Ep700: Arjun Murti – You’ve Got to Get Out of the Battle At Some Point

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win in investing, you must take risks but to win big, you've got to reduce it ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives to join me, go to my worst investment ever.com and sign up for our free weekly become a better investor newsletter where I share how to reduce risk and create grow and protect your wealth. Fellow risk takers this is your worst podcast hosts Andrew Stotz, from a Stotz Academy, and I'm here with featured guests, Arjun Murti. Arjun. Are you ready to join the mission?

Arjun Murti 00:48
I am ready. Thank you for inviting me, Andrew.

Andrew Stotz 00:50
Yeah, I'm excited to have you on and I want to introduce you to the audience. Arjun has over 30 years of experience as an equity research analysts, Senior Advisor and board member with global experience covering traditional oil and gas and new energy technologies. The bulk of his Wall Street career was on Goldman Sachs, where he retired as a partner in 2014. He recently unretired to join Veriton, an energy research strategy and investing firm are doing publishes super spiked a substract, long focused on the messy energy transition era. He is also on the board of ConocoPhillips, a senior advisor at Warburg Pincus and on the advisory board for clear path and the center on global energy policy. Arjun, take a minute and tell us about the unique value that you are bringing to this wonderful world.

Arjun Murti 01:46
Well, thank you, Andrea, that's a great introduction. I think, you know, it gets to why did I unretire? And why did I start super spiked to substack blog of all things. I was happily retired, I had a good career at Goldman, I was fortunate to see my children through middle school in high school. But we started getting to this energy transition era. And it has been to my dismay, how it's been handled, where, to me, we have the worst of all worlds. That's kind of what we're headed towards where we're not doing that actually a lot to change our greenhouse gas trajectory. Yet, we're in an environment where people are trying to limit especially fossil fuel supply, which is simply going to lead to high and volatile commodity prices. And how do we break that logjam? I am Angeles, you'll find for sure not a hard left to center person. But I think there's a lot of issues with what the right either proposes or doesn't do about all these issues. And so as someone who has experience who is not an analog in these things, but would like us to all move towards a healthier energy evolution era, I did feel an obligation to at least put my ideas out there. It does not mean I'm right. But let's have some pragmatism to this energy and climate debate. It is far too important. You do not get to have global GDP growth without adequate energy supply growth. Ideally, we'd like it to be cleaner, but we need it to be there in the first place. And that is why I've unretired. And hopefully I can bring something pragmatic to the discussion.

Andrew Stotz 03:11
And I was just, you know, before we started, I seen I was listening to your super spike Podcast, episode 24. And I found it very interesting, you know, some of the discussion. But before we talk about some of that, and go into the main question of this, I would love to understand, like, what's the problem that we're trying to solve for here in the space that you're looking at?

Arjun Murti 03:35
The number one issue we need is people need energy supply. And it's not like other things. Without energy, you can't do anything. And so people think, well, it's to drive your car, maybe to fly someplace, it's to turn on your lights at home. But it's actually everything, even everything we see here in this video, the books behind you the clothes, you and I are wearing the microphones, the Zoom meeting itself, all of it, and everything requires energy. Yeah, we take it for granted, except when it's not there. No one can live with that energy, even for five minutes, right? I live in, unfortunately, a backwards part of the world called New Jersey. And we regularly have blackouts here. And so we now have a backup generator because God forbid were without energy for even five minutes yet. And Andrew, I know you're in Southeast Asia, there are anywhere from one to 3 billion people on Earth, who either don't have any energy, or at least not to the modern kind, or have used very small quantities are that there are the lucky 1 billion of us that live in the US, Europe, Canada and Japan that use the bulk of the world's energy. That is the other 7 billion that we're trying to solve for. And so the question is, how do we provide energy that's available, affordable, reliable, but we are also trying to solve environmental challenges clean air, clean water, biodiversity, and decarbonize as well and can we do it all perhaps, but you got to give people energy first and we've forgotten the basic purpose of why we use energy

Andrew Stotz 04:59
you That's interesting because someone may say, well come on June, you know, there was a time when we didn't have oil and gas and all this stuff and the humans existed. And I think the point is, that was human energy.

