Keep an open mind

I was delighted by the response to my editorial last week in which I expressed my niggling doubts about the future of the big oil exposure in my portfolio. “Oil producers will be around for a long time yet. We won't be seeing electric transport ships, passenger planes or lorries for a long while!” said one reader, and indeed the general feeling was that we don’t have anything to worry about just yet.

That was the conclusion I too had reached, because like those commenting I understand how deeply oil is ingrained in the global economy, that cars only represent one aspect of the hydrocarbon distribution chain, and that the shift to electric vehicles will be slow. But I think it raises a wider point around how investors mentally engage with the shares they own. One reader suggested that oil companies will simply shift to become the largest investors in renewable energy, and thus maintain their stranglehold on the way we power our lifestyles. This is of course possible, but it is making a leap of intellectual faith that has so far not been backed up by evidence: just because a company is good at one thing does not necessarily mean it will be good at another, and incumbency is no guarantee of success.

In fact, there is plenty of evidence to the contrary: the list of incumbents in other industries battered by disruptive forces is a long one; just look at Amazon and its impact on high street retail; or the failure of Pearson to adapt to digital textbooks; or – in a scenario still playing out – the rise of pay-TV models such as Netflix and Amazon that threaten traditional TV models, not least that of the BBC which will no doubt face further pressure for reform of the licence fee regime after this week’s publication of its top earners’ salaries. I could go on, but the common feature is that businesses often find it hard to wean themselves off the revenue and profit streams they have relied upon for years.  Often they are simply not organisationally flexible enough, unlike new entrants.

Nevertheless, Shell is, as our reader suggests, committing $1bn a year to renewable energy projects. But it seems like small change given $240bn a year is being spent globally on renewable projects, and even in contrast to Shell’s own $20bn annual profits. Indeed, as Mark Robinson argues on page 52, the renewable race is still wide open, and a dominant force in renewable innovation could just as easily emerge from the smog-filled cities of China as the West. We must, therefore, keep an open mind and be ready to change it, because as investors we are all subject to cognitive biases, the most dangerous of which is known as confirmation bias. It’s what, as Algy Hall notes in this week’s cover feature, makes us stick with a share when evidence is mounting that trouble is brewing: we filter out facts we don’t like and only pay attention to those that support a previously held view.  


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