“Over the short run, the market is a voting machine. Over the long run, it is a weighing machine.” - Ben Graham

Most people go to high school and are concerned with their social life. It is quite natural at that age, as fitting in and having lots of friends is important to a young person. Being accepted by the popular group plummets in value once you leave high school. In fact, you learn pretty quickly nobody cares who was popular at XYZ school in the middle of some town.

However, the popularity issue is something that does play a part of the world in other areas. Clearly, fashion trends are affected by popularity. Travel patterns and schedules, other than in the Coronavirus period, are influenced by popularity. Betting odds on sporting events is greatly impacted by popularity in the form of money flows. The most obvious place where popularity can play a role in outcomes is political elections. I hear there is a big one coming up in November, by the way. Clearly, popularity is a subject which remains pertinent. Along those lines, we turn to the investment universe and to see how popularity applies there as well.

Over the last fifty years, hydrocarbons were one of the best investments you could have made, but markets only care about the here and now. What have you done for me lately? More importantly, how do things look for the next five to ten years? One does not have to look very closely at the energy area to understand that carbon-based energy investments have terrible results over the last decade.

An increasingly influential group in the investment world is based on the acronym ESG, which stands for environment, social, and governance. The environment piece is rooted in the idea that the world must transition from carbon based energy to renewables (wind, solar, geothermal, nuclear, hydrogen). As an example, Blackrock’s CEO is Larry Fink, and he is the head of an organization which oversees 6.5 trillion dollars of assets. Note the t for trillion. Mr. Fink is a leading advocate for the transition away from carbon based energy, and has been writing about its impact on investment choices over the last few years. In some ways, this is the investment world’s version of high school popularity.

There is a major difference, however, because the ESG crowd votes with their considerable capital. Simply put, they sell what they don’t like and buy what they do. Over the last few weeks, the largest oil companies in the world have reported their earnings. Investors haven’t been too impressed, which has been the case for a very long time. The European oil majors have released their future plans to diversify away from carbon based energy production. The largest U.S. oil companies are sticking with carbon-based fuels.

There is a tremendous amount of pressure in Europe to move towards clean energy, and the decision to cut dividends and reinvest profits away from hydrocarbon is being viewed with plenty of skepticism by the investment world. If you put yourself in the shoes of an energy executive, you’ve been paying large dividends to your shareholders for many years, and still, your stock sits at a ten-year low. Electric cars are all the rage, and your job is to create shareholder value for your investors. Importantly, the European majors believe the returns on capital in the mobility area will be comparable to traditional energy returns, maybe slightly lower. The largest institutions are yelling from the top of their lungs they want you to move away from hydrocarbons, but they don’t tell you, they just sell your stock. And they keep selling. Popularity was important in high school, and in today’s investment world, still very much applicable. It will be quite interesting to look back five or ten years from now to see whether carbon based energy or the electric version is more popular in the investment profession.

On Friday, the July jobs number came in better than expected, printing 1.8 million (better than the 1.7 million forecast). Earnings dominated the week with headliners Disney, McKesson, Chegg, Twilio, and Fox, among others, that exceeded expectations. Companies which fell short on guidance included HSBC, Paycom, Wynn, and Planet Fitness. Google bought a piece of ADT, while Marathon sold its retail gas division to 7-11’s parent. The earnings parade continues next week, along with close attention on virus case numbers, the ongoing stimulus negotiations (House, Senate, White House), and further news on vaccine candidates. Given where things are in the economy, earnings, and election cycle, I am confident all of us are monitoring popularity trends quite closely. As we should be.