Investing for Sustainable Gains

What do you really own, in your 401k?  Those shares of stock, those bonds - are they really the best way to invest in America’s future? Your future? The world’s?

If your 401k plan is like mine, you have some mutual fund choices - maybe even a lot of them. The mutual funds are either “passive” (index) stock funds, with a little of everything (within the index), or they are “active” (managed) stock funds… plus some bond funds. One example is the S&P500 index of most of the largest U.S. corporations.

Now, I save into the 401k because of how the game is rigged: I like to defer taxes until I actually need the money, and there’s the “free money” in the form of a “company match”. But I’m not happy with where I have to put my money in order to get those benefits. Do I really want to be financing the 500 largest corporations in the U.S.? Not all of them are exactly paragons of wise economic activity! Just look at what the fraud banking and health care sectors have been bribing lobbying Congress for… or the war-profiteers military-industrial complex… or the toxic junk & fast food vendors… or the telecommunications and power monopolies utilities… do I want to be investing in all THAT? Is investing supposed to be about profiting from the weaknesses of others, or about building up our collective strength? Even for otherwise reasonably productive large corporations, too often I hear about cutting quality in the name of profits, failing to actually serve their customers, and distributing rewards to management rather than shareholders.

That is not the system I want to be supporting and sustaining with my hard-earned savings. I cannot count on such a system to provide for my retirement, nor would I want to think that my last days of peace and relaxation were funded by such activities! So, I say no to the S&P500. And despite various fancy titles, unfortunately the other stock funds are pretty much the same witches’ brew.

No stock funds for me… So, what about bonds? This is long enough, so I leave that for the next post…

“It’s 11:00.  Do you know what your money is doing?”

This post begins a running theme for this blog:  The Ethical Dimension of Investing.

To whom do you lend?  And what, exactly, do you really “own”?

Did you own the S&P 500 last year?  Ever stop and think how much of that was “invested” in the very same financial companies which have so egregiously failed (in many senses of the world), but which subsequently repaid themselves with public money, outrageous fees, and legislative legerdemain?  Did they repay you?  I did, and they didn’t. I don’t want to be a part of that again!

When you want to “buy a bond”, or a CD, or put “money in the bank”, does it matter who gets the money, or is one’s job simply to choose a secure institution with a reasonable (preferably above average?) rate of return?

I think more is required of an investment than simply “security of principal and a reasonable rate of return”.  I want to know that my money is being put to a use that I can agree with.  I’m tolerant enough not to insist on it, but I think you should too.  It’s hopeless to expect perfection.  But I don’t want to be bankrolling some venture which history will someday judge the modern equivalent of the South Sea Bubble or TulipMania.  I suppose it’s okay to relieve willing fools of their money in a zero-sum game, but a fair amount of “investment” activity is downright destructive. Especially when the willing fools get bailouts at my expense!!!

Indeed, a lot of speculation which appears to be “zero-sum” is, in truth, necessarily negative-sum.  Because even if money just changes hands without an overall gain or loss, nevertheless time is wasted which could have been put to better use.

This is a general introduction. The next post in this series will delve into specifics from my perspective.  But for now I want to mention Move Your Money, which provides a provocative (if perhaps hyperbolic) illustration of the issue!

“Wisdom Speaker” is a working physical scientist living on the east side of the San Francisco Bay Area.  Wisdom Speaker is between 30 and 50 years old and has a top-tier Ph.D. in his field.  W.S. also has a spouse, 2 children in school, a house with a mortgage, and occasionally a sharp tongue. Like many his age, W.S. manages a portfolio that is “big enough to worry about, but too small to retire on”.

For years, W.S.’s spouse led the family to develop strong saving habits, and over the years they invested using conventional buy-and-hold, dollar-cost-averaging, asset-allocation methods. But in 2005 realized that conventional financial wisdom was no longer adequate to the times. Unfortunately this occurred after buying a new home near the peak of the 2000-2006 housing bubble. Although the home equity could not be saved (for some years, anyway), the housing experience “woke them up” to the speculative/Ponzi financial environment. Time was invested in a more detailed financial education. Abandoning “buy-and-hold” and taking detailed control of the household finances, W.S. went to cash and avoided the 2008 financial panic.

The family finances came out well ahead of their 75/25 allocation benchmark, but now the question arises as to how, exactly, one should invest for sustainable gains going forward.  The classic definition of an “investment operation” is one which, “upon thorough analysis, promises security of principal and a reasonable rate of return” (Benjamin Graham). In short, a sustainable gain!  Now, some of what is often considered speculation is in fact investment (e.g. trading with a high probability of success, but a short time horizon).  On the other hand, the lesson America failed to learn from Enron and the dot-coms is that too often, what is sold as “investment”, is actually speculation - or worse, fraud!  Clearly we cannot trust others to do our “thorough analysis”, guarantee “security of principal”, or deliver a “reasonable rate of return” for us.  How now to invest?  W.S. hopes to share what he has learned about investing for “Sustainable Gains”, and to learn from others with similar interests.

W.S. also believes that Graham missed a critical element of what constitutes an “investment”.  There is an ethical or moral dimension to investing:  one must put one’s time and treasure to good use, and be able to sleep well knowing what the “investees” are doing with one’s treasure.  An “Investment Operation” must be one which “upon thorough analysis, promises security of principal and a reasonable rate of return while putting capital to a use one can agree with.  Wave upon wave of financial scandal shows that this issue is far wider than “socially responsible” index fund sellers would have one believe.  Even the simple act of buying a CD, or a T-bill, has an ethical component. So ”Ethical Investing” will be another theme covered here.

Another issue that comes up almost immediately is that the fiat money we use today isn’t wealth, or capital, or anything really.  It’s a bunch of carefully arranged electrons (or paper, or metal disks, but always of minimal intrinsic value) which record the exchange of debts.  But debt is not capital!  Capital is the surplus of production over consumption.  Debt is an agreement to deliver future production in exchange for current production.  True wealth might be better defined as accumulated resources to meet human needs.  W.S. has only dabbled in this area so far, but understanding the “Nature of Wealth” is vital to having “Sustainable Gains” in this area, and will be another theme here.

Finally, there is the eternal issue of time. One can often earn more money, or save it, but one’s time is far more strictly limited. Time spends itself whether one likes it or not, one never knows how much one has left, and it’s darned hard to get more!  But perhaps careful “Time Investing” (not just time management), particularly in conjunction with financial investing, can lead to sustainable gains (measured in terms of any personal goal) as well?  At any rate, between work, family, and personal needs, W.S. feels time-poor, and struggles to fit all the joys and sorrows of life into the 24-hour day, so “Time Investing” will be another theme here.

Hope you enjoy the site!  I look forward to seeing where this goes…