[Question] How to bet against civilizational adequacy?

[Wei Dai]

Coal prices are at historical highs (2x to 4x normal prices depending on the kind of coal), but coal miner stocks are not. They’re trading at historically low multiples, around 1x-2x spot FCF, meaning they can make their enterprise value in less than 2 years worth of after-tax profits, assuming coal prices stay where they are. So the market apparently “believes” that high coal prices won’t last. (The low multiples are also because due to ESG concerns on the part of their investors, many funds can’t invest in coal stocks without jeopardizing their AUM.)

By going long coal stocks, you can implicitly bet that 1) in the short run, the war between Russia and Ukraine and the associated sanctions and trade disruptions will continue (reduced energy exports from Russia is the main cause of the current high coal prices), 2) supply of (non-Russian) energy will not respond much to higher prices, and 3) in the longer run, humanity will have a harder time transitioning away from burning coal for energy, or using coal to make steel and cement, than the market thinks.

So (it occurred to me) a bet on coal is also a bet against civilizational adequacy. What are some other such bets one can make, that potentially have good risk/​reward?

P.S., I think coal can also double as a hedge against AI takeoff (meaning it’s likely to appreciate or at least preserve its value in that scenario). (I mean a soft AI takeoff. In a hard takeoff probably all bets are off.) Consider, if GDP was doubling every few years due to AI-driven economic activity, what’s likely to happen to demand for electricity and steel, and how quickly can supply respond? What are some other “unconventional” AI hedges?

(If anyone wants to actually do this, please do your own research! Aside from having an informed view on points 1-3 above, you should also understand the different types of coal, grades of coal, coal blending, met/​thermal substitution, coal/​gas/​oil substitution, trade routes, transport limitations, contract commitments and negotiations, political risks, weather risks, execution risks, etc.)

[Matt Goldenberg]

I mean, isn’t stock picking in general a bet against civilizational adequacy?

[Wei Dai]

Even an adequate civilization still needs stock pickers. (If everyone invests in index funds, who sets the stock prices?) But they probably wouldn’t still be resolving conflicts by throwing bombs at each other for months/​years on end or by trying to starve or freeze each other into submission, or shut down nuclear power plants in the middle of an energy crisis...

[Matt Goldenberg]

If everyone invests in index funds, who sets the stock prices?

Large firms and professionals who work together full time to pool and analyze the best information. Stock picking is a bet that civilization is so inadequate that you can beat the large amount of capital, time and expertise that go into these firms.

[Wei Dai]

My current view (having updated a bunch of times) is that it actually is pretty hard to beat the professionals by stockpicking, or in other words, the opportunities are more limited than I thought. Looking back, what has worked for me basically fall into 2 categories:

1. A sudden influx of “dumb money” (e.g., caused by government stimulus checks) overwhelms the “smart money” and leaves a lot of assets mispriced.

2. ESG concerns make certain asset classes uninvestable for the professionals.

(And then there was my COVID bet back in Feb 2000 which worked out really well, which I’m not sure how to account for. Although that was more of a macro bet than stockpicking.)

So my portfolio is really concentrated into anti-ESG bets at the moment, hence this post asking for other ideas.

[CurtisSerVaas]

What stocks are in your non-ESG portfolio?

[Wei Dai]

PBR-A, EGY, BTU, ARCH, AMR, SMR.AX, YAL.AX (probably not a good time to enter this last one) (Not investment advice, etc.)

[Martin Vlach]

Maybe in cryptocurrency sector the Lunar-punk movement can be seen as a bet against national governments( which I use as proxy to civilisation here) being able to align the crypto-technologies with financial regulations.
This is a very convoluted area with high risks of investments though. I would look into ZK-rollups, ZCASH or XMR here considering such an investment.

[Dagon]

This is a great question. The problem with passive financial investing (where you direct money, but are not involved in any operational decisions) is that it’s inherently a bet FOR civilizational adequacy—it only takes a partial collapse (or corruption or not-collapse-but-stupid-equilibrium-change) to keep you from getting paid.

I know nothing about the coal business, but I can imagine they’re already so leveraged that a slight drop in prices will kill them. I can imagine regulatory risks that shut them down (or nationalize their profits by environmental or tax mechanisms). I can imagine that many of the public companies are operators rather than owners of the underlying mineral rights, and most of the long-term value is locked up in private companies and trusts.

It’s also possible that this is a market failure, and ESG and other irrational capital allocation has made this a great opportunity. I don’t know how I’d get to the truth of it (or more formally, how I’d update from my EMH-on-average-but-highly-variant-per-company prior for this industry), without a LOT of effort and some amount of insider knowledge.

