But Tom Brady Said....

 

If you watched the baseball World Series last month, you might have noticed the umpires sporting the letters “FTX” on their uniforms.  Or maybe you’ve seen an ad for “FTX” that featured Tom Brady, Steph Curry, or another celebrity.

FTX is (or maybe at this point I should say “was”) a cryptocurrency exchange based in the Bahamas that rocketed to fame and apparent success thanks to its flamboyant 30-year-old founder and CEO, Sam Bankman-Fried.  His business model seems to have been to hobnob with big shots in the financial world, propose and institute bold—if unwise—practices for his operation, freely throw money around, and court endorsements from celebrities in exchange for a stake in his company—all while acting the part of the offbeat MIT-graduate whiz kid, dressing in khaki shorts and tennis shoes while hosting cocktail parties on the beach and meeting with the more staid colleagues in the financial industry.

Perhaps it was that iconoclast image, the brilliant rebel reputation, that attracted all the followers—and investors—to his company.  He pitched a new approach to the futures market at the Futures Industry Association (FIA) meeting last year.  Evaluated objectively, his proposal bypassed the structure that is meant to protect investors and thereby introduced new risks to the market.  But that didn’t seem to faze many or even most of the people listening to his pitch.  He was offering a “gateway to the crypto world” (in the words of the Washington Post), with FTX operating like a bank in that it maintained customer accounts, exchanged currencies, and made loans and other investments with investors’ money.  But it operated without the tough regulations and oversight of a normal bank or exchange.

As Adam Levitin, a Georgetown University law professor and expert on cryptocurrency issues astutely observed, “People invested billions in an unregulated financial institution based in a Caribbean island.  How could this end well?”

Now FTX has collapsed, Bankman-Fried has lost his entire $16 billion fortune, the money of nearly one million investors has disappeared, and several celebrities are facing lawsuits for their part in hyping what many are saying amounted to a Ponzi scheme.

I can’t say that I have a lot of sympathy for the people suing those celebrities.  Well, maybe for some of the small-time investors.  But how many times does this have to happen; how many too-good-to-be-true investments have to fold in bankruptcy; how many celebrities whose fame is in sports, fashion, or just about anything other than finance, will endorse an investment that will supposedly make us rich but turns out to be fool’s gold, before we learn the lesson?

As with nearly any bad investment, there were people who were raising red flags about FTX, including the FIA itself.  Maybe not waving those flags as vigorously as they could or should have, but they saw problems with the model on which FTX was based and steered clear of it.  But the hype, the novelty, the celebrity….it overcame most hearers’ good sense.  According to the New York Times some big firms like BlackRock backed FTX.  And Bloomberg flatly wrote, “Many sophisticated finance pros were duped by Bankman-Fried’s wacky charm.”

Common sense, everyone.  As the saying goes, “If it sounds too good to be true, then it probably is.”  And the rule applies not only in high financial circles but in our everyday decision-making.  Our culture seems to always steer us to be in pursuit of the big—and fast—buck.  Instead of slow-and-steady investing and seeking sound advice, we let a Victoria’s Secret model or a sports superstar tell us where to put our money.  Or maybe we should listen to them—then do the opposite of what they suggest.  I expect that would work out much better for us in the end.

Until next time,

Roger

 

“For where you have envy and selfish ambition, there you will find disorder and every evil practice.” James 3:16 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973,   1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide.

Totally and Absolutely Ethically Invested? I Doubt It

 

In my post last week I addressed how lack of transparency in the corporate world (and not just the American corporate world) challenges the ability to invest according to one’s values.  I used environmentalism as an example.  But the challenge applies to anyone seeking to invest according to whatever values he holds. 

As a Christian myself, let me use that as a starting point to illustrate.  There are a number of brokers that tout their Christian-oriented investments.  They generally steer clear of investing in companies which profit from the sale of alcohol, tobacco, firearms, “adult entertainment”, and gambling services.  When I checked a few of these funds I found large energy companies (hydrocarbons) and mining companies among the largest holdings.  For someone who is a Christian and also cares about the environment, this would be a problem.  One of the companies heralded it plans to reduce emissions 99% by 2030 (sound familiar?).  It was also in the news for having to pay a $12 million fine to a state environmental agency for pollution it caused.

