The chief investment strategist at global asset manager GMO has managed to dodge recent bubbles and scoop up opportunities on the cheap. But he's getting increasingly worried about the environment, which bodes ill for Alberta. And don't get him started on the Fed…
What's your feeling about the state of the world?
In the short term, we're jogging along okay. In the longer term, I worry about the inability of many countries to come to terms with environmental issues. There is little sign that anyone gets the point that we can't afford to go on burning coal unless we want to end up with a miserable, dystopian future.
Environmentalism crops up quite a bit in your thinking these days. To what extent are you arguing as an environmentalist versus an investor?
It's very hard for me to separate them. It leads to some clear conclusions: Coal and tar sands will be stranded assets, in that they won't get their money back. The coal industry is seen increasingly as dangerously polluting and contributing to global warming. The pollution in Chinese cities may be the single-biggest driving factor on that.
You've been critical of Canada's oil sands in particular. Why?
The tar sands is a particularly dirty and expensive form of fossil fuel. It doesn't bubble out of the ground like it does in Saudi Arabia. If we burn an appreciable chunk of your tar sands, we're toast. We're in this boat together, and the boat is leaking.
You've been warning of a potential stock bubble, followed by the third bust since 2000.
How do you play this sort of environment?
There is no easy answer, and anyone who thinks there is one is either ignorant or a crook. If you get out too soon, you'll be victimized as an old fuddy-duddy. If you stay in too long, you'll be just another trend-follower. But we know what the Fed does, and we know what [incoming Fed chair] Janet Yellen thinks. She says the market is not badly overpriced, which means she's not going to get disturbed if it were 20% or 30% higher. Consequently, I don't think that is unlikely.
Is this bubble-and-bust cycle one that can and should be avoided?
Of course it can and should be avoided. But by appointing Janet Yellen, you know there is no inclination on the part of officialdom to change the game. Bernanke and Yellen are guaranteed extensions of what I think of as the Greenspan experiment in stimulus and relatively lax regulation. It is a totally failed experiment, with enormous pain. Will they never learn?
You're a big-picture strategist. How important is stock-picking when you get the central ideas right?
I would say that the big picture utterly overwhelms stock-picking if you get the big picture right. And if you only get it modestly right, it really would be a good idea to have some stock-picking skills up your sleeve.
Why has timber persisted year-in and year-out as a good investment?
When we first picked it up in the late 1990s, it was a totally mispriced asset. It was unacceptable to most institutional investors, except for a handful of mavericks, and it was notoriously illiquid. That resulted in a ludicrous mismatch with the rest of the market—and it provides wonderful diversification and has a long horizon suitable for pension funds.
What's your favourite long-term resource?
Forestry and farmland, if you can find those properties that have the least overpricing. They would tend to be overseas, in reasonably stable countries. Unless I could get a share in the Moroccan government's phosphate enterprise, in which case I would do it with a quarter of my net worth and feed it to my grandchildren.