70 | In Defense of Values-Based Investing: The Mysterious Third
Traditionally, the performance of investments has been measured using two primary factors.
The first and sexiest is investment return - how much did the investment grow over time? This is what you'll overhear people bragging about at a party or on social media.
The second is investment volatility - how smooth was the ride to achieve the return? You won't hear as much about this one, but I think it's what allows the most seasoned investors to sleep well at night and pat themselves on the back for a job well done.
Understandably, these two criteria are relatively easy to measure and compare across investments, so they've become factor 1A and 1B for analyzing performance over time.
From the start, there has always been a mysterious third factor that anyone could feel in their gut, but struggled to put into words.
Recently, as access to information has become more ubiquitous and timely, it has felt like defining this third factor is more within reach even though at times it's still as mysterious as ever.
Is the company actually creating value for people or is it extracting value from people?
Does the company contribute to the flourishing, in the most holistic sense of the word, of all people in the world?
Or does the company contribute to the continued deterioration, in the sneakiest sense of the word, of all people in the world?
The trouble is that distinguishing between value creation and extraction is hard.
Does Amazon create value by partnering with small businesses to allow them to connect with a larger footprint than ever before or does it destroy the fabric or our culture by sterilizing and globalizing the consumer experience?
Does a brewery perpetuate a society's challenges with alcohol or does it create a space for connection that combats society's struggles with loneliness, depression and anxiety?
Does a car manufacturer provide access to vehicles that allow us to be productive, see the world, and connect with others or is it one of the cornerstones of society's poor relationship with debt, social comparison, and inability to embrace public transportation?
Plenty of companies have generated phenomenal investment returns capturing significant value for their owners, while pushing our society further away from a long term state of flourishing.
Differentiating between creation and extraction is quite complex in the moment, and can even still be pretty murky in hindsight.
This third form of investing is more akin to actively selecting companies than indexing, but the filter with which those companies are evaluated is quite different from only maximizing profit and minimizing volatility.
Additional Reading
Shadows and light by Seth Godin
Is there any perfect company? by Sherrie Johnson Smith