But if environmentalism is not this Christian investor’s priority, would he then be okay investing in these funds?  Well, how about the presence in the fund’s top holdings of a company that supports the intelligence community and its sometimes deadly activities?  It’s there.  As is a company that manufactures microchips that can be used in lethal, high-tech weapons and slot machines. Or if this conscientious investor wants absolutely nothing to do with alcohol or companies that profit from it, would he object to Costco (a large purveyor of wines) being among the top holdings (which it is)?

Mutual funds generally hold the stocks and bonds of dozens or even hundreds of companies, so even a top-10 holding in their portfolios may only comprise one to two percent of the money invested by that fund.  So if I have $10,000 invested in a fund that has total assets of $150 billion dollars, my investment represents only 0.000000066 of that fund which might invest only 1% in a company on my naughty list.  It’s so small as to be insignificant.

But this assumes an investor can actually identify the bad players he wants to avoid supporting.  At one time Altria owned Kraft Foods.  Altria is best known for owning the large tobacco company, Phillip Morris.  Did you boycott Kraft Mac n’ Cheese while Kraft was owned by Altria?  Did you then rejoice and put it back on your shopping list when Altria divested from Kraft?  Do you have a buy/no-buy list of brands when you go shopping?  Good luck keeping it up to date.  Just look up the history of some of the largest American brands and see how often they change hands or purchase and sell and merge with other companies.  It would be a fulltime job to track it all in the interest of keeping your portfolio “pure”.

Let’s take it farther.  How about the $10,000 held in a certificate of deposit at the local bank?   The bank uses money on deposit to lend to individuals and businesses.  Should I be questioning the bank whether they helped fund the new tobacco and vape shop down the road?  Depending on the bank’s assets and the size of the loan, I might have inadvertently contributed a great deal more than 0.000000066 to that distasteful enterprise by virtue of my money being held by the bank.

Moreover, many companies make political or charitable contributions that I may find objectionable.  Do I vet every company in a mutual fund along that criterion?  Some companies even hedge their bets politically and contribute to both political parties.  What do I do with that?

My point is that this world is interconnected.  I don’t drink alcohol or want to encourage drinking by others, but I shop at grocery stores that sell it.  I don’t approve of one national retail chain’s approach to alternate lifestyles, but I still patronize that chain, because they often have very good sales.  Should I spend more money to shop elsewhere?  Though I infrequently go to a movie, will I stop doing that because next week that theater may be showing an “R” rated film that I cannot condone and would not view?  Should I put my money under my bed instead of at the bank so I don’t end up indirectly supporting a business I find objectionable?  Should I pore over the financial reports of every company of which I own a minute share by virtue of my 401(k) account investments, to be certain they don’t cross my dearly held beliefs?  That would require quite an investment of time.  And can I trust even a Christian-oriented brokerage firm to offer me only investments in companies that not only don’t sell alcohol, tobacco, etc. but are not critical suppliers to those who do and which do not violate other values I hold that are not specifically “Christian”?

Some groups of investors take an activist approach to their value-based investing, buying stock (which is, after all, an ownership stake) in companies that violate the investors’ principles but with the intent to use that ownership to effect positive change in the company.  At one of my recent jobs, my employer was about to take what I considered an unethical stand in regard to a client.  I was about 24 hours away from turning in my resignation over it.  But then my son reminded me of this principle, that I might disagree with some things my employer did but if I were to resign then I would not be there to mitigate the damage from this one action by the employer, help prevent future bad actions, or be there to advocate for clients who might suffer from those actions.  (In the end, the employer reversed course and did not take the action against which I was protesting.)

So while I don’t patronize vape shops, buy and consume alcohol, or work at a casino, I choose NOT to seek out only investments that meet my specific value system.  I don’t object to principled individuals trying to do so, and I respect their right to disagree with me.  But for me, the task requires too much time to research and in the end would probably prove futile. 

