03 June 2006

Investment guru does not understand what investment is

Mark Skousen, writing on socially responsible investing, writes that:

If you wish to maximize your profits, don’t limit your investment choices. If you choose to make value judgments on which stocks you are going to invest in (in today's example, "socially responsible investing" funds), you are probably going to hurt your return.
Mr. Skousen bases his conclusion by comparing the performance of a socially responsible mutual fund (the Sierra Club Stock Fund - SCFSX) against a mutual fund which focuses exclusively on investing in tobacco, alcohol, gambling and military stocks (the Vice Fund - VICEX). He claims that he didn't cherry-pick his funds, but his reasoning is baldly casuistic. It isn't valid to infer a general rule from a single example.Still, what I really want to focus on here is the elephant in the room when it comes to investing, which is the question of "value judgments."

Mr. Skousen quite reasonably assumes that investors generally desire to maximize their profits. How is it that profit doesn't qualify as a value? Profit is only one aspect of an investment. Warren Buffet advises that you treat the purchase of a portion of a company (essentially what a share of stock represents) exactly as you would treat the purchase of the entire company. We all need to make a living, so I find it difficult to resent profit--which is supposed to be the reward for competent work--per se. (I of course recognize that profit can be unfairly earned.) But am I the kind of business owner who's willing to accept the fruit of labor which results in the production of weapons or drugs? I presumably want to own the kinds of companies that I would found and operate.

Well of course I value profits over life on earth. I’m an investor.

Profit is only one reason among many that people work. Subsistence, personal satisfaction, a desire to contribute to one's community, and the desire to improve the world are others. Financial investment has never been a purely pecuniary consideration. Like all investors, socially responsible investors seek to maximize their return within such constraints as represent their values. Some people can tolerate high levels of risk; some people can tolerate larger demands on their time for research into investment opportunities; and some people can tolerate profiting from the production of nuclear weapons.

Mr. Skousen may be correct about socially responsible investments yielding lower returns (though I doubt it). His underlying assumptions, however, are both pernicious and foolish. Investment is nothing more than financing your values, and values are best understood as a system of mutually constrained desires. I want profit, but not at any price. I can only hope that Mr. Skousen and his readers agree.