Chief Investment Strategist, The Freeport Society
“Never confuse genius with luck and a bull market.”
– John Bogle, founder of Vanguard
Bogle, who passed away in 2019 just a few months shy of his 90th birthday, was one of the good guys. Along with Charles Schwab, he spearheaded the 1970s revolution that democratized the investment world.
Schwab gave the discount stockbroker to the masses. Bogle gave us the low-cost index fund.
For two conservative-looking old men in suits, these rabble-rousing revolutionaries did more to keep Wall Street from picking the pockets of ordinary investors like you and me than probably any two people in history.
I often think of Bogle’s sage advice to never confuse genius with simply being in the right place at the right time. It was true in the 1990s dot-com bubble… the house-flipping bubble of the 2000s… the meme-stock bubble during the pandemic… and among ESG investors today.
I’m not a fan of environmental, social, and governance B.S. Neither is Warren Buffett, as I discussed recently. It’s an investment dogma preached by do-gooders with no real skin in the game and no notion of unintended consequences.
ESG investors found a natural home in tech stocks because they superficially “look” green. Software companies don’t have smokestacks and don’t drill for oil… even though they consume voracious amounts of energy.
They also don’t generally abuse working-class employees… but this is mostly because they don’t have many to abuse. They hire almost exclusively college-educated, white-collar professionals.
And their corporate governance is generally abysmal, as the boards of directors are often toothless to rein in their founder-CEOs.
But hey, they look good in the ESG rankings, so they’re fair game!
The Fallen Technology Angel Keeping ESG’ers Up At Night
ESG investing looked great over the past decade because it was essentially a bet on Big Tech.
According to Bloomberg Intelligence, funds registered as having outright ESG objectives hold more tech assets than any other sector, and mega-cap tech names like Apple, Microsoft, Amazon, and Nvidia tend to dominate their holdings.
These same tech names have been some of the biggest winners in artificial intelligence (AI). This was not genius by ESG investors… or proof that it somehow “works.” It was a case of being in the right place at the right time… and it seems that rather than be happy with their good fortune, they’re actively looking to strangle the goose that laid the golden egg.
ESG investors being what they are, it seems that the technology that padded their profits over the past few years is now the new boogeyman.
According to Bloomberg…
The New York City Employees’ Retirement System, one of the biggest U.S. public pension plans, said it’s “actively monitoring” how portfolio companies use AI, according to a spokeswoman for the $248 billion plan…
And Norway’s $1.4 trillion sovereign wealth fund has told boards and companies to get serious about the “severe and uncharted” risks posed by AI…
The worry is that, left unfettered, AI can reinforce discrimination in areas such as health care. Aside from AI’s potential to amplify racial and gender biases, there are concerns about its propensity to enable the misuse of personal data.
To be fair, some of these fears are legitimate. I don’t like the idea of a handful of large tech firms having god-like power over information either. And we’ll need some regulation. But that is the domain of the legislative process in Washington… and not unelected, self-proclaimed ESG guardians. I’m not a big fan of Congress either, of course, but at least those clowns have to stand for reelection every two years and, in theory, can be held accountable.
Let me be 100% clear. I’m wildly bullish on AI. It’s the latest poster child for exponential progress, one of the core investment themes of the Freeport Society.
AI is massively boosting productivity on par with the Industrial Revolution, which was unruly and disruptive. It put a lot of people out of work… and destroyed much of the pre-industrial rural and artisanal economy. But it also led to the rise of cities and raised living standards to levels no one could have imagined.
Life today is vastly different than it was in 1700. We have cars, computers, the Internet… Yet life in 1700 wasn’t all that different than life in 1700 BC for most people. Basic improvements in productivity and technology were incremental and plodded along slowly.
But during the Industrial Revolution, productivity and technology went exponential. We’ve had more progress in the past 300 years than during the 3,000 years that preceded it, and we’re seeing something similar unfolding today in AI.
And it’s coming at a critical time.
With the baby boomers retiring and globalization breaking down, cutting off the supply of affordable foreign labor, we need the productivity boost that AI promises. It lowers production costs, and in a world of scarce labor, it’s the only way we keep a step ahead of inflation.
Layoffs are back in the news this week as Spotify gets ready to cut 17% of its workforce in a third round of layoffs. That’s ok. Don’t fear AI. Embrace it, along with the other companies driving exponential progress. I detail the ones to watch in my free special report called 5 Unapologetically Profitable Stocks for 2024. Download that here.
To life, liberty, and the pursuit of wealth.