In the 1950’s, a convent of nuns wanted to invest a couple million dollars. They quickly discovered that they held personal religious commitments inconsistent with many of the industries they were looking at. Each business they considered, no matter how worthy, seemed to have some areas of conflict for them. For example, a major retailer might include cigarettes or liquor in its product lines. Energy companies, despite the necessity of their product, sometimes did not care about the environment as much as the sisters thought they should. The growing aerospace industry seemed like a worthy avenue, but in addition to benefitting the travelling public, they also produced planes and weapons of war. Everywhere the nuns looked they found conflicts. They began to think they should just leave the money in the bank, but then they wondered who the bank might loan their money to. They finally realized that finding an investment perfectly aligned with their personal moral commitments would not be possible.
Ultimately the sisters decided upon what they considered to be a reasonable compromise. They hired a money manager who agreed to assemble a portfolio that would exclude any company that was directly involved in the manufacturing of alcohol, tobacco and firearms. The manager warned the sisters that the very industries they were forcing him to exclude happened to be some of the most profitable of the day. The sisters accepted that their returns might suffer.
In the 90’s there was a movement known as Socially Responsible Investing, or SRI. Like the nuns, individuals wanted investments that were consistent with their personal beliefs. It was a noble goal, but the investors quickly ran into the same challenges as the convent, as they tried to determine and agree upon which businesses held exactly the same values as the investors. Much debate surrounded what SRI portfolios should and shouldn’t be investing in, and whether such investing would be profitable.*
Some investors today are particular about the types of industries they want their money invested in, while others view the investing process as more of a financial matter than a moral statement. Some don’t want any oil companies or banks or weapons manufacturers. Others are opposed to pharmaceutical companies. Some don’t want any international operations involved in unfair labor practices. These are noble goals, but how is it possible to know for sure? When I look at my high-tech cell phone with all its tiny parts and technologies that originate from countries all over the world, I realize I can’t possibly know the dealings of all the businesses involved in its production.
If you are interested in socially responsible investing then you must consider the many challenges that face assembling such a portfolio, the added cost of doing so, and that you will be limiting your investment options. Whenever you limit investment options, you have to accept, as the nuns did, that you may be limiting investment returns as well.
Imagine you are the owner of a successful business that your family spent decades building. Then one day you are being interviewed about your business by a television station. During the interview you casually make a comment that identifies your political leanings in a hot topic area. Suddenly, as if by whirlwind, the next day you learn your business has been targeted for a national boycott, not because of the products you sell, but merely for your political beliefs. Welcome to the investing reality show of 2017.
When I was a young investor I worried about all the typical risks a business might face such as credit, inflation, competition, interest rate, market and others. Now a new risk has been added to that list – political risk. This is the risk that, completely apart from a business’s product line, a company gets drug into, or voluntarily walks into, a political battle that leads to a boycott. Boycotts are not new, but social media has made them much more powerful.
The political climate is so heated in our nation that apparently it’s no longer enough to discuss matters in a public forum. Both sides have now taken to attacking the business interests of the other. Retailers are boycotted for policy decisions that have nothing to do with the products they sell. Some manufacturers are boycotted by retailers who disagree with their political views. One person mentioned to me the other day that there were so many boycotts going on that she could no longer remember where she was not supposed to be shopping anymore, or where she was allowed to buy her coffee.
It is difficult to calculate the effect of a boycott; they may hurt or they may even help a business by increasing brand awareness. I didn’t even know Ivanka Trump had a clothing line until someone decided to boycott her. Likewise, privately held Chik Fil A restaurants reported increased sales after they were targeted for boycott. I have also watched stock prices suffer under a boycott, though it is impossible to know how much may have been caused by other factors.
Choosing to invest in individual stocks brings a unique and elevated level of risk. With the heightened political risk that companies now face, I advise investors to be even more careful if they are buying single stocks. There doesn’t seem to be an end in sight to the current boycott epidemic, but maybe over time businesses will decide to exit the political arena and go back to just producing and selling great products.
Until then, investors may need someone to design a new cell phone app that tracks all the current boycotts with the added feature of warning them when a company they invest in has taken a political stand that may result in offending half their customers. It is truly a new world we are living in and, all kidding aside, investors should be careful of this new risk.
