The Examined Life Assesses All Three Forms of Capital

Capital is often narrowly defined as a tangible financial resource. Yet even accountants understand that intangibles have value. In fact, adding together the intangibles alone on Google’s financial statements totals over $19 billion. These brands, patents, and goodwill are harder to measure, but no less important and valuable.

Individuals also carry intangible capital on their own “balance sheets.” Taking stock of your intangible capital is an essential aspect of the examined life.personal-capital-triangle

Much has been written about material capital, so I feel little need to offer anything but a very brief summary. This category includes your house, your savings, your cars, and anything else that fits in your jewelry box, garage, or investment account.

The next two forms of capital are the more intangible types:

Human capital is the category of your educational degrees, expertise, and personal health. Unlike financial investments that require faith in the management and expertise of others, you are the primary agent in this fundamental form of intangible capital. Is your training or physical or mental health keeping your from reaching your potential? If so, there’s no time like the present to start making changes to improve.

Social capital (also known as cloud capital) is the hardest to measure, but still important. Social capital concerns the relational and spiritual connections that provide meaning and value in life and beyond. I have yet to talk with someone nearing the end of their life who felt that they spent too much time with friends and family.

Relationships are a highly transferable part of social capital. Consider how often you were helped or hindered because of your family, associations, and references. Some inherit a large starting social capital balance, while others may be disadvantaged by race, gender, sexual identity, and/or other characteristics that separate one from the norms set by culture. Before you can begin to set social capital goals, you’ll need to begin with an pragmatic assessment.

If you identify anxiety, depression, stress or burnout, your primary goals may be focused on retreat, exercise, and reflection. An examined life requires time for self-reflection. Bill Gates takes two one-week “think weeks” every year, and a personal mentor of mine recommends at least one 24-hour silent retreat per year.

When financial advisors dare to guide discussions into the more intangible forms of capital, we call this life planning. Whether you do your life planning with your money guy, a trusted friend, or alone on a mountaintop, the point is that analysis and goal setting take time and intentionality.

You can begin taking stock of these three forms of capital by asking yourself the following question: How do I feel about each of my current balances?

Material capital: Good Shape, Needs Work, or Bankrupt?

Human capital: Good Shape, Needs Work, or Bankrupt?

Social capital: Good Shape, Needs Work, or Bankrupt?

There is wisdom in assessing all three forms of personal capital at the same time because they all impact each other. This is why the arrows of the personal capital triangle (see image above) point in two directions. Too often, only one aspect of capital development is assessed at a time—if ever. Failure to consider the big picture might lead your financial advisor to make one assessment and your clinical psychologist, quite another.

Viewing your material capital in isolation from your human and social capital has also fostered an unnatural ethical tension. Material gain earned by any legal means necessary may be creating debits to your human and social capital balances. The examined life considers all three forms of capital when reflecting and setting goals.

Author’s Note: Before creating this post, I started with a conversation among friends and I want to thank everyone who shared comments (both online and in person) which all helped shape my thinking on this subject.

Don’t Go At It Alone

A lack of affordable SRI investing solutions may incentivize some savvy investors to do their own research and purchase their own portfolio of individual stocks, but this is almost always a mistake.

If you’re joining the SRI movement, it’s likely because you have a vision for our world and the economy that’s bigger than your own portfolio. To leverage the full scope of impact, you should identify ways that you can coordinate your efforts with others whose values overlap with your own. The easiest way to do this is by purchasing a SRI fund, but there are other ways to maximize your impact.

Going it alone makes it extremely difficult to keep pace with the changing landscape of SRI investing. Volkswagen, for example, was once a darling of sustainable investors—then we found out they were rigging the emissions tests. Other companies are making radical improvements and are becoming worthy of SRI attention. The field is quite dynamic and you or your investment manager will need support to stay on top of latest developments.

You also need to consider how you plan to manage shareholder responsibilities. When I was a younger and more naive investment advisor, I argued that investors should begin attending shareholder meetings and voting proxies. Both tools were given to owners to exercise their stewardship oversight and I now realize that both are a big waste of time for most investors (the Berkshire Hathaway meeting excluded).

