- Why investors should beware increasingly unforgiving debt markets
- Why you should frankly give a damn about company balance sheets
The first climate change bankruptcy
A false sense of securityIt would be wrong to suggest utilities never go bankrupt – indeed PG&E filed for bankruptcy itself in 2001 as California was hit by rising wholesale power prices and rolling black-outs – but instances are rare and this may induce a false sense of security.
Extrapolating the future from the recent past – or ‘anchoring’, as it is known in behavioural finance – is a common enough failing among investors and it was perhaps the California connection that prompted me to recall how value investor Mohnish Pabrai addressed the subject, back in 2004, in a piece entitled The Yellowstone Factor. “Yellowstone National Park is volcanic in nature, yet not one cone or caldera is visible,” he wrote. “In the 1960s, this mystery was finally solved: the entire park – 2.2 million acres – is the caldera. It is the largest active super-volcano on Earth. Yellowstone started erupting about 17 million years ago, and it has a cycle of erupting roughly every 600,000 years.” Which might lead you to wonder – when did the last eruption occur? It was 630,000 years ago, notes Pabrai –meaning we are “ about 30,000 years past due on the next big one” – and he goes on to observe: “Yellowstone represents just one of the many ugly outlying events that have an extremely low probability of occurring, but that does not mean that the odds are zero or that they can be ignored. “Even the most seemingly resilient businesses, by their very nature, are very fragile temporary creations — and it would take a lot less than Yellowstone’s eruption to wipe them out. The Yellowstone Factor alone implies that there isn’t a single business on the planet whose future is assured.” The fate of PG&E should have brought the point home to markets – at least until such time as they have to relearn it all over again.
- Juan Torres Rodriguez is an author on The Value Perspective, a blog about value investing. It is a long-term investing approach which focuses on exploiting swings in stock market sentiment, targeting companies which are valued at less than their true worth and waiting for a correction.