Inside An Investor’s Mind

Little more than one year ago, I bought shares in Canada’s largest airline, Air Canada (TSE:AC), at about $9 per share. At the time, my investor geek friends (naturally, I count myself among the geeks) questioned whether jello had replaced the brain previously inhabiting my head.

Historically, you see, the airline industry has not been friendly to investors. That, I suppose, is putting it mildly. For the brutally honest take, lets defer to legendary investor and gazillionaire, Warren Buffett, who called the airline business a ‘death trap’ as recently as 2013.

From one notable quip to another, Buffett offered this in your face sketch:

“If a capitalist had been present at Kitty Hawk back in the early 1900s, he should’ve shot Orville Wright; he would have saved his progeny money.”

So … if I haven’t been invaded by jello, what makes me think I know more about investing than Buffett?

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Research, Research, Research, Before You Buy

Let’s get this out of the way: I fully recognize the limits of my investing chops. Besides, comparing myself to Guru Buffett? Really? He’s a self-made gazillionairre. I’m not. Enough said.

Then what was I thinking?

To start with, life is nothing if not teeming with change. And that includes the aviation industry. So when I read a research report issued by TD Securities (TSE:TD)(TSE:NYSE) that argued the case for AC, saying that the airline was massively undervalued, and slapped a $21 target price on a stock hovering around $9, I took notice.

But, hey, it’s just a research report. And it’s essential to keep these reports in perspective, to understand that the company issuing the report may be self-interested (i.e., they may own the stock directly or through a subsidiary). That if you have ten securities companies issuing reports on one publicly traded company, often, nine will have a ‘buy’ or ‘hold’ recommendation and one lone voice will issue a ‘sell’ recommendation.

What does this all mean? While stock analysis may be informative, prudent and reasonable, it’s also self-promotional. By way of research reports, analysts do what they can to support the investment industry, to get investors to enter and stay in the game.

So while TD’s report was intriguing, it wasn’t enough to convince me to buy AC.

And the $21 target price? Which was more than double the current value?

Every investor must absolutely, positively, take these with a healthy grain of salt, skepticism and doubt. If I’m not making myself clear, how about this: Do NOT make investment decisions based solely on a stock analyst saying a certain stock is about to lift off, destination moon.

Because here’s the thing about target prices: they’re educated guesses, nothing more. Granted, securities analysts have access to more information than your typical investor, and may have more of an understanding of a particular industry and inner workings of a particular company. But, and this is hugely important, they do NOT know where a stock is headed, no matter how confident and blustery they appear.

 


Off Target

Consider a research study published in 2006 by Mark Bradshaw of Harvard Business School and Lawrence Brown of Georgia State University. These two guys examined nearly 100,000 12-month price targets issued by analysts from 1997 to 2002.

And here’s what they found: only 25% of stocks were at or above target at the end of a 12 month period; and less than 50% of stocks exceeded the target (then fell back) at some point during the 12 months.

This is their conclusion:

“Target price forecasts are overly optimistic on average, and … analysts demonstrate no abilities to persistently forecast target prices.

This evidence is consistent with prior findings of low abilities of various experts to forecast interest rates, GDP, recessions and business cycles, and the infrequency with which actively managed funds beat the market index.”

Okay, fine. Then are price targets and analyst reports of any use? Sure. Read the reports. Understand the rationale for slapping on a high price target. But don’t be sold. And certainly don’t let these reports be your only information source upon which investment decisions are made.

Getting back to AC, reading TD’s report was step one. After which I reviewed AC reports issued by other securities firms; researched and compared other airlines based within Canada, USA, and elsewhere; and read domestic and foreign newspapers, searching for information about the airline industry. And after taking time to digest all this information, I made the decision to buy AC.

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The Times, They Have A Changed

It just so happens that as I was contemplating purchasing shares in AC, Warren Buffett was considering buying certain American based airlines. And after word got out that Buffett invested nearly $10 billion in four airlines in late 2016, he had this to say:

“It’s true that the airlines had a bad 20th century. They’re like the Chicago Cubs. And they got that bad century out of the way, I hope.”

As an investor, what did Buffett’s considerable investment do for my psyche, for my decision to buy AC? Reflexively, I experienced a boost, felt good about my call. ‘Hey, look at me, I got in the game before Buffett.’