[Wei Dai]

The problem with passive financial investing (where you direct money, but are not involved in any operational decisions) is that it’s inherently a bet FOR civilizational adequacy—it only takes a partial collapse (or corruption or not-collapse-but-stupid-equilibrium-change) to keep you from getting paid.

That’s a good point. Apparently I’m still a believer in civilizational adequacy, at least to this extent! But a lot of this is just lack of alternatives, right? Even if I was to become an owner-operator, my money could still be regulated/​taxed/​nationalized away, and it’s riskier in other ways (e.g., less diversified).

I know nothing about the coal business, but I can imagine they’re already so leveraged that a slight drop in prices will kill them. I can imagine regulatory risks that shut them down (or nationalize their profits by environmental or tax mechanisms). I can imagine that many of the public companies are operators rather than owners of the underlying mineral rights, and most of the long-term value is locked up in private companies and trusts.

Only the middle one is a real issue.

It’s also possible that this is a market failure, and ESG and other irrational capital allocation has made this a great opportunity. I don’t know how I’d get to the truth of it (or more formally, how I’d update from my EMH-on-average-but-highly-variant-per-company prior for this industry), without a LOT of effort and some amount of insider knowledge.

Yeah, I don’t know how to do it without a lot of effort either. (The “insider knowledge” I have came from following a former professional coal industry analyst who often shares his views on Twitter and in Twitter Spaces. Seems to be enough so far, but hopefully I’m not just fooling myself /​ gotten lucky.)

[Gurkenglas]

So the market apparently “believes” that high coal prices won’t last.

https://​​futures.tradingcharts.com/​​marketquotes/​​QL.html buying a contract for coal to be delivered x years from now costs more as x goes up, for oil and corn it costs less as x goes up.

Link a source for the “coal miners pay off in 1-2 years at current coal prices” claim, please?

[Wei Dai]

https://​​futures.tradingcharts.com/​​marketquotes/​​QL.html buying a contract for coal to be delivered x years from now costs more as x goes up, for oil and corn it costs less as x goes up.

This seems to be outdated or completely wrong data, as QL is the symbol for Central Appalachian Coal Futures Contract and it was delisted in 2021. But confusingly, tradingcharts.com seems to show the contract still being traded as of 8/​12/​2022, which I don’t know how to explain. I can’t find any current data about QL on CME’s own website though, or any other website, so this is probably some kind of screwup on tradingcharts.com’s part, like maybe they’re showing some other futures chart under the QL symbol.

See here for one coal futures contract that is definitely still listed and being traded.

Link a source for the “coal miners pay off in 1-2 years at current coal prices” claim, please?

It’s a little hard to find an authoritative source for this, as no professional analyst makes company forecasts based on coal prices staying where they are, and a lot of coal companies have contract commitments made when coal prices were much lower, which makes their most recent results worse than they would otherwise be. Whitehaven Coal seems to be an exception to this. Take a look at their latest quarterly report, and noticed how they generated about ¹⁄₄ of their enterprise value in cash, and check out this coal price chart to verify that current coal prices are still about what the last quarter’s average price was.

[ike]

Maybe buying IPV4 addresses? https://​​news.ycombinator.com/​​item?id=32416043 some discussion here.

Civilization has been trying to move to ipv6 for decades, but IPV4 is still widespread and commands a premium. With more internet growth this could blow up more.

[Elizabeth]

If anyone is thinking of getting clever with coal investing note that the only coal ETF closed a few years ago

[Gurkenglas]

Why, does that happen a lot with ETFs?

Its price curve seems to fit geopolitics, though its composition is Basic Materials 22.11%, Energy 55.97%, Industrials 21.93%.

[Elizabeth]

I have no idea, but a lack of ETFs makes it harder to invest in the sector while ignoring all the things wei said to pay attention to

[Lech Mazur]

Frequently enough: https://​​www.etf.com/​​etf-watch-tables/​​etf-closures

[Ben]

Many investors will not want to invest in weapons, coal, casinos and certain other “bad” products. This moral cut in demand presumably means these investments have to give a better mix of returns and risk in order to attract buyers. (Conversely when something like a Wind Turbine company sells shares it might be able to offer less returns because people want to help the “good” company.)

You could use this to add an extra twist to all those LW articles about efficiently giving to charity. Fist you decide that some “universally recognised bad thing” is not so bad really (compared to say, dead children). Then you work out how many children you could save by investing in it.

eg. you decide a child’s life is worth more than a X acres of rainforest, and donate appropriately (loosing rainforest as opportunity cost). However, maybe you could do even better by investing in an Amazon Logging Company and actively trading rainforest for lives.