Arjun Murti 05:12
Well, that's exactly right. So since we started using fossil fuels, it started with coal, it has since moved on to oil and natural gas, do we still use coal, we've used more coal in 2023, than we love use at any point in history. So coal demand is still growing, we've had the least number of people living in poverty, we've had rapid population growth, a sign of health, as much progress has been made in these last, let's just call it 150 years, as was made for centuries prior to that. And it is all due to harnessing energy and then using it to do the next trade of things. And ultimately, that's things like technology and healthcare, and all the types of things that I again, I think we take for granted, it all starts with energy, harnessing energy, and we should not and cannot take it for granted.

Andrew Stotz 05:54
And in places like Thailand, where I am, I mean, I came in 1992, I can tell you, I traveled up country and around the country. And I could see many people using buffaloes for plowing their fields. And the dream was to get a hand run diesel or petrol engine, tiller, that they could run down instead of having the Buffalo and that was the dream. And then they sled steadily got to that and increase the output that they could do and increase their income. And then they said, I need a pickup truck, because I need to get this to market and I had to rely on other people and all that. So now they've got the pickup truck. And then the next thing that they want is, you know, I want to you know, send my kids to school and generate excess cash. And so all of a sudden, my kids are not producing on the farm. And you know, it's like, there's this transition that's happening in India in Thailand, it's already happened in China to a large extent. And are these people not supposed to have that transition? Or, you know, as you've said, We need energy.

Arjun Murti 07:01
We need energy. And I'll give you one stat. So the 1 billion that lucky of us, we use 16 barrels of oil per capita, the other 7 billion people use 20% of that three barrels per capita. And again, there are a lot of people that use zero barrels or fractions of the barrel per capita these are, it is frankly, unacceptable. Yeah, what is happening right now, the discussion is often dominated by Europe, first, to a lesser degree, the United States and Canada, dictating to the rest of the world, you must decarbonize and perhaps we should, all in favor of tried to find lower carbon forms of energy. Nuclear is a great example of that. And in certain places, solar and wind, and these kinds of things work. But you have to get people energy. First, it is a hierarchy of needs, you need energy, to have progress. It is economic and social justice to give the least fortunate modern energy supply to better the lives we benefited from in Europe and the United States. And certainly, the 1.4 billion people in Africa, the 1.4 billion people in India, the 1.3 billion people in China, nevermind the rest of Southeast Asia, they certainly deserve the right and opportunity to have the same kind of energy supply that we have, without us artificially restricting it.

Andrew Stotz 08:11
And just to clarify what you said, I'm going to just make it more simple, from my mind is that about a billion people, the world consumes 16 barrels per person or per capita, versus let's say, another 7 billion people in the world consume, how much was that?

Arjun Murti 08:30
Three barrels per capita? Okay. And again, probably one to 3 billion of those people barely use the barrel per person. It is really stark, the difference in energy use and with energy use is economic growth. It's opportunities for all people, but including women in particular benefit from access to energy. You know, it's a real challenge out there.

Andrew Stotz 08:53
So one of the questions coming from the emerging markets, the developing world is, I don't understand why doesn't America just cut its consumption? Why are they constantly I mean, pressures, the whole world is, you know, is going through this revolution in theory. But if they're consuming 16 barrels per day, per capita, per person per year, then why not just cut consumption.

Arjun Murti 09:17
There are opportunities for efficiency gain. As an example, America is now 70 80% SUVs. We used to be 80%, like cars and trucks, and as a result, we've missed 80 to 90% of the fuel economy gains, truck cars and trucks get heavier, and it offsets the national improvement into vehicles. And, you know, there's a huge, huge opportunity to probably reduce consumption by 25 to 30% by focusing on efficiency, but the energy supply we use is also why America is the strongest economically most powerful country in the world. Even with the challenges we have we are 25% of global GDP and 25% of a whole bunch of things, despite only being 375 or whatever it is million people out of 8 billion people on earth so with A small fraction of the people, we are an economic powerhouse. And with that comes a lot of energy use. And so I'd say it's not so much about how do we curtail our demand or their efficiency. It's really about how do you give the rest of the world the energy supply, so they can have the kind of economic growth or economic opportunity that we enjoy here in the US, they may not be able to replicate and get to our standards fully. But certainly, they can make a lot of progress from where they are today. India stands out Africa to follow India, you mentioned you're in Thailand, clearly, some of the Southeast Asian countries have already been up that S curve, but there's a whole bunch of people that are still at the lower rung.