Then I talked myself down. I mean, what did it really matter that I spotted an investment opportunity before Buffett? It meant nothing other than I may have had access to some similar information. And just because Buffett is buying airlines, that in itself is no reason for me to buy. Because my investment objectives are likely different than his. Because he can afford to lose $10 Billion, and I’ll be hurt if I lose a lot less. And most importantly, even though Buffett is an investing genius, he’s human (gasp!) – no, really, he is – and he too experiences losing investments.

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Higher and Higher … Not

This week, nearly one year after my buy of AC, the stock soared to $22. More than doubling my money. Well, look at that, the TD analyst was right! Uh huh. And on 50-75% of his other predictions he was wrong. So, as my teenage son would say: whatever.

Still, I have to tell you I was feeling good. To my thinking, I bought low, and sold high. The perfect trade. And I rode that wave of satisfaction for about 24 hours. Because the next day, I read a new report issued by TD. Seems that they have now upped their target price to $34. Other securities analysts have also increased their target price, most to the mid and upper 20s, with one lone voice calling for a fall back to the teens.

And for a few minutes after reading these ambitious price targets, jello does jiggle my brain. Suddenly anxious, I’m thinking, uh oh, did I sell too early? The analysts say AC stock is going even higher! I could make even more money! Oh no! Why did I sell?!

The insanity then passes. BuddhaMoneyLama takes hold, reminding me that greed sucks. Telling me to be grateful for my good fortune, for my wisdom to sell at a peak. All is good now. Mental balance returns.

Will AC go higher still? Maybe. Do I care? No. Because I’m no longer invested. Because I’m satisfied with my profit and am now looking forward to investing the proceeds in other companies that offer better value.

And I’m certainly not buying the analysts bluster that the stock will now rise another 75%. I mean, this is what analysts do. If they’re lucky enough to make a correct call on target price, as soon as the price is reached or within spitting distance, they raise their target even higher. ‘Hold forever; the stock will go up, up, up!’ And they do this because it’s their job, to entice more people to invest in the stock market.

Here’s what I have to say to that: don’t succumb to jello brain. Once a security has reached YOUR target price, whether on the upside or down, stay disciplined and sell. Say thank you very much. And move on to the next investment.

 

 

 

 

 

 

 

The Stock Market’s Dark Side

Elon Musk, founder and CEO of Tesla Inc. (NASDAQ:TSLA), recently did something highly unusual: he disparaged his company. Specifically, he knocked …

Elon Musk, founder and CEO of Tesla Inc. (NASDAQ:TSLA), recently did something highly unusual: he disparaged his company. Specifically, he knocked Tesla’s share price, saying it is “higher than we deserve.” Whether true or not, to publicly state that your company is not worth its current trading value is not only rare, it’s virtually unheard of. It’s just not what a CEO does.

Because in addition to assuming responsibility for day to day operations, a CEO also acts as a company’s primary media pitchperson, head cheerleader, numero uno fan, selling the company’s virtues to the public and financial analysts. And always with a positive spin. Unless you’re a rare breed known as Musk, so it seems.


Sales, Man, That’s What Corporate Life Is All About

I’m not here to riff on corporations as evil entities myopically bent on achieving profit and maximizing shareholder value, all the while paying little heed to contributing to the social good and society at large. To varying degrees, some companies adhere to a social conscience, others don’t. For better or worse, such is the diverse nature of organizations, and humanity.

Still, regardless of how much or little a for-profit company gives back to its employees, communities, and our world, they all share something similar: they’re in the sales business. Whether selling goods or services, companies need sales to generate revenue to turn a profit to stay in business. And selling involves promotion, marketing, and advertising. And if you have a media friendly CEO, well then, all the better for driving sales, all the better for business because that CEO’s favorable image connects with consumers, persuading consumers to use, watch, listen to, or wear a company’s product.

Think Steve Jobs and Apple. Media loved writing about Steve, and Steve knew how to play the media, to manufacture himself as a near mythical legend, and position Apple as not only best in class but in a class of its own worthy of sticker prices considerably higher than rivals products. This sort of image making, however close or far removed from reality, impacts consumers buying habits and investors desire to own the stock, and consequently bid up share price.

Now, I’m not saying that Steve wasn’t a genius visionary or that Apple doesn’t make exceptional products. Instead, what I am saying is that you can have the most excellent product or service on the planet but if relatively few people know about it, and sales lag, then the company will soon fade away.

