I did not know Larry Summers was Paul Samuelson’s nephew. Paul Samuelson used to describe himself as a “cafeteria Keynesian”, just picking the bits he liked from the Keynesian economics.
‘Cafeteria’. That’s a good term, I think, to be a cafeteria adopter of anything. ‘Cafeteria investing’ – isn’t that a sensible attitude to have towards a vocation that depends on an ever-changing circumstance?
Plus, there is no ideal investing strategy, there never was. The world changes all the time, what may have worked for the past investors may very well not work for the future investors. Furthermore, the kinds of businesses that did very well two decades ago are struggling today, and the unicorns are businesses that did not even exist back then. Having an unchanging strategy means someone can take advantage of our system. The need for rigidity opens us to this vulnerability.
Sad, but true, from the New Yorker:
However, if the aim of divestment campaigns is to reduce companies’ profitability by directly reducing their share prices, then these campaigns are misguided. An example: suppose that the market price for a share in ExxonMobil is ten dollars, and that, as a result of a divestment campaign, a university decides to divest from ExxonMobil, and it sells the shares for nine dollars each. What happens then?
Well, what happens is that someone who doesn’t have ethical concerns will snap up the bargain. They’ll buy the shares for nine dollars apiece, and then sell them for ten dollars to one of the other thousands of investors who don’t share the university’s moral scruples. The market price stays the same; the company loses no money and notices no difference. As long as there are economic incentives to invest in a certain stock, there will be individuals and groups—most of whom are not under any pressure to act in a socially responsible way—willing to jump on the opportunity. These people will undo the good that socially conscious investors are trying to do.
This means that divestment risks being harmful. Several studies have shown that, because of the pressure against investing in morally dubious companies, “unethical” investments (sometimes called “sin stocks”) produce higher financial returns for the investor than their “ethical” alternatives. The economists Harrison Hong and Marcin Kacperczyk found that sin stocks outperform other stocks by 2.5 per cent per year. This has even resulted in a niche industry: for instance, the Barrier Fund, formerly known as the Vice Fund, is a “sin-vestor” mutual fund that exclusively invests in companies that are significantly involved in alcohol, tobacco, gambling, or defense. It has beaten the S. & P. 500 by an average of nearly two percentage points per year since 2002. By divesting from unethical companies, “ethical” investors may effectively transfer money to opportunists like the Barrier Fund, who will likely spend it less responsibly than their “ethical” counterparts.
There is also the vulnerability that your investing style may be out of trend. Even if it is out of trend for just two years you can be extremely vulnerable. We have all heard that the market can stay irrational far longer than you can remain solvent. In this case, your style may be out of favour for far longer than you can remain solvent.
Not that I’m saying that we should flip-flop between strategies and allocations – that would not be wise – but there is a real need for open-mindedness when the world is not static. Bottom-up analysis is all very well and good, but investing without regard to the environment, macroeconomic or otherwise, will see you buying a value oil company in late 2014 when oil prices were in the middle of their steep descent. Sticking to stock-picking and accounts without considering the peer group or industry dynamics will greatly disadvantage ourselves against investors and funds that do.
Knowing that there is value in all of the styles and thinking, including being open to the latest development in finance mean we can adopt the very best of practices into our own investment style. It does not mean that one has to adopt wholesale, but being a binary thinker and giving blind loyalty to a particular style means one will likely have average returns.