71 | In Defense of Values-Based Investing: Cost Isn't Only Measured in Dollars

If defining the "mysterious" third factor is challenging, then actually executing a strategy that accounts for it is as nuanced, complex, and filled with constraints as anything in personal finance.

One set of nuance and complexity has to do with the level of due diligence and research dedicated to evaluating possible investments.

Whether you are doing the research yourself or hiring someone to do it for you, the process of evaluating companies through a personal set of values or beliefs is a tall task.

Time becomes the limiting factor if you're picking individual stocks and trying to evaluate each of them based on non-financial merits.

Trust and alignment of values become the limiting factors if you're trying to find a fund that will actively evaluate each company for you.

Accessibility and awareness become the limiting factors if you're looking for a private investment that might address the mysterious third factor.

Underneath all three approaches, the level of judgment intensity is a spectrum unto itself - it's one thing to avoid companies that fail to check certain boxes, but it's another thing entirely to only select companies that check all the boxes.

Then there are the technical and behavioral factors to consider too.

The more we limit the field of investment candidates, the harder it is to be diversified, which can lead to greater return, but also greater volatility.

The more we tighten up our criteria, the less correlated our returns will be to the greater market, which can challenge our level of conviction during the inevitable periods of under performance.

Each of these nuances is a hidden "cost" that can be worth paying, but like any hidden costs, the less you know about them before you start the more likely you are to be disappointed when they show up.

We can continue to talk theoretically about all the nuances, but like any other investment approach, outcomes are driven by the same themes of being diversified, deciding your blend between stocks and bonds, expecting to buy and hold for a long time, and being patient through the ups and downs.

As fun and rewarding as it can be to talk about "impact" and "flourishing" and "value creation", if we forget the fundamental themes then we aren't going to make it very far. And if we haven't cared for our own relationship with money, then most of the effort will be for naught.

But if we've acknowledged the nuances, cared for the basics, and tended to our own relationship with money, then the upside on all three factors - return, volatility, and that mysterious third - is quite a worthy pursuit...