Apple doesn’t have that problem. They remain as extraordinary at the sales game as they are at manufacturing. And to this day, their image among consumers remains intact, best in class. As does their market value, which is higher than any other company on this planet, by far.


Promotion, Man, That’s What The Stock Game Is All About

Whether you’re a stock market behemoth like Apple or Google (NASDAQ:GOOGL), or a teeny tiny penny stock, in one way or another, you’re promoting your stock, i.e., you’re selling the merits of owning your stock because you want more buyers than sellers; this is how share price marches upward.

The typical medium in which behemoths promote their stock is mainstream media. Be it an interview with the CEO, a quote, a prediction as to what comes next in the stock market or economy, an annual meeting turned Woodstock for Capitalists (i.e., Berkshire Hathaway’s (NYSE:BRK.A) annual shareholders meeting), or a product unveiling (i.e., Apple’s annual Worldwide Developer’s Conference).

And while the CEO may firmly, honestly, believe in what they are promoting, we the consumer would be wise to interpret their words with a grain or two of salt. Because they’re just words. In the investing game, words are not enough. Not even close.

Numbers, not words, tell the story. On a basic level: Revenue, Expenses, Profit, these matter more, so much more, than words. I mean, words can be beautiful and flowery and convincing, and we’re all susceptible to oratory charm. But it’s important to see words for what they are, and in the financial world, words decidedly take a back seat to numbers.

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When The Numbers Don’t Add Up, Run!

Penny stocks are a different animal.

Technically, a penny stock is defined as any stock that trades for less than $5 / share. But for our purposes, a penny stock is one that trades for less $5 / share AND is not listed on a major stock exchange AND is a small company AND is often illiquid (i.e., relatively few shares are traded each day, making it difficult to buy and sell).

Now here’s the dark side of penny stocks: scammers LOVE them! And they can make a small fortune off people who don’t know any better, people who chase pots of gold and ends of rainbows, people who lay their bet on spam email promoting the latest and greatest 10 cent stock promising to power through to $10 or $50.

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The typical penny stock company touted by scammers? Little to no revenue, little to no shares traded daily, little to no business prospects.

And the angle, the hitch, the hook? The company says (words, words, words) that it’s changing its business model and is now in a HOT SPACE. For example, if the price of gold takes off, the company will morph into a gold mining company. If biotech is hot, you guessed it, the company reinvents as a biotech company.

Then, if it’s a big time scammer, they pay a promoter(s) serious coin (we’re talking hundreds of thousands to millions of dollars) to scream about the INCREDIBLE, UNBELIEVABLE, FANTASTIC investment opportunity presented by this itsy bitsy shell of a company. And the promoter(s) sends out millions of emails, many press releases, and arranges for inclusion in hundreds of investment newsletters and stock chat rooms. This is the modern version of a boiler room (i.e., refers to a bunch of guys [rare for women to engage in this activity] hard selling stocks to random people over the phone – well depicted in the movie, Wolf of Wall Street).

Once the word is out, once enough people have been suckered into becoming buyers of this worthless stock, the scammers start selling. Because, you see, before all of the promotional activity was set up, the scammers arranged for most, maybe all, of the issued stock to be in their name or, if sophisticated, the name of a faceless corporation. The faceless corporation gives them cover from regulators who have rules regarding the boundaries of promotional activity.

And if the CEO of Penny Stock Corp. says he doesn’t know who is behind the promotion, and the regulators cannot identify the promoter, then Penny Stock Corp. CEO has no worries. And he dumps his stock to pie in the sky investors who bid up the price. Until, that is, buying momentum halts, selling ensues, and stock price craters in a matter of hours or days.


The Case of Dry Ships

But you need a real life example. So let’s briefly describe what happened recently with a company called DryShips Inc. (for the full story, check out the detailed accounting here).

In November, 2016, DryShips disclosed a huge loss and suspended debt payments to preserve liquidity. Shortly after, the company, with a market value of close to $5 million, didn’t just catch fire, it was a veritable inferno! In just four days, the stock price leapt more than 1500%!

On November 8, its stock was priced at $5107, with a grand total of 38 shares being traded. Two days later, price jumped to $13,328 with more than 5,000 shares traded. Come November 15, price it $81,760 with more than 9,000 shares traded. By November 29, price had tumbled to $4849.

