Uncertainty Is a Certainty
By Steve Schueth
“These are the times that try men’s souls.” This famous line is the first sentence of Thomas Paine’s essay The Crisis. It may be as applicable to our current economic situation as it was to the state of the American Revolution when it was written in December of 1776. Our souls are now being tried by the credit crisis, volatile financial markets, and a recession.
Naturally, we all crave certainly. But times like this remind us that one of the few certainties in life is change. In other words, uncertainty is a certainty.
Unfortunately, we cannot predict where the financial markets will go from here—no one can. But, more likely than not, we are nearer to the bottom than the top.
Ageless wisdom holds that the best time to invest is when everyone else is selling, when emotions are running high, “when blood is running in the streets.” One of the wisest, richest, and most respected investors in the world, Warren Buffett, has spent a lifetime proving this wisdom. He’s buying stocks. He’s also telling us not to be afraid—for fear itself can do more harm that the underlying reality—and to stay the course. He writes:
[F]ear is now widespread, gripping even seasoned investors… But fears regarding the long-term prosperity of the nation’s many sound companies make no sense… I haven’t the faintest idea as to whether stocks will be higher or lower a month—or a year—from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
Research bears this out. According to Dalbar, Inc., the average investor in stock mutual funds significantly underperformed the S&P 500 Index from 1988 through 2007, realizing only a 4.48% average annual return, compared to the Index’s 11.81%. The primary reason for this underperformance is the tendency to react emotionally to market events. Simply put, investors all too frequently –even in reasonably good market environments– abandon the market after it declines and buy back in after it rises. Many sell low and buy high, locking in losses, and missing recovery opportunities.
An important part of our job at First Affirmative is to establish investment discipline and to protect our client portfolios from the fierce winds of emotion. Another important part of our job is to help clients earn competitive financial returns while investing in enterprises that contribute to a clean, healthy environment, treat people fairly, embrace equal opportunity, produce safe and useful products, and support efforts to promote a more peaceful peace.
We believe that investors bear responsibility for the impact our money has in the world. We know that every purchase and investment decision has an impact on the quality of life our grandchildren and great grandchildren will enjoy. We help clients make money and, in the process, use money in transformative ways to improve society for all.
Managing investment portfolios for socially conscious investors is our core business; but as we go about our business, we demonstrate leadership within the socially responsible investment industry in various ways. For example, First Affirmative’s CEO serves as a director of the non-profit industry trade association, the Social Investment Forum. We maintain ongoing relationships with most of the mutual fund companies, asset managers, and other industry service providers. And once a year, we produce the premier gathering of the SRI industry in North America.
Certain First Affirmative staff are now in Whistler, British Columbia, preparing to host the 19th annual SRI in the Rockies Conference. We are expecting a record 700+ SRI industry leaders and practitioners from North America and around the world to join us here. We anticipate discussion about how socially conscious investors can help to reshape the future of the global financial system around the principles of transparency, fairness, good governance, and long-term thinking.
“The financial crisis has put a spotlight on some of the worst practices on Wall Street, many of which socially conscious investors have worked to remedy over the years,” notes First Affirmative CEO, George Gay. “We believe that a more socially responsible approach to investing can—and should—play a role in helping to transform the investing world.”
The current financial crisis has made the argument for responsible business and responsible investing ever more pertinent. The real bottom line is the ecological systems that support all life. We can “fix” the financial system relatively easily, as compared to vast global challenges like climate change, energy and water shortages, poverty, and the growing global demand for limited resources.
This financial crisis may prompt a healthy shift from a focus on next quarter’s earnings to long term value creation. We think systems for measuring, accounting, and reporting on corporate activities will undergo major revisions designed to foster transparency. Executive compensation schemes are likely to be overhauled and brought into alignment with longer-term profitability.
We applaud a new research paper published by Deutsche Bank earlier this week which argues that the accelerating pace of global warming will force governments to invest more heavily in climate change mitigation and adaptation, despite the financial setbacks of the current market crisis.
We agree with Bjorn Stigson, president of the World Business Council for Sustainable Development, who has said that he thinks “the next decades will see a new industrial revolution that will be clean, lean, and mean. Clean, because of climate consequences, water stress, and economic impacts. Lean, characterized by a low carbon economy and eco-efficiency… Mean, because we will experience transformational change and destructive innovations that will create winners and losers.”
According to British Prime Minister, Gordon Brown, “This is a defining moment for the world economy.” He is calling for new rules for global finance, the guiding principles of which would include “transparency, sound banking, responsibility, integrity, and global governance.” We agree. It is no exaggeration to say that the SRI industry has been working toward these goals for many years.
Bernard Lietaer, a designer of the Euro as the currency of the European Union, said that “crisis is the only time when real systemic change is possible.” In every crisis lies opportunity. Perhaps this financial crisis will serve as a catalyst to shift both consciousness and behavior in positive ways. Although painful, it may turn out that it was necessary to raise awareness of the need for businesses to be responsible global citizens and to engage in determining the solutions to the most serious global problems.
If so, this episode will have produced monumental benefits. Each of us can be proud of our contributions.
Steven J. Schueth
Posted: October 24, 2008