72 | In Defense of Values-Based Investing: Right and Smart
This is not a sales pitch for Eventide Investments, but their investment process and commentaries illustrate the mysterious third factor better than anyone else I have ever read or seen.
Shaun Morgan says, "The true measure of success for a business lies in its ability to generate a profit by creating value. But profits generated by extracting value often have a limited lifespan. Profits generated by creating value, on the other hand, have the propensity to rejuvenate and sustain themselves."
An ability to identify and own companies that have been, are, and will continue creating the truest form of value for the world will lead to out-performance over long periods of time.
Eventide goes further by describing how a company that creates value interacts with each of its stakeholders in their Business 360 process...
When a business delights its customers, they become loyal patrons and go on to promote it to their friends and family, but when it disregards its customers, they walk away and tell others to steer clear.
When a business supports its employees, they give their best to their work, but when it neglects its employees, they in turn neglect their work or quit.
When a business cultivates a sustainable, humane supply chain, suppliers deliver quality goods and services, but when it mismanages its supply chain, suppliers and their workers suffer and deliver lower quality goods and services.
When a business respects and invests in local communities, they see the business as a blessing and go on to support it, but when it ignores local communities, they see the business as a curse and may actively oppose it.
When a business preserves and cares for the environment, it nourishes and sustains productive yield as the business grows, but when it damages the environment, the company may run out of resources or even face litigation or environmental disaster.
When a business satisfies an important need for society, people delight in its products and services, growing the market, but when it harms society with its products and services, society suffers and condemns the business.
Anyone can appreciate that delighting, supporting, cultivating, respecting, preserving, and satisfying is going to lead to better outcomes for all stakeholders in the long run.
This kind of investing not only begins to define the mysterious third factor, but also is the best way to achieve greater returns and lower volatility over the long haul - making it both a worthy and a profitable pursuit, because "doing what is right is also doing what is smart".
Additional Reading
A paradox of status and power by Seth Godin
The Fourth Source of Alpha by Shaun Morgan
Introduction to the Business 360® Framework by Eventide Asset Management