The journalist who wrote the article referenced above ends his story by referring to the “stock’s mysterious rally.” Well, other than being able to prove who was pulling the scam strings, there’s no mystery. The stock blasted higher owing to deceitful manipulation and nefarious promotional activity. Because absolutely nothing related to the company’s business activity justified a massive move in volume and price. And at the end of the day, guess who loses? Right, Joe/Jane Investor who were suckered into buying worthless paper.

As an investor, you do not want to get anywhere near this kind of stock. So please do your best to ignore any spam investing emails, ignore talk of a stock being “the next Facebook”, ignore any and all penny stocks because buying penny stocks is akin to gambling, not investing, and nine and half times out of ten, you will not exit your stake a happy camper.

Hot Stocks Burn!

A little bit of knowledge can be dangerous, so its been said. And in the stock market, oh man, ain’t it the truth! Especially in a boom market like the technology heavy NASDAQ.

During the past nine years, ever since the financial world began healing from the Great Recession, the return on a NASDAQ index fund has been relentlessly positive.

Sure, temporarily, price dips into the dreaded valley of bears but give it a day or two or thirty, and charging bulls wrestle momentum forward as price resumes its heady ascent. Currently, the NASDAQ stands above 6110. A mere one year ago, it was at 4800. That’s a 27% gain in one year! Such a gain is outrageously potent when considering that equities historically return an average closer to 8%.

‘Ya, well, that was then, this is now. Get on board the gravy train or stand there with your hands in your pockets, money in a savings account and earn your 1%. Good luck with that!’

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Derailments Happen

More or less, that’s what Jake said to me the other day. Jake is in his late 70s. His wife, Nancy, passed away several years ago. Until bidding farewell, Nancy held the title of family investing guru. Despite having next to no knowledge nor experience with investing, Jake figured, how hard can it be?

And since he’s taken over the portfolio reins, Jake has done well. As have others who have invested in American based index funds.

But here’s the thing: Jake attributes success to his investing prowess. Fact is, Jake has no knack for investing, no know-how, no prowess. I don’t say this as a knock against Jake. Not at all. He’s a fine person with a warm disposition and a kind heart. It’s just that I know Jake well enough to understand that he’s been following the crowd.

And the investing crowd has been riding a tsunami sized wave of good fortune since late 2009. And for anyone whose investment days only just started after the last recession ended, it’s quite possible that all they’ve known are good times.

Cool. Good. Excellent for all who have seen their portfolio grind and bump higher and higher as the NASDAQ, S&P 500, Dow Jones continue to break records. And should Stock Market Gods continue to stoke global economies and shine light upon corporate profits then, hey, whose to say that, far from nearing its end, this party isn’t just getting started?

Hmmmm … hope for the best, nothing wrong with that. But choose to remain blind to the fact that the longest period of sustained economic growth in the USA was 10 years (1991-2001), that from the 20th century onward, recessions typically occur every three to six years, that we are currently in year nine of the economic expansion cycle … and you may be in for a nasty turn of your portfolio.

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This Is Not Chicken Little Calling

Jake talking:

‘Australia is experiencing its 26th consecutive year of economic growth; old age doesn’t derail economies, something has to kill them; consumers are spending; banks are lending; full employment; property prices rising … tell me: where’s the dark, foreboding cloud indicating recession and stock market collapse? Huh? Where?’

Absolutely, Jake. All signs look positively stellar. I mean, who can argue with what you just said or the zooming stock prices of Amazon, Apple, Google and Facebook this year? Wowzers!

But you know what? The stock market, and life, is about looking forward, not backward. Sure, we check out history to learn from others, to learn what worked and what didn’t. Still, as far as my limited knowledge reveals, we humans don’t know what’s coming in the next minute nevermind the next year or two or ten and beyond.

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What’s This Game All About

I’ll give Jake this: economies of the developed world are healthy and look to be getting stronger. And in year five and six and seven and eight, and now nine of the US expansion, pundits have been tripping over themselves to call the next recession and stock market downturn. Yet all they’ve done is fall flat on their face as growth continues and stock markets chug along.

But does this mean you shouldn’t be careful? (yes, yes, be careful!) Re-assess your portfolio? (again, yes!) Consider selling winners and taking profit (oh, yes!) rather than staying fully invested and letting all the chips ride? (yikes, don’t do that!).

Why? Because managing your portfolio is about managing risk. There is ALWAYS risk in your investment portfolio with some assets inherently riskier than others. And you can best manage risk by coming up with a plan that allocates fixed percentages of your portfolio to different asset classes.

