Post #107: Voting with Your Wallet

2 April

     I argued in my recent post on confidence issues (#104) that the massive movement towards passive investment might be read as dawning insight into the limitations of our individual intelligences, although it’s not often put in those terms. Nonetheless the development looks questionable to me—not so much out of an economist’s concern about resource allocation (the more common worry and a serious one), but because it has drawn my attention to something in our thinking around investment that doesn’t make much sense to me.

     Nowhere else in my life would I agree to take my decisions on a course of action based only on what promises the greatest yield, regardless of how the sowing and harvesting is done—so why is it that I should start from that premise when it comes to deciding where to put my savings? Yet so pervasive is it as a base line that it might sound odd to question it at all. One aspect of this problem is the ethical dimension: if there is such a thing as right livelihood, urging the avoidance of unethical ways of making money, among other things, then how could it not also apply to investments? Some level of ethical filtering seems quite crucial, and this presents much greater difficulties than one might think since the usual formulae for separating ethical from unethical enterprises leave much to be desired, in terms of false positives and negatives alike. (One may find Disney or FaceBook objectionable even if they pass the usual tests with flying colors, and one may have a soft-spot for microbrewers and other purveyor of suspect goods and services even if they run up against various ethical precept and prejudices. I would rather make these judgments myself than leave them up to the determination of a mutual fund policy.)

     What occurred to me the other day runs much deeper, however. Why should the emphasis be on the highest return if that is not what I would ask first in any other domain of life? Not that I am indifferent to payoffs, mind you, only that it is one consideration along many, and clearly subordinate to whether what I do seems a broadly right and meaningful use of my faculties to me. Why should I not take that consideration as my bottom line and put together a diversified collection of stocks and bonds, based on which companies and governments are moving the world, roughly, in the direction in which I believe it should be going? Because such a crude portfolio is not likely to return as much as one put together with a view to yield-maximization, would be the expected answer. Perhaps. But so what? Why should the prospect of somewhat lower returns deter me any more from investments I can feel good about than from a line of work that was never aimed at maximizing my lifetime earnings either, as if that were the only thing that mattered, but at allowing me to earn a living, sometimes more comfortable, sometimes less, while doing something I believe in and enjoy doing, on the whole, whatever the downsides may be?

     But wait: it is not rather presumptuous of me to think I could judge which companies and governments (if bonds be included in the mix) are in fact moving the world in the right direction? It would be so, certainly, if I were making this judgment in a way that was binding on others; but I am not presuming anything of the kind, any more than I have been pursuing my profession with a view to what others should be doing with their lives. The point is not to decide, on behalf of all mankind, what is right and what is wrong in a field unimaginably complex, but simply to cast my vote, so to speak, by deciding which kinds of activities I would like to derive my income from, and which not. If I put all my savings into a pizzeria, say, I am not thereby decreeing that pizza is the world’s greatest food and that everyone must have it for breakfast at least twice a week; but if it were done in the spirit I am arguing for here, then my love for that kind of food would feature prominently in my decision-making, as it does for most restaurateurs who don’t need to think twice about their culinary commitments because they take them so much for granted. Perhaps other kinds of restaurants promise a far higher return, but that is not the point; of course it would be nice to get a good return on my pizza-investment, but there is no reason why I should decide on it with dollars and cents first and foremost on my mind, let alone with pecuniary considerations carrying everything before them.

     The reason why we seem so prone to losing sight of something so elementary when it comes to investment is probably that when we turn to giant institutions, our intuitions, which evolved for much more personal interactions, fail us, and everything takes on an abstract texture that makes number-crunching seem more fitting than the kind of “sentimental” approach that I am talking about. But I am not convinced that we are right in dismissing the role of the emotions in so cavalier a manner, even around financial issues that call for a cool head. If I am an outdoorsy type who swears by a particular equipment maker, should my savings not go to them, provided they return something, or perhaps not even that, if they happen to be going through a rough patch and I am willing to go with them? Would there not have been a great case for buying Apple shares, in the days of Steve Jobs, out of sheer love for the Mac and all it used to stand for? And so it would go, for a car-lover (not me!), with the company that he credits with making the best four-wheelers, or with one’s favorite airline or hotel chain, one’s preferred coffee purveyor or dog-food maker, or whatever else catches one’s fancy particularly in our world…

     Grossly unsophisticated from a financial point of view, it might be said. But why so, given how demonstrably poor the record is, even among the most supposedly sophisticated, on stock-picking for returns only? If you were simply to put together a big enough selection of personal favorites, making sure to diversify across industries and markets, your chances of matching the performance of most mutual funds would be pretty good, and since you have no fees to worry about, you might even match the index funds, or beat them, who knows. Even if you did not, and your returns came out a little behind the benchmarks, why should you lose sleep over it? You are getting your coin from things you feel good about, or that you love, even! What kind of Scrooge would you need to be for that not to matter, but only the ring, ring, ring of the virtual cash register? Yet we routinely act as if it were, obviously, the only thing that should be important to us. Bizarre, if you think about it.

     I am not saying that anyone should invest in this manner, any more than I feel called upon to tell others how they should spend their money in other respects. I would ask them to use their best judgment, please, and to bear in mind that the resources they are commanding are entrusted to them, not just handed to them to despoil as they wish, even if there is no enforcement mechanism save the good or bad opinion that others may form of the judicious or injudicious spender. I too reserve the right to form such opinions about the wisdom (or lack thereof) in how others spend their money, but it does not concern me much. What interest me a lot more is why, given how much we take voting with our wallets for granted in other ways, we should suddenly behave in so coldly calculating a manner when we have to decide what to do with our savings. Which is how I thought of it too, I must admit, until the other day I was asking myself just what I was doing, and why I should either put my trust in dubious mutual-fund methodologies or follow the stampede into index funds—and I found myself unable to give a good answer.