Until next time,

Roger

“I wrote to you in my letter not to associate with sexually immoral people—not at all meaning the people of this world who are immoral, or the greedy and swindlers, or idolaters.  In that case you would have to leave this world.”  I Corinthians 5: 9-11 NIV*

*Scripture quotations taken from the Holy Bible, New International Version® NIV® Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™  Used by permission.  All rights reserved worldwide.

 

Investing According to Your Values?

 

Investing according to one’s non-financial values seems to be a growing trend.  Money magazine reported in its November issue that sustainable funds (defined in the article as environmental-, social-, and governance-focused, or ESG, investments) in the U.S. took in a record $70 billion in new money in 2021, up 35 % from 2020.

The article in Money also noted, however, that the trend has attracted some negative attention in the form of some states’ attorneys-general who are accusing ESG fund managers of letting a political agenda drive their investment decisions rather than the financial wellbeing of their clients.

I’m not going to jump into that debate.  I find it perfectly acceptable, commendable even, that someone would want to invest according to his values and principles.  And if environmental issues are important to you, then by all means you should have the freedom or even the responsibility to put your money into companies that promote your values.  Conversely, if I think Exxon is a good investment and I don’t care if they produce and sell fossil fuels, I should have the freedom to invest in Exxon.

But I do have more than a little skepticism about value investing in general.  It is much harder to adhere to one’s values in the investment world than one might think.  Let’s use environmentalism as an example.

Perhaps you’ve heard some of the extraordinary claims made by some companies about the progress they have made to become more environmentally friendly.  Bloomberg this week cited several:

“Proctor & Gamble vowed to cut its heat-trapping emissions in half by 2030, before announcing it had surpassed its target a decade early.”

“Cisco Systems Inc. recently said it had exceeded a goal to reduce its climate pollution by 60% over 15 years.”

“Continental AG, the German tire and auto parts juggernaut, claimed it had slashed greenhouse gases by an astounding 70% in 2020.”

Wow, I’m breathing easier already.

Or not.  Because Bloomberg Green’s investigation showed that the reductions were more like 12% for P&G, 8% for Continental AG, and a 22% INCREASE in emissions at Cisco.

What gives?

It boils down to an accounting trick—or (some heavily polluted) smoke and mirrors, if you will.  Each of those companies used what is called market-based accounting when calculating their climate impact.  Under this bookkeeping method, a company can purchase credits from clean energy providers so they can lay claim to burning clean energy and show a reduction in emissions to investors.  The clean energy may have been used by another company—or even you!—but they take the credit for cleaning up the world.  And these are just three companies among hundreds or even thousands that use this widely accepted methodology.  Nor does the misdirection end there.

Inside Climate News last week ran an article about the supposedly vanishing emissions generated by fossil fuel companies.  Under pressure from value investors who are pushing for greener practices, these energy companies are divesting from some of their older and dirtier assets likes wells and coal plants.  But as the magazine points out, private equity firms are eagerly snatching up these assets.  After all, the war in Ukraine has proven we still desperately need, and will pay top dollar for, fossil fuels.  Europe and the U.S. are scrambling to find secure sources of natural gas and oil, not solar panels.  These privately held companies do not have the investor pressure to clean up the environment and are exempt from many of the financial reporting rules governing publicly traded companies.  As long as they are making money—and I’ve got to believe in the current state of affairs they are—these private firms will continue to run these higher polluting assets, probably for much longer than the original owners would have.  The net result is a greener ConocoPhillips or Shell or BP, but a dirtier world. 

Is nothing what it appears to be?  What’s a conscientious value investor to do?  Next week I will continue on this topic, bring it closer to the level of personal finances, and offer what you may find to be an unpalatable take on the whole subject of value investing.

Until next time,

Roger

“Save me, Lord!  There are no good men left, and honest men can no longer be found.  All men lie to one another and deceive each other with flattery.”  Psalm 12:1,2 Today’s English Version