In 1999, I met my wife and moved to San Francisco. At that point, I was a pretty conservative dude. Moving to San Francisco equals game over. I morphed from a Buchanan conservative to what most Americans would call a "flaming liberal." During those times, my wife often told me that I would likely retreat back to the middle.
And she's right, I am now not quite in the middle, but a ways left of center. Socially, I am still ultra-liberal. On most other issues, however, particularly fiscal issues, I tend to range between middle of the road to conservative. As I reflect on these transitions, I think my political mix has made me a better investor.
Why The Change?
In some ways, it's a stereotypical change. You have a kid. You start making more money. You become a little less idealistic. You shift to the "right." And, honestly, it's stereotypical in both directions. I hardly think all conservatives hate the poor, have no lofty visions and kick neighborhood dogs for sport. Generally, labels like "left" and "right," "liberal" and "conservative" stink because they're so imprecise. We're all too unique and complicated has human beings to fit into some pre-defined box.
That said, I use the terms because they're, by and large, universally understood and, broadly speaking, they paint an accurate picture. And, undoubtedly, a shift, in many of us, depending upon our circumstances and individual psyches does take place. But why do I think this metamorphosis has made me a better investor?
I Stopped Hating The "Rich"
Protest. I spent a fair bit of time participating, attending and observing them while in San Francisco. Not a morning goes by without a crowd gathering at a consulate office, in front of the Chevron (CVX) building or in Union Square for a "Free Mumia" rally.
Most folks get protest all wrong. That includes "the protesters" and the many conservatives who disdain the practice. The latter tends to lump all participants together as "the protesters," failing to acknowledge the great diversity that exists in such groups. You name the "type" of person and you'll find them at a large anti-war rally.
On the other hand, many "protesters" make absurd associations between political and social ills and the actions of corporations and well-to-do individuals. I always wondered how putting Super Glue in the lock of a Starbucks (SBUX) door did anything but kick off a horrible day for the wage slave who was scheduled to open that day. And the choice to drive an SUV and live in the suburbs does not necessarily put blood on somebody's hands.
As I digress, the point is that if you hate the rich and rich corporations, you're probably more likely to shun some of the best investments or even regular investing. You've brainwashed yourself into making the leap from War In Iraq and misguided politicians to they're evil people so anybody else with money who we can call a "capitalist" must be evil as well. In turn, I cannot support them by visiting their establishments, let alone buying their stocks. I cannot back that up with science, but I can support it with personal experience, which does tend to independently replicate.
Ten years ago, I would have never considered, at one time or another, stocks like Tesla (TSLA), Ralph Lauren (RL), Lululemon (LULU) or even Apple (AAPL) a buy, simply because they make products that not only appeal, but, generally speaking, can only be had, consistently, by the relatively affluent. Bottom line, the woman who drives a Tesla to the mall, buys a Polo shirt for her husband and some LULU yoga pants for herself while texting on her iPhone should not be the recipient of your scorn because there's a war about oil (presumably) going on and somebody, somewhere does not have enough food to eat. You do not contribute to inherently complex and historically-rooted problems by purchasing a $4.00 latte and 100 shares of SBUX. You just miss out on a 79% gain over five years.
While this one ties into the first point, it warrants distinction. Hatred for Starbucks among the crowd I used to identify with only gets trumped by a deep dislike for McDonald's and Walmart. Between the three companies, you have your answer for everything that is wrong with America and its place in the world. That type of blanket thinking ends up doing little, if anything, for the greater good and, potentially, hurts your financial future.
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Not only have these companies performed incredibly well over the last five years, but they've all taken major strides to become better "corporate citizens." Of course, the evil corporations created that euphemism, but I'll go with it. Walmart likely provides the best case study.
The folks who still bash the company (which, admittedly is still far from perfect) must have missed this excellent story in "progressive" publication, The Atlantic:
In the grocery section of the Raynham supercenter, 45 minutes south of Boston, I had trouble believing I was in a Walmart. The very reasonable-looking produce, most of it loose and nicely organized, was in black plastic bins (as in British supermarkets, where the look is common; the idea is to make the colors pop). The first thing I saw, McIntosh apples, came from the same local orchard whose apples I'd just seen in the same bags at Whole Foods. The bunched beets were from Muranaka Farm, whose beets I often buy at other markets-but these looked much fresher ...