Every year, investors are asked to vote on a whole host of issues. Perhaps a company seeks to repurchase shares of its own stock. Or it plans a merger. Companies hire and fire new directors. These actions typically require a shareholder vote.

The problem is that most shareholders own a tiny fraction of total shares and this makes the uncoordinated actions of any one shareholder meaningless. The unspoken message at most shareholder meetings is essentially, “We’re only doing this because we’re required to.”

Naturally, most mainstream investors who own stocks ignore requests to vote or attend annual shareholder meetings. I no longer blame them! Exercising ownership powers are only fruitful when made in coordination with an ownership block large enough to be recognized.

To overcome these hurdles, you may want to identify a fee-only (no commissions) investment advisor who specializes in SRI investing—even better, find one who avoids the plethora of expensive SRI funds. An investment manager can identify investments that match your values and help manage all of your voting responsibilities.

Coordinated action can also take place by purchasing a mutual fund or ETF but the challenge here is that most funds have a poor track record of shareholder advocacy on governance issues as cited here and here. Investments that do have a strong track record for shareholder advocacy often have management fees that exceed a reasonable threshold.

To overcome these challenges, some decide to self-manage a stock portfolio. If you go this route, I recommend that you start by reading James McRitchie’s Shareowner Action Handbook, where he walks investors through the ins and outs of exercising shareholder powers. James is a personal hero and is one of a small group of individuals who regularly file their own shareholder resolutions to encourage corporate best practices.

You will also want to check out the work being done at Proxy Democracy, where you can see how leading investors including public pensions (e.g., CalPERS) and SRI fund company leaders (e.g., Calvert and TIAA CREF) voted their shares.

A natural corollary to this collaboration principle is a willingness to compromise. The two go hand in hand. The quality and quantity of research in the developing field of SRI investing has many gaps that offer plenty of room for disagreement on how best to rank or classify a given company. The deeper you decide to dive into the world of SRI, the more willingness you’ll need to live in “the gray”—that is, between simple black and white solutions.

However you decide to engage, let me be the first to warn you that the SRI community is unlike any other investment community that I’ve ever been a part of. There’s a more even distribution of men and women in leadership roles in this community and this gender balance brings with it a greater sense of collaboration. One leader in the field argued that it’s going to take billions and even trillions of dollars committed to sustainable investing before the capital markets will begin to take this new approach seriously. To get there, we all need to find more avenues to work together.

Note: Featured Image on this post was used under Flickr Creative Commons.

The Case For Responsible Investment (In Light of Central Bank Interventions)

While many are increasingly feeling distrust over markets that are losing touch with reality, SRI (Sustainable, Responsible, Impact) investors have good reasons to stay engaged with the ways their portfolio impacts the real economy.

As I talk with investors, I hear many express a level of concern that teeters on disillusionment over central bank interventions that are undermining the fundamentals of the markets. Equity valuations using both backward reported earnings and forward estimates all sit at unsustainable levels. While this suggests that performance may be lower for longer, investors should also consider another power even stronger than the Fed, the ECB, and all of their cousins. This unparalleled force is known as the human race.

global-population

Population estimates by Angus Maddison

Our species isn’t just growing larger; we are also consuming more resources as we grow. We’re demanding more food, more buildings, more computers, more bicycles (especially in the Illian family), and we’re consuming more energy.

world-energy-consumption

Data compiled by Gail Tverberg and available at Our Finite World

It’s clear from world energy consumption that human appetites show no signs of slowing down. This means businesses will continue to have demand for their products and investors will continue to lay claim to a share of the earnings pie.

Increasing demand for goods and services also means that the job of the SRI investor is never over. It’s human nature to occasionally lose sight of the common good in search for greater personal financial gain. And these impulses are especially dangerous when the human beings are at the helm of the world’s largest corporate citizens. We witnessed this in the case of Enron, the BP oil spill, Lehman Brothers, etc. The list will only grow longer with each passing year.

I don’t suggest that we’ll ever see the end of acts of unabated self-interest, but I do believe investors can foster a more civil marketplace. Financial transactions that benefit some while exploiting others have no place in a sustainable economy. Here’s another principle: we won’t invest in any business that ignores its environmental footprint.