Albert Einstein was a great scientist, but first, he was a great mathematician. I tell my kids that most everything in the world, including those amazing video game graphics or high tech fight scenes in the latest mega movie, or even the waves crashing on the beach, comes down to math. As a mathematician, Einstein reportedly said about interest: “Those who understand it, earn it…Those who don’t, pay it.”
A current example of the value of understanding math can be found in the Utah legislature which is considering a bill to raise the individual income tax rate by 7/8ths of one percent. The argument claims that it is just a small increase. Politicians routinely speak in tiny percentages as a way of minimizing the cost in the voter’s mind. Since Utahns currently pay a flat 5% income tax, increasing that amount to 5.875% is actually a 17.5% tax increase. If politicians campaigned on a plan to raise income taxes by 17.5%, I suspect they would face a tough challenge. (Now you who are anxious to slam me on tomorrow’s opinion page, hold your keyboards. I am not giving an opinion on these tax issues, just showing the importance of correctly understanding the math as you evaluate them).
Investors face a similar math challenge with investing. An example may be upfront bonuses offered to purchase certain investments, that are often presented at free dinner seminars. I have seen some products that offer what they claim to be a 10% signing bonus. That seems great but the fine print points out that you may need to hold it for ten years in order to collect it. So that bonus is actually just 1% per year. With this understanding, an investor can more clearly decide if it is worth 1% per year for the liquidity they are giving up, among other things. In making decisions during one of these dinner seminars it may be wise to consider another Einstein quote. “To obtain an assured favorable response from people, it is better to offer them something for their stomachs rather than their brains.” I guess Einstein understood more than just math.
As with taxes, in investing, small percentages can mean very large dollars over the course of time. Never discount the value of squeezing out a few more fractions here and there, nor should you ignore the potentially dramatic cost that losses play in the final result. Just as many painfully learned in 2008, the math of investing requires you to protect against unreasonable losses that take years to recover. A few percentages gained or lost can make a huge difference over time.
There is a science and an art to assembling a successful investment portfolio, but both begin with an understanding of the math involved. Einstein was a great mathematician, which is why he is credited with calling compound interest the 8th great wonder of the world. Unfortunately, that “wonder” can work for you or against you, depending on how well you understand and use it.
Click I learned more about risk this week from a few teenagers while preparing to return from a trip to California. Due to all the rainstorms, when it came time to fly home, I went through a very detailed weather briefing. I concluded the trip would be safe to take but with mid-level winds in excess of 140 mph blowing across the mountain range, it would likely be turbulent. I then briefed my passengers and explained that the trip would be bumpy, but we would arrive safely. Oddly, my mostly teenage passengers were thrilled at the prospect of a roller coaster ride home. One replied (while demonstrating the action), “It will be more fun if we hold our hands up.” What normal passengers fear, they saw as a benefit.
When I plan a flight my focus is on getting to my destination safely. I understand that safety of flight is largely dependent upon decisions that occur before I even drive to the airport. The fate of most fatal plane crashes is set before the plane ever leaves the ground.
Once in the air there may be new challenges to face that hadn’t been planned on. One of the common issues pilots deal with is trying to avoid turbulence, not usually for safety, but for the comfort of their passengers. On some days ATC’s main focus seems to be helping pilots find smoother altitudes. Similarly, financial advisors are constantly looking for ways to avoid volatility in their client accounts, mostly for client comfort. Given the political volatility right now, I suspect many surprises lie in store for investors, and advisors will be working overtime in their attempts to minimize financial turbulence.
Along these lines, I overheard a conversation between my son Jared and a client in which they were discussing methods for selecting investments. At one point Jared said, “Remember, it is not our job to pick winning stocks, it is our job to pick a winning portfolio.” I must admit, this dad was beaming to hear my son, who has been working around our office since before he could read, come up with such a brilliant statement. It reminded me of the old pilot’s saying that “any landing you can walk away from is a good one, and if no metal was bent, it was a great one.” A successful portfolio is not defined by individual stock selection or by avoiding all turbulence, but by whether you are reaching your goals.
My risk lesson with the teenagers continued after we landed in St. George when I advised them on the car ride home to text their mothers that they were safe. One of the girls, noting that my 16-year-old was driving the car, responded with a smile, “I think I will save that text until after this car ride is safely over.” Indeed, we all view risk differently. In the end the girl was right. It’s all about getting to that final destination intact.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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