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Laws Of Gravity Still In Play

Okay, real world example instead of blathering on: let’s say Jake’s plan involved allocating 20% of his investment portfolio to equities in the technology space, either through buying individual stocks or index funds. And with the gains Jake has made in the tech sector during the past few years, tech’s share of Jake’s total portfolio has ballooned to 45%.

Having too much exposure to tech, i.e., too much risk, makes for a portfolio out of balance. Because when (not if, but when) there’s a market fall, you can be sure that those tech related gains will wither if not evaporate entirely.

Now, since Jake wants to maintain technology exposure at 20%, assuming he accepts sage guidance from BuddhaMoney, he’ll happily sell 25% of his tech assets, pocket the profit, and reinvest elsewhere.

For example, maybe Jake will bump up his fixed income allocation (currently at 20%) and buy a Bond index or individual bonds because he wants to reduce portfolio volatility. Or maybe with interest rates seemingly, finally, on the rise, he’ll put his money to work in financial companies, banks and insurance, since their bottom lines tend to benefit from rising rates. Or increase his cash holdings (nothing wrong with cash; best to be patient and wait for opportunity rather than rushing into investment action).

Whatever Jake decides, the most sensible course of action is to maintain a balanced portfolio, diversified across asset classes (i.e., stocks, bonds, real estate), industries, and geographically. Because booms don’t last forever, crystal balls are the stuff of dreams, and the laws of gravity will not be repealed any time soon.

 

 

 

Risky Business

Starting in late 2007, and continuing throughout the so-called Great Recession, conventional talking heads prophesized the end to America’s reign; tea leave readers foretold China’s economic belly flop; the European Union threatened to unravel, to be undone first by Greece, then Portugal, then Ireland, then Spain, then … and the all mighty consumer stopped spending thus greasing the downward spiral.

With eyeballs bugging out left and right, folks terrified of an impending crash landing fled financial markets. Too risky, too dangerous, they said. So equities were dumped en masse and shelter was sought under cover of Government Treasury Bills and mattresses.


And Now … The New And Improved America

Nearly a decade later, the American economy has healed. U.S. manufacturing is undergoing a renaissance, fracking has transforming the energy sector for better or worse, housing markets are humming, unemployment targets have been exceeded, and, as a matter of self-interest, global economies are cheering, and benefitting from, America’s phoenix like rise. Compared to the dark days, the financial world as we know it is at relative peace.

And in the wake of perceived macro economic risks falling by the wayside, stock market indices are hitting one new high after another. Feeling secure about domestic and global economic prospects, investors continue to pour record amounts of cash into equity index funds and mutual.

Seems like a smart move, yes? I mean, with systemic, default, credit, liquidity, operational and market value risk sirens no longer screaming, isn’t now the perfect time to get into the stock market, to shoulder more risk in exchange for higher return?


Reality Check

Risk. It’s double-sided. In the investing world as in life in general, risk may simultaneously present danger and opportunity. Yet, many people hear the word risk and run, as if it’s a fatal hazard to avoid. And sometimes it is. Sometimes, after plotting bar charts, measuring graphs, researching and analyzing, doing due diligence until the cows come home, we rightly conclude that the chance of potential harm outweighs any possible reward.

At other times (i.e., Great Recession), we get scared. Emotions drive decision-making. We panic and sell into downdrafts at a loss. Then we stand on the sidelines biting our fingernails, waiting for calm to return, convincing our self that we’re safer bearing the risk of not investing.

Are we safer on the sidelines when markets implode? Or we missing out, failing to capitalize on golden opportunities?


Fear of Loss May Equal Loss of Opportunity

When it comes to investing, emotions are your nemesis. When they take over, we become blind to unbiased data.

We minimize the fact that North America has experienced more than forty economic recessions during the past two hundred years. We overlook the reality that every one of those recessions came to an end, that the sun never stopped rising, and growth eventually resumed an upward trajectory.

Meaning? That recessions are part of the natural capitalist cycle, and that while extreme volatility has been known to cause shallow breathing and digestive issues, it may also be understood as a measure of temporary price fluctuation. Not loss (unless you sell at exactly the wrong time), but fluctuation. And these fluctuations often present opportunity for gathering low hanging fruit leading to juicy returns.


