THE BLOG

What Would Warren Buffett Do With Canadian Assets?

12/09/2014 06:10 EST | Updated 02/08/2015 05:59 EST

Warren Buffett is the world's most famous investor. The Oracle from Omaha's pithy sayings and "buy and hold" philosophy have won him legions of fans. His most quoted rule is "don't lose money." His second most famous rule is "don't forget the first rule."

The turmoil in the energy world made me think of him. What would Warren do with Canadian assets? The price of oil has been dropping like a stone for the last few months leaving long term expensive oil plays in a quandary. Canada is uniquely positioned to be sideswiped because much of our energy is costly, locked into one market, and difficult to get to others. It is hard to know if or when such turmoil will settle down and if it does will it be at a price point that works? It is reasonable to assume that the market watchers are asking exactly the same question. The consensus point seems to be that $95 per barrel is required in order to give investors a return commensurate with the risk.

A question that may or may not being asked is the value of the assets on the books of our energy companies. The Carbon Tracker Initiative has been asking that question for a number of years now. Since Climate scientists are absolutely certain that global warming cannot exceed 2*C without catastrophic consequences it therefore follows that a great deal of the carbon reserves listed as assets by all the major oil companies are un-burnable. Do the markets and regulators discount these un-burnable "assets" when analyzing risk?

Mark Carney the Governor of the Bank of England says "the vast majority of reserves I are un-burnable". He like others are worried about a carbon bubble the effect of which means that energy companies are overvalued and assets will be stranded, much like the financial crisis of 2008. He is sufficiently concerned that he has written to Great Britain's financial regulators asking for a review of the values underlying their stock market prices. If a company's valuation is based on un-burnable assets then the company is clearly not worth what the market says that it is.

Currently nations are meeting in Lima for the latest round of climate change negotiations. It is a world class blaming exercise where everyone else is at fault and nobody takes any responsibility. The Harper Government is shirker in chief. Repetitive excuses and no meaningful climate change action program entitles Canada to fossil of the year awards year annually. In turn other countries say that if Canada does nothing why should they?

Nevertheless in tortoise like fashion the world is coming to the point where carbon is being priced, primarily because the world has no choice. The Chinese who heretofore refused to do anything until others moved first get it. Even a communist government which in many ways is quite oppressive realizes that its citizens have to breathe. Anyone who has spent any amount of time in Beijing knows that it is not an attractive place to be when the smog roles in. Foreign companies are having a difficult time convincing their employees to stay in an environment where coal particulate covers everything and everyone. The Chinese government is moving out of necessity, not out of altruism.

So what would Warren do? "Buy and hold" is a strategy that has served him well. It is a long term strategy that assumes a certain amount of investor patience. A long term horizon. However even Warren may be blindsided by the "tragedy of horizons"; the market failure to not look far enough ahead to coming problems like the environment.

Mark Carney is from Alberta. When he participated in the "Enhanced Disclosure Task Force" I wonder whether he had his home province in mind? Enhanced disclosure would put detailed carbon costs into financial statements.

The short term problem is that Alberta has expensive oil which will make it challenging for all governments to achieve their fiscal goals. Revenues are down. Already we are seeing the incredible shrinking surplus of the Harper government.

Medium term the market will right itself and business will pick up. However longer term will it take into account un-burnable assets and restrict credit and investment accordingly? I suppose that is why Mr. Buffet is fabulously wealthy and the rest of us are not.

ALSO ON HUFFPOST:

Dutch Disease: What Is It?