At first glance, investing with a social conscience may seem more complex than just trying to make money in financial markets. The added restrictions are a dimension that many investors do not strictly apply to their portfolios. Values Investing (commonly known as Socially Responsible Investing, or SRI) demands a dual mandate in portfolio management: to not lose money while seeking a rate of return comparable to the risks assumed, and to do so without compromising personal values. In a world of great sounding ideas, one often over-looked approach to achieving consistent investment success with a conscience is theValue Investing approach, where the fundamental financial health, viability, and business activities of the investments made are the central focus.
“Value Investing” is a broad term that encompasses many theories and approaches, from passively investing in indices of companies that appear undervalued to buying whole businesses (such as the Value School’s well-known proponent Warren Buffett). What’s common among the various factions in the value camp is an interest in buying investments at a reasonable (better yet, cheap) price. Whether the focus is on the current price of the company or purchasing promising growth at a bargain, what the value investor wants is to buy a dollar for 50 cents.
What makes this approach ideally suited to the needs of Values investors is that integral to the process of finding reasonably priced assets is a truly thorough evaluation of the practices and activities of a company. In analyzing a business’s activity, both the value-focused and socially responsible investor uncover whether that business is worth investing in. The quantitative side (what am I paying for which assets and earnings?) hopes to uncover promising value propositions. The best Value Investor always takes one step further, looking at the qualitative aspects of a business: how do they do what they do? Are they marketing something that will continue to be desired? For many, it is continuity of profits, not profits alone, that make an attractive investment.
The Value Investor asks these qualitative questions because Value Investing is, at its core, all about buying businesses- not speculating on the stock market. The more the investor can develop a thesis on the true value and viability of their investment, the less likely that speculation will be a motivating factor in portfolio management. SRI has not necessarily been about buying businesses thus far, but it absolutely could (and perhaps should) be just that.
You could stop at identifying businesses that are doing things that are beneficial to society and ignore the financial status of those businesses. That is, you could focus on that qualitative dimension of an organization, as I see many in the SRI field doing. Indeed, not every socially proactive enterprise is profitable. However, if you do discount the need for strong financials, what is being done to achieve goals as an investor? You wouldn’t be assuming market risks if you didn’t have needs to meet. What are you doing to make sure you’re meeting them? Discarding and ignoring the fundamentals of “good” companies may neglect one side of the dual mandate of the socially responsible investor: not losing money.
On the other side of the coin, imagine you’re invested financially in a company you simply don’t believe in: would you be able to estimate its worth fairly and in an unbiased fashion? That business you have half a mind to organize a protest against- if bad news about their earnings hits this next quarter, would you be able to stick with it through some tough times because of a healthy-looking bottom line? It can’t be said enough that not becoming biased against your investment is crucial to remaining empirically and logically oriented in your investing approach. There’s a careful balance to be found between loving what a company does and loving how much profit they generate. Value Investing has been bringing rational solutions to that problem for decades, and it remains uniquely applicable to those looking to fund their retirement, their children’s education, future charitable giving, etc., while not compromising their personal beliefs.
Combining Socially Responsible Investing and Value Investing can be a great solution for individual (and institutional) investors. Value Investing’s inherent focus on buying businesses- their societal impact as well as their balance sheet- can help investors not lose money and not lose their convictions. This approach can do a great deal to meet both sides of the Socially Responsible Investor’s dual mandate for money management, and it can do so in a way that doesn’t pit you against your investment growth. The right mix of profitability, responsibility, and rationality is something worth seeking.
Whether you choose to work with us at Victor Schramm, LLC, work with another advisor or broker, or do it yourself, we hope to continue to broaden the discussion of what Socially Responsible Investing is and how it can continue to meet the financial (not just conscientious) needs of investors. To learn more about Value Investing, a great place to start is Benjamin Graham’s The Intelligent Investor. Other authors and commentators we highly recommend include Seth Klarman, Martin Whitman, Howard Marks, and Christopher Browne. We’re confident that seeking value in the markets can accommodate your values.