Mental Wonkiness

Why the persistent, near universal investor short sightedness? Why, without fail, does the appetite for equities decrease when markets are volatile and increase when markets are stable?

Blame one of the biggest risks of all, the risk residing between our ears, that conceptual notion called The Mind.

Embedded in the mind is fear, a primal emotion. According to behavioral finance’s prospect theory, fear saddles investors with what is called loss aversion, i.e., we place more weight on the pain associated with loss than the good feeling resulting from gain.

True, it’s only a theory. But just for fun, test it out. Ask yourself, what emotions did you feel back in 2007-2009 when reading successive month end statements showing lower and lower portfolio values? And when daily media reports gluttonously shared the feast of bad news how often did your stomach turn? Did those feelings make you want to buy stocks or bolt for the exit, courtesy of fear?

Fear overpowers the investor’s two most effective weapons: logic and rationality. Without these, we’re practically defenseless against the onslaught of panicky herds. And certainly, unlike Warren Buffet, we forget that market uncertainty may be our friend.


Profiting from Uncertainty

Late 2008, holding fast to the conviction that global capitalism wasn’t flat lining, Mr. Buffett wrote a cheque for the tidy sum of $5B to buy Goldman Sachs (NYSE:GS) preferred shares yielding a hefty ten percent (equals $500M/annually). At the same time, he buys warrants allowing for purchase of 43.5M common shares at $115.

Three years later, GS buys back the preferreds at a ten per cent premium (another $500M for Buffet; another day at the office) and, as of the time of this writing, GS commons trade near $215 making for a plus 90% value increase.

When most everyone else was sprinting to the bunkers, how could Buffett be sure that stock market declines were not a harbinger for the end of the world as the Mayans predicted?

Well, other than stating the obvious that hindsight is 20/20, I’m not going to pretend to have an answer. But I’ll go out on a limb and say that, as a student of history, Buffet knew the following:

  • Since the 1940s, the Dow Jones Industrial Average (DJIA) has declined by at least 20% more than 12 times;
  • Since 1906, the DJIA has been on an upward climb, moving from 100 to near 21,000; and
  • About every five years or so, there’s a temporary market pullback before resuming the march to new heights.

Related, I wouldn’t be surprised if Buffet’s faith in the upward trend of financial markets mirrored a similar faith in civilization as so eloquently stated by Franklin D. Roosevelt in 1945 (quoting Rev. Endicott Peabody, Roosevelt’s former teacher):

“Things in life will not always run smoothly. Sometimes, we will be rising toward the heights, then all will seem to reverse itself and start downward. The great fact to remember is that the trend of civilization is forever upward; that a line drawn through the middle of the peaks and valleys of the centuries always has an upward trend.”


Learning From The Giant

Though there will never be another Warren Buffett, we mere mortals may learn from him. During the next recession (a matter of time), investors would do well do pop an antacid or two and consider buying fundamentally sound, large cap, domestic and global companies that happen to get sideswiped by general hysteria.

As for today, some market indices are trading at or near record highs. For the most part, the easy money’s been made. So this brings us back to the question, is now a good time to buy equities?

Some say, yes, buy now. Others say the present day rotation into equities is little more than another chance for sheep to get fleeced. While a third investor subset isn’t so sure, believing there are still too many question marks and it would be best to wait for greater clarity.

The thing is, the future is never clear. So for investors, it’s more about injecting rational thought and sidestepping fear. It’s more about asset diversification and long term perspective, rather than timing purchases. Do this, and balance and wealth are bound to grow.

 

 

 

Ethical Investing … Why Bother?

‘Good People’ have a moral compass. ‘Good People’ adhere to universal ethics. ‘Good People’ care about others. ‘Good People’ care about more than just making money. Therefore, ‘Good People’ who invest their money engage in Socially Responsible Investing (SRI). Following this line of thinking, ‘Bad People’ do not engage in SRI, are selfish, greedy, and immoral.

Yikes! On several fronts that’s too, too, too … it just doesn’t sit right with BuddhaMoney. Okay, still, is it True? False? Simplistic? Naïve? All or None or One or more of the above?

SRI Investors: Who Are You?

Before picking a side and jumping to conclusions, let’s flush out the concept of SRI or Ethical Investing, two terms often used interchangeably.