There’s no time for thoughtful citizens to linger in despair as a rapidly changing world develops.  All hands on deck!

Investing Lessons from America’s First Stock Company

Investing in America began with bankruptcy. In the early 17th century, the hottest stock in England was the Virginia Company of London. Instead of adding to their fame and fortune, wealthy investors gained several hard insights from this first company to go bust on American soil.

Fame Is Not To Be Confused With Fortune

Sir Thomas Smythe.jpg

Sir Thomas Smythe (1558 – 1625) was Treasurer for the Virginia Company and a prominent citizen of London

By 1609, the Company was two years into the Jamestown settlement and despite many setbacks from rugged conditions and native attacks, Virginia Company trustees captured enough public interest to issue a second stock offering. This wasn’t quite tulip bulb euphoria but it is safe to assume that any new information on this overseas enterprise was a hot topic in every pub from London to Liverpool.

To publicize the glory of joining ranks with the Virginia Company, investors were given the moniker “adventurers” which sounds better than “people who are willing to take huge risks with their life savings while sitting on their 17th century couches.” Name tags are no substitute for a return on investment. Any time an investment is motivated by having a good story to tell at a social event, there’s a strong chance your financial returns will suffer.

Exclusivity Is A Poor Predictor of Performance

A single share of Virginia Company stock cost 12 pounds 10 shillings, the equivalent of over six month’s wages for an ordinary working man. As you can imagine, the high cost of ownership culled shareholders into a who’s who of English society.

Today’s investors continue to be wooed by the allure of elite hedge funds only available to those with enough wealth or income to meet the “accredited investor” standards of the Securities and Exchange Commission. Despite our efforts to expose the unjustifiable costs and underperformance of hedge funds, their greatest attraction seems to be the fact that average investors are barred from accessing them.

Doing Good Is Not A Business Plan

The marketing campaign for the Virginia Company relied heavily on a stream of ministers in support of their effort. Printing sermons may sound like a strange marketing strategy in modern times, but if there was one idea that bound England’s established Anglicans and upstart Puritans together, it was the idea that the Native Americans must be ushered from savage paganism and shielded from the Catholics. Royal Chaplin, Daniel Price, called the Virginia Company’s colonization effort “the most worthy Voyage that ever was effected by any Christian, in descrying any country of the world.”

The modern divorce between moral responsibility and wealth management swings to the other end of the spectrum. Faith-based zeal is good complement but poor substitute for a prudent business plan.

The pursuit of survival in the New World left little space for pursing the religiously inspired motivations of investors. After failing to identify a plentiful source of valuable natural resources, colonists found a profit source that many considered a detestable vice in the home country: tobacco.

In fact, King James so despised tobacco he wrote a treatise enumerating its many health dangers and described the odor as “hateful to the nose.” Tobacco would grow to become Virginia’s most valuable export, but not quickly enough to offer much benefit to investors.

As the financial stability of the Virginia Company crumbled, the top officers resorted what should have been a final warning to savvy investors. From 1612 onward, the Virginia Company offered a series of lotteries to provide most of its revenue. As morally dubious then as it is today, lottery revenue helped keep the colony afloat for a dozen more years.

Instead of saving native souls, the Virginia Company brought tobacco products and lottery tickets to their fellow Englishmen. Dark irony should be expected when doing good is a substitute for a solid business plan.

Frontier Investing Is High Risk

The trustees of the Virginia Company should be commended for retaining their investors’ patience for approximately fifteen years, but the King of England was not so easily soothed.

After grave reports of mismanagement at the Virginia Company and staggering loss of life filtered back to England, the Crown’s patience was finally exhausted and the company’s charter was revoked on May 24th, 1624. Other than a few hundred acres of generally worthless land that was awarded to shareholders in absence of any monetary returns, shareholders lost their entire investment.

Despite the financial failure of the Virginia Company, surviving colonists persevered and planted the first seeds in what would become the wealthiest nation the world had ever seen. Americans celebrate their birth, but wealthy English investors learned the hard way that speculative investments can fail spectacularly.