Would you invest in cow dung?

I spent a few years investing in cow dung and garbage ("rubbish" to British readers).

For a few seconds there I was probably the financial markets world expert on financing rubbish and dung. Yay!

Cow dung and rubbish when they decompose give off methane -- a gas that is a major cause of climate change. We had a carbon credit system worldwide that London investors were expert on cashing in on. The methane from cow dung and garbage was collected and turned into renewable energy, sparing the earth’s atmosphere. The United then awarded you a carbon credit you could cash in on. Bingo --- money for dung --- with all those cows and rubbish there were 1000’s or funding opportunities.

Obviously being an “investor” I had never actually visited a landfill or dairy farm. Actual data collection is much too unglamourous and best left to engineers and those science types. But I built models about how fund managers could make $$$$ billions taking advantage of climate change regulation.

My office was on Pall Mall one of the fanciest streets in London right next to the Reform Club (Winston’s Churchill’s club). We could see into the room Churchill used to read in. Down the street we had St James Palace and the apartments where Prince Charles lived with his sons.

You get the picture -- very swanky.

When you’re the dung investing expert you get to go all kinds of interesting meetings.

A rush request came in one morning from one of the biggest hedge funds in town needed a carbon credit expert that afternoon… they were a 3 minute walk from us and run by the Rothschild's family. The CEO of my company looked me up and down -- I was in a California casual outfit as usual with unwashed hair, but I was the only person who could take a look at the projects, check the numbers and not completely embarrass myself in front of the big boys. Swallowing his sense of fashion - I was allowed to go.

My task was to sit pretending to be part of the hedge fund team while they interviewed a company called AgCert that was producing carbon credits from animal manure. They had massive projections for growth and were raising money from some of the most sophisticated investors on the planet.

We took them through a gauntlet of questions and covered all the "risks" possible over the afternoon. The best of the best making a huge investment decision.

The Agcert guys left left after and hour or two and the main hedge fund guy walked me onto a balcony that looked over Green Park.

"So, would you invest?"

"Not with my own money."

So we weren't investing our own money -- instead we were investing "institutional money" from pension funds or governments --- basically YOUR money.

I realized that the fund manager saw his investing as just something he did… he didn’t connect that money to actual people.

This is not to say fund managers are evil -- they are some of the most intelligent and interesting people I’ve ever come across -- but they are incentivized in the wrong way.

So why would this fund manager (very nice guy by the way) invest YOUR money in cow dung, but not his own.

He (like the rest of the industry) feel pressured by:

  • might have a mandate to put a certain amount of money into renewables but not finding enough investments, opts for lower quality ones.
  • feel compelled to invest in something exotic like carbon credits as they are "uncorrelated assets" and help balance out his portfolio during market crashes.
  • FOMO -- fear of missing out --- he doesn't want to miss the next big thing and if everyone else is investing in something, he's not going to get fired for going along.

What can you as an individual investor do to stay sane in this environment:

  • Not chase fads or expect your fund managers --- unless you have deep expertise.
  • Understand the biases in the investment decision making process.
  • Be clear on the mandate you are giving fund managers --- long term growth rather than choppiness.

By the way AgCert -- the gold from manure company -- raised a few 100 million, couldn't deliver on their revenue targets and were liquidated a few years later.

Best,

Mallika