Andrew Stotz 10:36
The irony sometimes just makes me You know, sometimes cry and sometimes laugh, but I think about, you know, America has this economic it's an economic powerhouse, like you say, it's also a military powerhouse. And energy runs the military machine that's now consuming getting close to a trillion dollars a year of the US budget. And what are they doing with that they're using all that economic and energy power, basically, to force their will on every country that doesn't abide by what they want in the system? And which I would call maybe the opposite of inclusivity. Right? You could say that, you know, America's enemies around the world are not included in that system. And I just, you know, again, go back to how, how is it that America has been so successful, and there's like a propaganda machine going on about energy, about climate about all this stuff, when in fact, the biggest purveyor, or the user of this is the one that's pushing, and I'm thinking like, everybody outside of America is just striving to get their kids into school and stuff like that. And I just like, it just blows my mind. Sometimes when I look at I guess, part of it's because I left America 30 years ago, and I just observed kind of from a distance, and I have some, you know,

Arjun Murti 12:02
questions? Well, the biggest propaganda, the biggest concerns I have about what I call the unhealthy energy discussion we're having really comes out of Europe. And that is where the etiology is most striking. So you could take a country like Germany, where both solar and wind this is not a natural region that is good for either of these things, yet they have retired nuclear plants, they were wholly dependent on Russian gas. And of course, what happens the second Russia goes to war with Ukraine and the gas is cut off. Germany is raising towns to produce more lignite coal. And if you're not a coal export, this is the worst kind of coal that you can burn. And so Germany has de facto replaced nuclear, which of course, is carbon free, with coal, which is absolutely unbelievable. Primarily, because all the investments that made in solar and wind and so forth, cannot meet their needs. It is a variable or unlimited resources. I think people appreciate storage will improve in coming years, but it's nowhere near where it needs to be. Yet Germany and Europe is dictating to the rest of the world, you must meet these climate objectives and there's nothing wrong I can I support the idea of decarbonizing, but you can't take away people's energy first. And you can't tell them, you don't get to have the same choices that we had, you know, America's military use. It's a complicated issue. That's probably beyond my expertise. And this podcast, perhaps, certainly Americans protected the world's shipping lanes. And I think the whole world to some degree, has benefited from America's military. And they're clearly people that have been negatively impacted for it. It's a complex issue. But I think the discussion energy is better here than it is in Europe. But that's a pretty low bar to clear. I think what we have learned post Ukraine is we are starting to see a split in the world, where you have the Middle East countries like Saudi Arabia, UAE, Iraq, Iran, plus Russia, selling their energy to Russia to excuse me, China and India and other parts of Southeast Asia. And there's a logic to that. They don't need us. They don't need Europe, for financing and to broker these deals to send the energy for all these kinds of things, to the degree that you used to. I still think there is a protection the world gets from America's military. And again, I'm speaking as an American, and I'm beyond that. There is a growing division in the world. And I am, I think Europe may be too far gone. I am hopeful America will come to its senses.

Andrew Stotz 14:25
Yeah, it's interesting. I was joking with a friend of mine, because we were talking about how if you're an Australian, and you go to Hong Kong, and you want to set up a bank account in Hong Kong, they're going to ask you to they're going to have you file a US tax form. Wow. Yeah. And this is called FATCA, and all kinds of stuff that's been going on since the Obama era after 2008. And it's remarkable. And I said, yeah, just wait, because in another five or 10 years, my prediction is the US is going to tax every person to mean the world, to pay for the cost of protecting the shipping lanes and all of that. And they'll do it through the governments that benefit from that. But that's just me, you know, coming up as like you, as an analyst, we got to think of different ideas and try to know what could happen. And that's just me kind of, you know, thinking about it, but I, I've really enjoyed the conversation. And I have so many different questions in my mind. And the last thing I just mentioned is, I was just talking to one of my members in mind become a better investor community. He's in South Africa, and he was talking about rolling blackouts, electricity blackouts are just, you know, really, really painful. And it appears as though, you know, South Africa is going to South Africa is going to have to follow the dictates of America and Germany, particularly because those countries lent them money, and they can't escape now. And then I'm just thinking about the ESG stuff that's going on, and then you think about other electric cars, and then you think about how Tesla was excluded from the ESG. You know, like, index and, and you just think, what, and then you mentioned, New Jersey now having consistent electricity, I know what's happening in California. And just to add one last thing onto the bandwagon effect and I teach in my valuation masterclass for my students, like, be careful, you may be on a bandwagon in the world is pounding on Toyota right now, like, you are not doing enough, you are not doing enough. And the President of Toyota was trying to fight back saying, you know, that there's a holistic approach here, but man, it just seems out of control. Any thoughts about ESG? And what you're seeing and all the different nonsense that I just talked about?