At its core, SRI implies investing in companies that meet a certain standard of corporate responsibility regarding social, environmental and ethical considerations. Generally, investors who take an interest in SRI fall into two camps:

  • Camp 1: SRI is an investment with a charitable component, in which non-financial rewards of the investment are just as important, if not more so, than the rate of return.
  • Camp 2: While corporate SRI practices may add value to their investment strategy, potential rate of return is the dominant consideration.

SRI Fans

As with any issue under the sun, there are proponents and critics of SRI.

Proponents believe that SRI is about ‘doing good’ by seeking a blended return, i.e., investing in companies that offer both strong financial return and social return.

That said, proponents do not hesitate to acknowledge that a business must turn a profit if it is to survive. But, they say, if the only focus is profit then survival is far from assured.

SRI Boo Birds

As for SRI critics, they hang their hat on the words of renowned free market economist Milton Friedman:

“There is only one social responsibility of business: to increase profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”.

Friedman’s followers lay responsibility for social issues at the feet of government, not private enterprise. Further, they assert that SRI investors are willing to accept lower financial returns for only the promise of vague and loosely measured social returns.

What’s the Purpose of Investing?

I’m not looking for a right or wrong answer, or to label anyone Good or Bad. For me, this is a personal issue to be determined by thoughtful examination of your conscience, your beliefs, and by asking your self, what is your purpose for investing?

  • Is investing about ‘doing good’ by seeking a blended financial and social return?
  • Is it about making a difference by supporting organizations that take a stand against human rights violations, lax environmental controls?
  • Is it about penalizing organizations that sell liquor or tobacco, that facilitate gambling and enable addicts?
  • Does ‘doing good’ mean you do not buy shares of companies that bribe government officials, lie and cheat, do not provide safe and fair working conditions for employees?
  • Or does it mean that, although an organization is not blatantly or even slightly offside on the ‘sin scale’, it just doesn’t measure up for other reasons, and whatever those reason are justifies steering clear.
  • Maybe investing is a simpler, singular, concept. I mean, why should it be about anything more than making money?

The thinking here is that if you want to support charitable causes, if you want to ‘do good’, then you will do so through donation of your time and/or money to registered charities, not through investing. Further, so goes this line of thinking, by not restricting your self to investing in SRI organizations, you have so many more available investment opportunities. And the better your investments perform, and the more money you make through investing, the more you are able to support worthy causes.

What do you think? There’s no right or wrong on this one, although some may disagree. The best you can do is to follow your conscience and avoid investing in organizations that do not meet your standards, whatever these may be. Because you have no one to answer to except your self.


Here’s the conventional thinking about SRI Investing:

Advantages

Social Fairness. Through investing, supporting companies that you believe promote social fairness.

Ethics. You vote with your dollars to support organizations that adhere to ethical business behavior.

Disadvantages

Poor Investment Returns. Companies pursuing socially responsible activities may not maximize shareholder value since all capital in the company is not primarily used to increase profits.

Increase Risk. Because there are fewer companies that qualify for SRI, there are fewer opportunities for portfolio diversification. In turn, this may increase overall portfolio risk. As well, companies engaged in socially responsible activities may have higher risk due to lower gross profit margins.

Lost Opportunity. You may be leaving potentially strong investments on the table not necessarily because the company is inherently evil or even terrible on SRI issues but because they don’t measure up to someone else’s standard of what qualifies as an SRI worthy company, even though that company’s products/services do improve the human condition in some manner and creates jobs.

Spin. Few companies do not employ marketing spin. Meaning, the company may be adept at creating an image of social responsibility but less competent at engaging in socially responsible activity. So, it’s essential to do your homework, to know that the company’s actions are in line with its image.

I know, that’s a a fair bit of information to chew on. So, hey, go ahead, take your time, there’s no rush. Once some clarity comes your way on this issue, and if you decide you would like to put dollars to work, you might start by researching the Funds listed below (big important note: I do not hold any of these Funds nor am I endorsing them):

  • iShares MSCI KLD 400 Social Exchange Traded Fund (DSI:NYSEARCA)
[https://www.ishares.com/us/products/239667/ishares-msci-kld-400-social-etf]
  • Domini Social Equity Fund (DSEFX)
[http://domini.com/domini-funds/domini-social-equity-fund]

 


Now, if you decide to buy these Funds or other Funds or companies falling under the SRI umbrella, just remember that your ownership of such securities doesn’t qualify you as ‘Good’ or ‘Bad’ People. Nah. No value judgment. Instead, you’re an investor doing what is best for you and your family.