• Investors must consider both sides of the story
  • Adaptation is probably a better idea than trying to control the planet
  • Sometimes, cash is the best investment

[Just over a month ago, Lord Frost of Brexit negotiating fame stuck his head over the parapet and declared that climate change might actually be good for the UK.

He argued the cost of mitigating climate change’s bad impacts might actually be a better option than pursuing net zero.

The thing is, one month before Frost risked his political career by stating the obvious before people were willing to hear it, we suggested the same thing in our newsletter Southbank Insider, which is free for all members of Southbank Investment Research, the publisher of Fortune & Freedom.

If you like today’s musings as published in June, find out how you can receive Southbank Insider several times a week here.]

I’m yet to meet a lawyer among our subscribers. But I’ve met plenty of medical doctors. A recent epiphany about human nature has finally explained why and unlocked an investment philosophy that may prove profitable. Or save you from some losses, anyway…

The basic idea is that people struggle to do the other half of a cost-benefit analysis. The other half being whichever half you’d prefer to ignore.

Some people are optimistic and they ignore the downsides. Others are pessimistic and they ignore the upsides. Either way, our brain likes to give us only half the picture. It likes stories with good guys and bad guys, not accounting.

We heard plenty about the costs of Brexit from economists at the Bank of England, the Treasury and universities. But what about the benefits?

Those who gave us the benefits… well, those who pitched the benefits couldn’t spot the downsides.

We hear about the parts of Antarctica that are melting, but not the parts that are freezing up.

We hear about climate change deaths, but not the lives saved by warmer weather.

We hear about the parts of the world experiencing desertification, but not the parts getting greener.

Those hurt by higher interest rates get all the attention. But what about savers and investors?

Those hurt by inflation get media interviews, but what about those with debts to repay?

My point is that this tendency towards oversight isn’t a conspiracy, but part of human nature. We like to behave like lawyers instead of doctors. We form an opinion and then present one side of the story to ourselves, dismissing all evidence to the contrary.

Doctors and economists are trained to weigh the costs and benefits before making a decision. Well, they were once… but let’s not go there.

The economist Thomas Sowell put it like this: “There are no solutions. There are only trade-offs; you try to get the best trade-off you can get, that’s all you can hope for.” The idea is that every decision has a cost and a benefit. You need to consider both to make a good decision.

It’s not a very optimistic message, I know. In fact, in many cases it causes downright paralysis in decision-making because you begin to realise just how marginal some decisions really are.

But sometimes optimism is dangerous, especially in the medical and economic policy fields. For lawyers, overoptimism pays handsomely… and costs their clients painfully.

Triggernometry’s Konstantin Kissin’s famous Oxford Union debate speech centred on this issue. He pointed out that combating climate change has costs. For some people around the world, if not the majority, those costs are prohibitive.

Now you might say that nothing is cost-prohibitive when it comes to saving the planet. Which is true, if it’s under threat.

But Konstantin recently became a father. Like me, he knows precisely how parents around the world are going to react when they’re told that their children must have a lower standard of living in order to cut carbon emissions.

Good luck to the climate change campaigners once the world begins to realise just how bad the trade-offs of net zero are. So far, we’ve only been fed the benefits.

This issue also explains the seemingly odd polling results on issues like climate change. The majority of people wanted net zero… but what if they were told how much it would cost? People back renewable and nuclear energy, but then engage in NIMBYism when it’s proposed in their backyard.

Neal Stephenson’s book Termination Shock is about the geopolitics of climate change. (It sidesteps the scientific questions.) One of the key messages is about the trade-off between costs and benefits around the world. After all, some parts of the world would benefit from climate change. This realisation completely redraws the lines of global geopolitical alliances and enemies, forming the context and plot of the book.

The Dutch, who have been keeping a step ahead of climate change for a lot longer than they’ve been burning fossil fuels, team up with the Venetians, whose city is sinking regardless of sea levels.

But climate change has enriched their new-found enemies, who band together to protect the new climate. Attempts to arrest climate change threaten their livelihoods, creating an alliance against those trying to limit warming.

The result is a bizarre game of political intrigue that upsets the world order. No doubt it sounds like fiction. But I keep seeing news that could’ve been in the book.

Back in the real world, Bloomberg reports that “Berlin Risks Water Shortages in Fallout From Germany’s Coal Exit” and “An unintended consequence of climate reform means the Spree River may get 75% less water.”

This bit had me cackling like an evil fossil fuel lobbyist:

Surrounded by lakes and swamps, Berlin wouldn’t automatically seem at risk for water shortages, but its ecosystem is finely balanced and is losing a key pillar. For more than a century, water from lignite mines fed the Spree and supported the marshy Spreewald, a UNESCO-protected biosphere.

Some have suggested that China’s focus on electric vehicles reflects their ability to supply, refine and manufacture the electric vehicle supply chain rather well, while it does not have domestic oil supply. It’s a geopolitical move, not a climate change one, in other words. Which makes sense given the amount of coal power China is bringing online…

Anyway, the point of my rambling is simple and it applies to other life decisions, not just where to invest: be sure to carefully weigh the costs and benefits of any given decision before you form an opinion or make a decision.

Economics actually helps with this, if in a painfully obscure way. The idea of “opportunity cost” is that you should compare the costs and benefits of any given choice to the next best option. In other words, when making a decision, don’t just consider whether it’s a good one. Instead, ask how it compares to the next best option.

An investment shouldn’t be made just on its merits, but on consideration of what the next best use for that money might be.

Adapting to climate change might be better than preventing it.

Money that’s kept as dry powder might be better than a poor investment.

Inflation might be better than a sovereign debt crisis.

A broader selection of high-risk, high-potential reward investments might perform better overall than a portfolio of blue-chip stocks, even if many of them fail.

The inconvenience of adding cryptocurrencies to your financial toolkit might be worth the freedom it hands you as central bank digital currencies edge towards reality.

You get the idea…

And if any lawyers want to complain to [email protected], they better include the arguments both for and against their point of view…

Until next time,

Nick Hubble
Editor, Fortune & Freedom