Arjun Murti 16:50
Well, I mean, I think first of all, people do need to speak up, right. And so again, I felt an obligation that I've got 30 years of experience in this sector, it is as an equity analysts, but I've seen, you know, energy supply demand globally, I've been around the world. I've studied the companies, I've studied government policies and so forth. And it doesn't mean I'm right. But I'm pretty sure the far left on this is not right. And I think there challenges with this, stick your head in the sand approach, sometimes the far right, at least in the US context can take on this. So how do you get how do you provide energy to people? How do you make sure it's affordable? And what are the things you can do to for example, limit methane, flaring and venting, which is a very solvable problem. By the way, today, there are other steps you can take to reduce your so called scope one emissions, I think on the ESG topic, it is something you know, my career started in 1992. And we didn't call it ESG. back then. But I one of the first company I looked at was a Refining Company called Tosco. And the portfolio manager, they had, at a time new strategy of buying refineries for pennies on the dollar. This was known to be a quote, bad business. But instead of spending the dollar for a new bill, they bought old assets and tried to run them better cut some costs. And I always wondered, are they cutting too many costs? Are they not spending enough on safety? And so is the free cash flow that we think they're getting? Is that actually sustainable? Or will they get to some point do some catch up capex? And that's basically an E of the ESG type concerns. There are other companies I've covered where we've worried about whether the founding shareholder or perhaps it was part of the government owned? What's the governance there? Am I going to be on the right same side as this as the primary shareholder? Or do they a different instance of mine, I think ESG has always been there. What's happened in more recent years, though, is troubling, where it's become de facto a policy replacement. So if people don't like or see that laws aren't getting passed, for example, the United States, you get activist putting pressure on companies to enact basically through corporate promises legislation that was not successfully passed as part of government. And I think that is where it becomes problematic. I think the virtue signaling the idea that they're sort of ESG good and ESG. bad sectors, like Tesla, me perfectly be inappropriate for an ESG index, they almost certainly have a governance issue. And I'm not sure how well they treat their workers. As an example, I happen to be a Tesla driver, by the way. And I think one of the companies that has actually done the best job on traditional health safety in the environment is actually ExxonMobil. So I could see why they might be included in the ESG index, and someone say Exxon Mobil, oh my gosh, but they've actually been in 1910. Andrew, they were the largest, most profitable company. And 100 years later, in 2010, still largest, most profitable company, they've been doing something right now, they did struggle last decade. And that's a different story for another podcast, but to have been a dominant, how many companies in how you're an equity analyst, how many times have you just been say, for 100 years? That you know, Royal Dutch Shell and ExxonMobil are the two and they're doing something right. And so to me that they reflected what is meant to be the good parts of ESG. Now, someone who's a climate activist would wholeheartedly disagree with this, but I'd actually say that they've done as much for humanity The providing low cost energy as anybody, and they've done it with a very profitable history.

