the climate scientist with his climate temperature estimate.  In both cases, even a miniscule deviation in the input data can create a large variance in the actual outcome versus the modeled estimate.  And no one can ever predict the future with 100% certainty.

Another reason I am skeptical of their conclusions centers on the dire consequences they predict without implementing their solutions.  The predictions of dire consequences are intended to create hysteria, and as I pointed out earlier, hysteria is something wise and thoughtful people avoid.  Unfortunately, those leading the hysteria are the politicians, who should be the voice of reason and prudence instead.

If climate change is a real problem, who will solve it, the capitalist or the socialist?  My money is on the capitalist. Why?  The motivation behind it.  The capitalist has an incentive to solve it – profit.  The socialist’s incentive? To maintain government funding.  Solve the problem and the funding goes away.  This gets to the heart of why I am skeptical of their conclusions.  This problem will be solved in bits and pieces, not as part of one gigantic collective effort.  What if we invest in one gigantic, collective effort, and it does not work?  There won’t be enough money for a second chance.  Money will be allocated much more efficiently by the capitalists.  By solving it in smaller chunks, there will be more room for error.

I am excited about the potential for the future of energy.  Fossil fuels are a sunset industry as we move towards cleaner, and ultimately, cheaper fuels.  I think solar has tremendous potential, especially as we harness more of its energy in each panel.  The idea of powering homes with solar energy, and getting houses off the grid is amazing to me.  I would love to get neighborhood power lines taken down.  I also know that is still off in the future.  I am also very interested in what a company like Tesla is doing with cars.  I can see a day in the not too distant future where all new cars will be built without a combustible engine.  But it will come in bits and pieces.

So I come back around to the advice I received, the Bible verse, and my own perspective.  What this has all taught me is never take the conclusions of the experts at face value.  They have been wrong plenty of times.  Eight months ago today, 97% of the experts assured us that Hillary Clinton would be our President today.  We saw the reaction when the certainty of that event did not happen.  The Wall Street analysts promised us unending prosperity with their Internet stock recommendations. The result to those who followed the experts was broken dreams, more than a few broken families, and a very healthy business for bankruptcy attorneys.

If you believe wholeheartedly in climate science, I have to conclude that this belief comes one of three ways: 1) you are intimately acquainted with the science through having worked in the industry, and performed extensive research yourself, perhaps in conjunction with other scientists in the field.  You have perused the academic journals and trade publications, gaining knowledge and even better understanding of the subject at hand.  Perhaps you have conducted original research that has been published.  If so, congratulations.  The second way is: 2) you are not employed in the industry or even within the scientific field, but you are a thoughtful person who will take the time to read extensively on the subject before forming a carefully considered opinion.  You will immerse yourself in the science, and you will happily read dissenting opinions to gain perspective and further inform your thinking.  You educate yourself and think for yourself.  You will always remain skeptical of prevailing opinion until you are comfortable with your own conclusions.  You will not take the pontifications of commentators, newspapers and definitely not politicians at face value.  I will certainly respect your opinion.  The third way you have come to believe in the climate science argument: 3) you have swallowed someone else’s political agenda hook, line, and sinker.  You have gladly accepted at face value the conclusions without understanding the methodologies behind it, simply because they hold themselves out as “experts”.  You receive your knowledge exclusively from mainstream newspapers and popular talk shows on TV. You never bother to ask yourself critical questions, nor do you conduct any of your own research.  You do not acquaint yourself with the science.  Your thoughts are someone else’s, and your opinion is not carefully formed.  I sincerely hope you are not Number 3.

What about pulling out of the Paris Accord?  The decision itself will not stop the research and the march forward toward cleaner energy.  Companies will continue to exploit profit opportunities in this area - the idea of doing well by doing good.  I have no problem with it at all.  But I refuse to be caught up in the hysteria.  I have no desire to be stampeded.  Is the Accord nothing more than a giant transfer of wealth away from the American taxpayer to the rest of the world?  It is not difficult to make that case, particularly when China, the world's biggest polluter, with the world's largest population and the world's largest economy, does not have to pay anything into the agreement for more than 10 years.  Do I think the earth is going to suffer terrible pollution because of the President's decision? No.  Do I think that companies that have invested so much into a cleaner environment will all of a sudden walk away from it all?  No.  As I stated above, I believe the capitalists will win the fight over the environment.  We have a long ways to go.  But, there is so much to be hopeful about.  The vast majority of Americans want a cleaner environment.  This is a worthy aspiration.  Do I think shipping taxpayer money off to a bunch of different governments, who are only obligated under a "voluntary agreement" to spend it on environmental clean up is a good idea?  No.  Give me the free market, give me an opportunity to exploit it for profit, and give me people with know-how, an unbreakable spirit, a determined work ethic, and the ability to make some money every single time.  Those are the people who will solve this issue.