Forbes, Climate Change and the Investment Process

“New NASA Data Blow Gaping Hole in Global Warming Alarmism” trumpets Forbes. So are the risks advanced by the Intergovernmental Panel on Climate Change (IPCC) all wrong? For any investment professional without an advanced degree in climatology (that is nearly all of us) it is difficult to reach our own conclusions faced with these kinds of “he said, she said” debates, but I believe it is possible.

First, a degree of skepticism is required when dealing with the climate skeptics. Not least of which is to be suspicious that any one single finding will suddenly upend an entire body of work that encompasses multiple strands. Sir Paul Nurse, the current President of the UK Royal Society, brings out this point clearly in a recent BBC Horizon documentary (I encourage everyone to watch the entire programme). Nurse states:

An important aspect of science is that it makes sense as a whole…..it is no good cherry picking one part of it….

As a medical analogy, scientists continue to discover errors in medical treatments; for example, up until recently most stomach ulcers were thought to result from poor diet or stress—only recently were bacteria found to be a dominant cause. But such discoveries do not bring down the whole structure of modern medicine. The discovery of ulcer-causing bacteria did not cause us to reject the latest treatments for cancer or heart disease.

Second, what is the counter argument to the case being put? Thankfully, the web gives you access to two superb sites that aggregate the consensus response to skeptic arguments: www.skepticalscience.com and www.realclimate.org. And as it happens, Real Climate addresses the paper underlying the Forbes article here.

The point I am making is that you should use an identical discipline to that of buying a stock. Say you find an interesting candidate to add to your portfolio on the long side. Do you a) go out and read all the analyst “buy” recommendation reports on the stock since you know in advance that they will back your initial buy bias or do you b) intentionally seek out and read the “sell” reports to unearth counterarguments that you were not aware of? If you answer was a), then I can tell you that your life in the financial industry will be nasty, brutish and short.

Third, when you receive an investment pitch, are you interested in the track record of the person pitching it to you? Now the two authors of the paper behind the Forbes article, Roy Spencer and William Braswell of the University of Alabama in Huntsville, are no Lord Monkton-type intellectual lightweights. They do, however, have a rich climate skeptic past that you can see if you punch their names into the search engine of Skepticalscience.com. In particular, Spencer is famous in climate circles for claiming in the early 1990s that satellite data on global temperatures contradicted the terrestrial temperature measurements. Indeed, if Forbes had reported on Spencer’s papers at the time, the headline would have looked something like this: “New Satellite Data Blow Gaping Hole in Global Warming Alarmism”.

Nonetheless, climate change science is an edifice built on multiple foundations as Sir Paul Nurse emphasised above. And here again we had multiple strands of research pointing to one conclusion and Roy Spencer and his partner John Christy pointing to another. Thus the most likely (but by no means certain) conclusion was that Roy Spencer was wrong. To cut a long story short, further investigation of the satellite data led to the discovery that Spencer and Christy’s analysis was wrong (you can see a discussion of the topic here). Spencer and Christy, I believe, accept that their original papers had flaws. Further, the latest paper co-authored by Spencer disputes the consensus IPCC view on the speed of warming from a different angle.

In investment terms, Spencer has a track record of coming out with big ballsy contrarian calls. Like a Henry Dent shouting that the Dow will reach 40,000 kind of call. Now Dent recently came out with a Dow 3,800 call. Could he be right? Yes. But, umm, how have his other big swings at the ball panned out to date? Well…..

Notwithstanding all the above arguments, I do not dismiss Spencer out of hand, and regularly read his posts on his blog here. I think his arguments form the benign version of the tail risk (that is the other end of the tail from the catastrophic outcomes); in other words, temperature sensitivity to CO2 is so low that global warming will be a slow-motion affair, thus giving mankind plenty of time to mitigate and adapt. However, nothing he has done to date has dissuaded me from tracking the negative tail risk. In sum, risk is probability times outcome, and it is with the truly bad outcomes that the major risk resides.

Finally, investment professionals constantly make decisions with regard to fields of investment in which they have no scientific expertise. As a portfolio manager, I bought pharmaceutical stocks but have no medical-related Phd. Comfort in those decisions came from data, either the stock price action itself or the trends in underlying metrics like prescription and sales stats.

Diving into Roy Spencer’s site is a bit like diving into the fundamental analysis behind a blockbuster drug—a level of analysis that you can’t hope to fathom without a couple of advanced degrees in the relevant field. However, the decision to buy a pharma stock is generally made at a much higher level: how is the drug clearing FDA-related approval hurdles and then how is the drug selling? Likewise, the bottom line for Spencer is to check whether global temperature trends are going up or down. Indeed, you can go directly to his site here and look at the chart (surely the first thing you do before buying a stock).  Moreover, just like with same-store sales release of a retailer, every month you will get a new data point to confirm or refute the trend. It is not that difficult.

In conclusion, the kind of analysis put forward in the Forbes article wouldn’t gain a pass mark at CFA Level 1. The article should have read: “New Data Put together by Analysts Who Were Wildly Wrong in the Past that Claims to Blow a Gaping Hole in Global Warming Alarmism Not Supported by Multiple Findings of Numerous Other Analysts with a Better Track Record (but Just in Case Let’s Track the New Data as it Arrives)”. OK, maybe something snappier. But frankly the article’s analysis was lightweight and I expect better from Forbes.

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