Andrew Stotz 20:06
That's what I like about shareholder value versus stakeholder value is that once you start opening up this door, for stakeholder value, it's like any claim can come in, and then it gets blurry. Whereas what I try to explain when I teach about it is that, you know, shareholder value is a function of two things. Number one, that free cash flow that you talked about. And number two, the risk associated with it. And if a company is generating maximum free cash flow today, but they're breaking laws and causing other things that are going to cause losses in the future, they are increasing the risk. And as long as we have equity analysts and people analyzing, in theory, they should be adjusting the value of that company. For that risk. Of course, there are cases of fraud, there are cases where companies are hiding things, and those risks don't get exposed. But that's what I think is great about shareholder capitalism is that it does incorporate, you know, good bad behavior eventually gets, you know, punished. But maybe I'm a dreamer,

Arjun Murti 21:18
Andrew, actually, I'm getting chills, because you've articulated more succinctly what I was trying to express in my rambling for a couple of minutes there, which is ESG is within the risk analysis of an analyst who assesses what is the outlook for shareholders is it is about the profits of a company. But what is the risk to generate those profits? Right. And there's an environmental risk, there's a health and safety risks, there's a governance risk, it's all within the analysis of the risk. And I appreciate your articulating that so well, thank you. Well, speaking

Andrew Stotz 21:46
of articulating, now, it's time to share your worst investment ever. And since no one goes into their worst investment, thinking it will be tell us a bit about the circumstances leading up to it, then tell us your story.

Arjun Murti 21:59
Well, the circumstances are is that it started with really the call that made my career, we call them super spike call, that oil was going to go from the 15 to $20, a barrel range, it had been in from the mid 80s, to the 2000s. To what at the time in 2004, we said was going to be 50 to 105. Triple to quintuple and stay there for at least five years was the essence of the call. And with it, we'd go returns on capital and profitability and energy. As a sector we do very well we call it super spike, because the spike implies that this is not a permanent condition. It's still a cyclical sector. So we tried to build in the idea that at some point, we're going to have to get off this call. And I think you know where the story is going to go. So this made my career I made Managing Director and ultimately partner Goleman, not just on this call, but there was a prominence there was a success to this call. And from 2002, when we started becoming bullish to, ultimately 2008 Oil went from the $20 dollar range that everyone thought we were going to be at Forever, to ultimately as high as $147. And we averaged $100, a barrel from 2000 to 2014. completely consistent with the high end of the range of original call, Total Home Run call. Everyone loves it, and all sorts of, you know, sunshine and roses from there. As you're going along as the Wall Street analysts, you're fighting the bears. The people who say, Oh, come on oil can't go past 30 years, that means Saudi Arabia is going to have been destroyed as a country. And if it's destroyed as a country, well, then the global economy is destroyed. And even though China had joined the WTO, and even though the stats were clearly that higher oil prices were leading to higher demand, and it wasn't causal, it was just a reflection of the fact that China didn't care what the oil price was. They were having an economic boom didn't believe that their country. And despite the obvious evidence that non OPEC supply and OPEC supply were all disappointing, and that OPEC had always overhyped, their spare capacity. These are all the kinds of battles you have as an analyst, and we fought the bears the whole way up. The issue is at some point, you lose sight of the fact that you're not battling the bears, you're making a call. And the original call was super spike, which by the very words implies a peak and then a fall off. That's some of the backdrop. I am someone who is always focused on returns on capital employed a profitability metric of full, there are many different profitability metrics we use, but you should use something. And I've always said the oil sector is not just about forecasting oil prices. So even though I spoke all about how we call this big rise in oil prices, it was really a call on the profitability of the sectors what I was most excited about that the sector was historically five to 10 to maybe 12% Return on capital sector, and I thought for a period of time, certainly the best in class companies and maybe at least the top half could be 15 to 25% Return on capital companies and that improvement of profitability happened in spades from 2002 to 2006. And here's where we're going to start getting into where things get wrong. So the issue of always fighting the bears, you know, being proven right, by the way for five years, which is a long time to be kind of right. And everyone else is wrong, getting a little overconfident in that. But my big regret. And well, I'm going to call my worst call ever because it's really my regret, even though I don't think I'm actually that criticized for it is that the returns on capital started rolling over, and I made excuses for it. And the excuses were fine for a period of time. So let me just give a few numbers from 2002 to 2006. Oil goes from 20 to 65, returns on capital go from eight to 25%. These are great numbers, the sector's outperforming the market from 2006 to 2008, oil went from 65 to $100, a barrel, returns on capital for the sector fell from 22% to 19%. If you know commodity sectors 19 is still a very good number. And that's basically what we said that, hey, yes, there's been some erosion, it's been a little bit of cost inflation, some capex overruns. But these are still very good numbers. We then got interrupted by the great financial crisis, which I never viewed as an energy event. And so we might not have been super early and saying, Okay, we're gonna have a correction here due to the great financial crisis. But actually, as a team, we pretty quickly said, Okay, there's going to be some temporary oversupply, what's the trough of the price, and I think we actually did a good job of calling the trough that was going to happen, and then the rebound. And so then you get to the rebound of Oh, nine and 2010. And again, we're back to non OPEC supplies, disappointing demand in China. And all these places are still doing well. And the sector rebounded dramatically off those Oh, eight and Oh, nine lows, but the returns on capital back $200 oil had now fallen to 15 to 16%. And the sector had peaked. It peaked in 2006. That was actually the highest weighting that ever achieved in the s&p of 16%. Now, we fell in OA sharply with the great financial crisis, we rebounded back to like a 14%. s&p wait from a trough of like 11, or something like that, you know, we got the rebound. And of course, when you work on Wall Street, a lot of investors do have shorter term time horizons, we kind of got credit for Hey, you kind of got the trough, okay, you've gotten this rebound, great, but it was over. And I regret. I would just say making excuses for my framework, you know, and by the time you got to 2014, the return on capital the for the sector was back to 8%. We had round tripped, oil quintupled as we forecast, the returns on capital have fully normalized. And we basically made excuses the entire way down. And so it's a funny thing, Andrew, were even I mean, I named my blog after that call, super spiked to denote a kind of a new version of chaos going forward. But we had the bull call correct. And we just, I'd say we never got off. And I'm not sure I've actually been criticized for it. It is my absolutely my regret is not okay to be still recommending a sector that is slowly eroding year after year. And one of the things I focus on now my research is your goal. As an investor, as a portfolio manager, I'm thinking of institutional investors. Now, it's to outperform the s&p or some relevant benchmark, over 510 and 20 year periods, that is not going to happen when your returns on capital peaked in 2006. And even though they rebounded in 11, from the OA trough, they were still headed down, and they were down from Oh, six to 2020. For 15 years, this sector suffered, eroding profitability, and the s&p weight went from a high of 16% to a low of 2%. Now, I retired somewhere in there, where it was still 100. And so people have sort of forgiven me this downside. But I actually think it's really terrible to have actually, called the call, the call was called Super spike. Yet we ignored the obvious peak, it was on our metric returns on capital, and we made excuses for it.

