OUR PROCESS- Governing Principle when Building a Portfolio
To be sure, there are countless ways to make money. Some ways are legal; some are illegal. Some ways come easy; some come with hard work and sacrifice. This issue of OUR PROCESS addresses one of the governing principles our firm adheres to when constructing the equity portion of an investment portfolio for a client.
In days gone by, there was a trend to invest based on social values. This was called Socially Conscious investing. For example, if you were against guns, you would exclude any company related to firearms from your holdings. Or, if you were against smoking, you would exclude any company affiliated with that industry. And so on. On the one hand, we understand why someone would want to align their investment dollars with their convictions. And in theory, it is a good idea. In our opinion, the idea of socially conscious investing is just that- an idea. In reality, companies are so diversified that the same company that owns a Bible publisher may also produce tobacco or a fine bourbon. In other words, the same company that is involved in something you very much endorse and want to participate in may also be involved in something you abhor. In the real world, it’s all very messy. As a result, socially conscious investments tend to lag in performance compared to the overall market.
More recently, this thought has evolved to include not just social issues, but also a firm’s commitment to the environment or using its “voice” to make political statements either in its products, advertising, or the composition of its Board. As a sector, this is called ESG which stands for environment, social, and corporate governance.
Ultimately, the goal of investing is to MAKE MONEY!!!! It is not to make a statement. That is not to say that we condone compromising ones beliefs and convictions for the sake of base gain. Quite the contrary. While we do not adopt the current trends, we do in fact build portfolios fully in line with our values. This BLOG addresses one such instance.
One governing principle of OUR PROCESS is actually quite straightforward. We believe that it is honorable to be involved in the commerce of goods and services. For example, a firm that farms sheep to sell wool and mutton, is a legitimate business. Similarly, a firm that provides care for lawns and shrubs is legitimate. So regardless of whether you produce a GOOD or provide a SERVICE, in this equation there are no “losers” or persons being exploited. One party gets a needed product/service while the other party receives compensation for work/services performed. Where we have a problem is when there is a winner and a loser in the transaction. Let me explain. Let’s take the sheep farmer in the example above. No problem there. But now let’s say someone sells a contract to either buy/sell wool at a some hoped for price in the future. Once again, there are two parties in this transaction; one who sells the contract and the one who buys it. The difference here is that there is no good or service involved. There is no work or labor being exchanged. This is purely a speculation on the future price of wool. Inevitably, there is one winner and one loser. For lack of a better term, we have coined the phrase “pure commerce” to describe this method of making money. The term actually stems from Scripture related to the ephah vessel from the book of Zechariah.
By applying this principle to our portfolio construction process, we purposely do not buy derivatives such as options, futures, swaps, etc. For example, we own stock in Apple, but we will not buy an option on Apple stock. While some could argue that we are leaving money on the table, for us it is a matter of honor.
Remember, we construct our investment portfolios based on numerous principles. This BLOG only addresses one. Nevertheless, it is a foundational principle for the way we do business. And it is not limited to just OUR PROCESS in buying selling stocks. This principle is also the reason we do not involve ourselves in digital currency- commonly referred to as cryptocurrency. Eventually- and not too long from now – money will be digitized and used by everyone as money. At present, however it is purely a speculative play gambling on the anticipation/expectation/hope of future price fluctuations. Once digital currency actually becomes currency, we will all be using it, but for now, it is pure commerce and violates the principle outlined in this BLOG post.
On a broader scale, avoiding pure commerce also functions to improve our ability to design portfolios with managed performance boundaries. (And that my friends will need an entirely separate BLOG dedicated to just that topic of OUR PROCESS). Suffice it to say that the dependability and quality of our advice hinges in large part on our ability to measure the range of future performance possibilities. And anything that improves the quality of our advice is good for our clients.
This is the future of Advice. This is planning done right!