Sustainable Returns Are Higher Returns
By
Victor Bivell
Eco Investor
November 2008
As authorities
gear up to increase regulation of the financial system and the stock market,
the worldwide share market crash is also prompting many people to re-visit
some basic ideas about investing - such as why do we invest? There have
only ever been two good reasons - short term income and long term saving.
What is clear is that in this, as with previous bubbles, too many investors,
or perhaps that should be stock market participants, crossed the line
from income and saving into that third and far more dangerous side of
the stock market. Some call it travelling too high up the risk/return
curve, others call it gambling.
Their motive
was higher returns, also called outperformance, excess returns and alpha.
Chasing higher returns is noble enough if done in moderation, but carried
to extremes it has consequences. For more conservative investors capital
protection is the norm and equities the source of higher returns. The
more we chase higher returns, the more equities are the norm and dangerous
activities such as excessive risk taking and socially irresponsible activities
become the source of bonus returns.
For retail
and high net worth investors the recent boom brought an abundance of financial
products that allowed them to take out tax deductible loans with which
they did nothing more useful than bet whether an index would go up or
down. The more thoughtful promoters offered long term capital protection
to help with any short term pain.
For institutions
and fund managers it became de rigueur to chase so called "alpha". This
led to a worldwide explosion of equally useless products that are so exotic
they can only be identified because they are beyond normal human comprehension.
But there is
a key difference between the race-track and the stock market. The race-
track is a level playing field, literally as well as in other senses.
You know the other participants are also having a bet, and their bet doesn't
really affect yours. But on the stock market, long-term investors don't
know if their money is beside that of like-minded investors or subject
to the whims of day traders, hedge funds, and similar stock market participants.
And of course
the stock market has many ways to chase higher returns beside the merely
useless. The more dangerous gamble with life and the planet.
Many chase
outperformance by slipping some money to morally dubious corporations
whose activities pollute the environment or are dangerous to health, although
some people prefer to call this investing in companies with a higher return
profile. This is the alpha-chasing but ethically slackadaisical investors
approach to ethical investment. How many times have we heard the argument
that doing the right thing or even just not doing the wrong thing will
cost a few percentage points on portfolio performance?
This has always
struck me as a morally irredeemable argument. It's like someone saying,
"If you invest in me I'll give you back fifty dollars. But if you let
me pump pollution into this beautiful fresh air, or if you let me give
these perfectly healthy people cancer, I'll give you an extra $2."
No thanks.
Whether those
higher returns were ever real or not may be debated forever. What is clear
is that the stock market crash has wiped out many years worth of these
supposed higher returns. The only things left, the only things it hasn't
taken away, is the damage - the pollution in the air, the sickness in
the people, the real cost that others often pay for some else's higher
returns.
It may be an
old-fashioned idea, but how we make our money is as important as ever.
Every now and then we just give it a new name. Call it religious values,
philosophical principles, social conscience, ethical investing, sustainability,
responsible investment… Likewise, theme investing such as the environment,
healthcare, media, or simple property trusts that provide companies with
offices and employees with a workplace - they all do something useful,
something helpful to others.
Being useful
can make just as much money as being dangerous, and in the long run it
can make a lot more money than gambling. The choice is not sustainable
returns versus higher returns. Sustainable returns are higher returns.
And that's "higher returns" in the full sense of the phrase.
If regulators
want to re-fashion capitalism or the stock market, a good place to start
are principles and values that don't have a use-by date.
|