Andrew Stotz 28:57
Maybe you should have called it super spike. And then when it happened, and you call it super spiked. How would you summarize the lessons that you learn?

Arjun Murti 29:06
You know, I'll tell you one of the things that happened. So there's a reasonably famous internet analyst from my time at Goldman, who was very well known during the peak of the internet bubble. And, you know, he ended up becoming CFO of Twitter, and most people will know who I'm referring to, but I'll leave him nameless since he didn't, you know, ask to be included here. But the directors of research in 2007 said, Why don't you talk to this person who lived through the tech bubble and has some regrets for it? So even got counseling about what are the warning signs to not let that battle of sort of fighting the bears and the fellow Wall Street analysts all of whom have been wrong for so long, sort of consume your thinking on things and try and figure out what are the metrics you're looking for? To what it is time to highlight that downside and so I actually got counseling from my directors of research from this leading former leading internet analyst has since gone on to continue to do great things about what that person went through, and I got it ahead of time. I didn't get it after the fact, I got it ahead of time. So at some point, you got to get out of your own ego, you got to get out of you got to get out of the battle. You know, I wouldn't have been conceding anything, I would have been nailing the call. And that's probably one of my number one takeaway. The other thing is I had a framework, that framework sometimes need to grow and evolve and adjust for circumstances. This was just clear as daylight the returns on capital are falling every year from 11 to 14. Why are you making excuses for companies that have a history of overspending that you live through in the first feet and like I didn't live through it, my career started in 1992. During the time oil was struggling, and the companies were struggling, they needed to restructure, so I was well aware that ultimately, this is going to be a cyclical commodity, capital intensive business, and returns will normalize. And I ignored my framework, which is a very big regret I have.

Andrew Stotz 30:55
Maybe I'll share my key takeaway. Um, first of all, it's so fun listening to you talk, because we started at pretty much the same time. I mean, I moved to Thailand in 92. And I started as an analyst in 93. And in 90, in 2008, I was voted number one analyst in Thailand. So I was kind of writing high at that time, not on such a dramatic call, but just for you know what I was doing. And so I kind of feel like I understand exactly what you're going through. And if I think about my main takeaway, it is understanding and inculcating reversion to the mean, into your thinking that there is always trees do not grow to the sky, if you believe that just go out and look at the tree that has been growing for 100 years out there. And you see, it's not touching the clouds. So number one, remember, trees don't grow to the sky. Number two, you need to understand what is the average. Now, while you were talking, I opened up my massive file of a database of 27,000 companies worldwide that I maintain to analyze. And I just, I just typed in while you were talking USA. So I had all of the major listed companies in the US going back to about 1995. And then I've calculated each year return on invested capital using the best estimates that I can make, given that it's a little bit more complicated, because we have the cost of equity, but I did some simplifying things. And that return on invested capital is about 12% in the US. And knowing that number is a critical thing, just understanding that average that you're way above it, enjoy that moment, but no, it is going to go back down to the average. And in some cases below. Now I have done research that shows that high return on invested capital tend to not revert to the mean, but towards the mean. But that is not the case with cyclical industries like oil, because that you know, that are based upon oil, oil and gas, let's say because of the fact that the cyclicality of the of the industry drives down returns sometimes, you know, deeply below that return on the average return on invested capital. So my biggest takeaway is to remind everybody that trees don't grow to the sky, understand your averages and know when you're below or above. And then from that, make sure you can still ride that wave. But know where you are anything you would add to that?

Arjun Murti 33:32
Well, I think you're totally right. And I think there's a good lessons for the broader audience, that those are things I knew. So I've always said their long term return on capital was about 10%. And my data at the time went back to 1970 is actually another substack. Crude Chronicles that's taken it back to 1910. And it's somewhere between nine and 10%. So that was always our normalized return. So we actually had that piece. We had the view that britches, things don't cost knowledge doesn't save you. So no. So for me specifically, it has to be something about the ego and the arrogance, and the overconfidence. It's something that I still people usually say, Arjun, you're nice and this and that. But that doesn't mean you don't become sort of a little overconfident about things. And I do think it was the battle and not realizing when the battle had changed, and you're still fighting the old battle. Yeah, you might see that today with some of the bubble stock growth winners where people are still fighting the last battle as if we're still in the old paradigm. And I see a lot of the mistakes that I made. I'm going to say from an ego standpoint, in maybe some of the folks touting still some of the former high fire growth stocks. I'm not talking about Nvidia, those kinds of companies, the ones that are not so profitable in particular. It's as the ego is my biggest mistake. I think

Andrew Stotz 34:49
you made me think about this great book I read by Jack Weatherford I think it was called Genghis Khan and the Making of the Modern World and he described his battle strategy Pretty well, which was basically Attack, attack, attack, and then retreat, retreat, retreat until you draw your enemy to your battlefield where you've set up your men to cut them off and hit them from behind as they're pursuing you. And it's the idea of kind of pulling off on your ego of just win win win, slowing that down, reversing and stepping back to prepare for the ultimate, you know, win. So, yeah, it's hard when you're in the heat of it. So I think that what I take away from what you just said, too, is that oh, yeah, that's right. Knowledge is not enough. Just having the data, having the numbers, it's about the emotions, it's about taking feedback, because you said you got feedback, you even got feedback, you had every

Arjun Murti 35:50
it's insane, we our call was spike in Superman was not going to be a month or something it was going to be multi year, but that it would revert to the mean of a long term return on capital of 10%. And I had the internet bubble guy, come talk to me, it really is unbelievable. I still don't understand why he was so willing to ignore it, I can only attribute it to arrogance. That's the only conclusion.

Andrew Stotz 36:14
So based on this gonna be a tough question now, based on what you learned from that story and what you've continued to learn. So let's go back in time, what one action would you recommend our listeners take to avoid suffering the same fate?

Arjun Murti 36:29
Well, that's actually a great question. I think it's like you can do all the data analysis in the world, which I'd done, you can do all the historical stuff, you can project out the future and actually done a good job about all that stuff. It is probably understanding the emotional side, and the psychological side that I think I've matured significantly on it. And by the time 2000, I was well into my 30s and young 40s. By the time we got into the latter portion of this call, so I can't even blame youth on this stuff anymore. But I do think it's going to be understanding the psychology and emotions is probably what I could have done a heck of a lot better, so

Andrew Stotz 37:06
great. What's a resource that you'd recommend for our listeners.

Arjun Murti 37:09
So I strongly advocate energy literacy, it is why I write my substack it is at origin murdy.substack.com, it is for free. And I would hope will always remain for free, even though I'm now unretired. It's also part of veriton.com. But I'd say there's some good books on the history. There's the prize by Dan Yergin, the Pulitzer Prize winning book, it is a great history of oil of oil in particular, and why we use it and its critical importance. But there's some newer writings by Vaclav Smil S M IL. He's the professor in Manitoba, I believe in Canada. He's not a left wing guy. He's not a right wing guy. He's actually an actual scientist who provides real fundamental kind of understandings of energy. This one of these guys, lots of books, numbers don't lie. He's kind of my favorite one. But whatever people could do to understand energy and try and get away from the hard left the world's ending in 10 years if we don't act, or the hard, right, which is Solon winter dumb. And the climate is always changing. both extremes are not the answer. We are how do you provide energy to the people of Africa to the people of India to the people of Southeast Asia? And by the way, a lot of people in America who are not as fortunate as me to have been a retired Goldman partner, how do you provide energy to all these people that is, first and foremost there and as to be there, it's ideally affordable. But of course, people will pay anything. So it doesn't have to be affordable, but it's ideally affordable, and it has to be reliable. We prefer to be from geopolitically secure countries. And while we're doing all this, you do not have to sacrifice clean air, clean water, biodiversity, and there is a path to decarbonisation, that includes nuclear, it includes some energy efficiency, it includes some solar and wind and includes taking the methane out of oil and gas to make it less carbon intensive. You need all of the above all people deserve energy. And I would implore people to understand energy fundamentals and not get caught up in the vitriolic rhetoric that comes from either side of the climate debate.

Andrew Stotz 39:04
Fantastic. And we'll have links to the sub to your substack in the show notes as well as those books that you talked about, or the book, the guy that you talked about in the books. I'll put that in. Last question. What's your number one goal for the next 12 months?

Arjun Murti 39:17
Yes, I've unretired. And I'd say it's too grandiose of a goal, but it is this idea of finding pragmatism in our energy discussion. And so I try my I don't think anyone will ever accuse me of being kind of a left wing person. But I definitely try not to be right wing either. And so how do you get people who are saying, let's just call it center, left center, right, I'm using US political terms, but I think they apply to the core aspects around the world. How do you get them to be the force into discussions and to get away from the extremes and I believe I can play a role in that I believe everybody can play a role in that and you have to speak up you just can't be in a text chain where you hate all your Democrat friends for being idiots on the one side and you hate all your Republican friends to be needy. If on the other side, I think there's a need for everyone who's not an extremist to start speaking up and engaging.

Andrew Stotz 40:06
Yeah, interesting and exciting. And in Asia, I know in Thailand is not so much, you know, left and right extremism because everybody's like, we need to provide energy to our population.

Arjun Murti 40:19
So that is always encouraging to hear my hope is in the rest of the world. So yeah,

Andrew Stotz 40:23
yeah, well, listeners, there you have it another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. If you've not yet joined that mission, just go to my worst investment ever.com and join my free become a veteran investor newsletter to reduce risk in your life. As we conclude our June I want to thank you again for joining our mission and on behalf of a Stotz Academy I hereby award you alumni status forget that Goldman Sachs stuff. You are now an alumni of my worst investment ever. You have taken your worst investment and turned it into your best teaching moment. Do you have any parting words for the brand is

Arjun Murti 41:01
better than making partner at Goldman Sachs? I'm very excited to be alumni of your academy. Thank you so much.

Andrew Stotz 41:07
Yeah, unfortunately, the pay is not so good. But overall, you've contributed to reducing risk in the lives of a lot of people and that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. Let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your worst podcast host Andrew Stotz saying. I'll see you on the upside.