I STARTED LOOKING into how and why Walmart could be plausibly competing with Whole Foods, and found that its produce-buying had evolved beyond organics, to a virtually unknown program-one that could do more to encourage small and medium-size American farms than any number of well-meaning nonprofits, or the U.S. Department of Agriculture, with its new Know Your Farmer, Know Your Food campaign ...
The program, which Walmart calls Heritage Agriculture, will encourage farms within a day's drive of one of its warehouses to grow crops that now take days to arrive in trucks from states like Florida and California. In many cases the crops once flourished in the places where Walmart is encouraging their revival, but vanished because of Big Agriculture competition.
... But buying local food is often harder than buying organic. The obstacles for both small farm and big store are many ...
Walmart knows all this, and knows that various nonprofit agricultural and university networks are trying to solve the same problems. In considering how to build on existing programs (and investments), Walmart talked with the local branch of the Environmental Defense Fund ... and with the Applied Sustainability Center at the University of Arkansas. The center (of which the Walmart Foundation is a chief funder) ...
Walmart says it wants to revive local economies and communities that lost out when agriculture became centralized in large states ... It's not something you expect from Walmart, which is better known for destroying local economies than for rebuilding them.
I've come to argue that if Whole Foods (WFM) really genuinely cared about things like local farming and (another buzzword) sustainability, it would not have much of a produce department at all. It would only carry the amounts and types of fresh fruits and vegetables that are absolutely necessary at a given time, given availability and circumstance. Instead, it would display a huge solar-powered sign where you expect the produce department to be that lists all of the local and regional co-ops and farmer's market's locations and hours and days of operation.
I know that sounds absurd, but it's no more crazy than a foodie acting as if the way Whole Foods acquires, markets and sells its produce is somehow superior to the way Walmart does it.
I Stopped Toying With 'Socially Responsible' Funds
When you let political bias or a do-good, feel-good attitude influence your investing, you not only risk passing up great stocks, you run the risk of buying underperformers and, quite possibly, dogs.
I was cleaning out a closet the other day. I came across an old file folder full of archived tax returns and other items of days gone by. After wiping the tears from my eyes, I stumbled upon a section of the folder that included all of these prospectuses for "green mutual funds" and socially responsible investments. Two problems exist when you let your political bias push you into these types of products.
First, they generally do not select stocks in a way most Birkenstock-wearing do-gooders would hope and expect:
There is perhaps a bit of confusion about what socially responsible ETFs include; some might expect these products to focus exclusively on organic food providers and religious bookstores. But in reality, ETFs such as the iShares KLD Select Social Index Fund (KLD) and North America Sustainability Index ETF (NASI) are substantially similar to broad-based equity ETFs covering the same regions of the world. The overlap is significant; it is really the excluded companies that make these socially responsible ETFs unique. For example, the largest individual holdings of KLD include IBM, Starbucks, and Nike.
And second, the great Roger Nusbaum makes a very thoughtful argument, not necessarily for or against this style of fund:
Very anecdotally speaking, it seems as though most socially responsible funds lag the market pretty consistently. I'm sure there are exceptions. While I can't be certain as to why this might be, I do know that the tobacco stock and liquor stock we use in "large" client portfolios have done pretty well over the long term. The nature of the demand for the product makes them steady performers and future prospects look good in my opinion. I'm pretty sure tobacco and booze are no-nos in SRI funds.
If a portfolio manager makes the decision to omit a tobacco stock because of his beliefs about the tobacco industry then he is projecting his beliefs onto his clients and, very subjectively speaking, I don't think that is right. If a client tells us no tobacco, that is his belief not mine and we can accommodate that type of request with the proper paperwork.
I'll take Nusbaum's "anecdote" any day of the week, plus he got me thinking. As a self-directed investor I have a hard enough time letting a fund manager essentially select my stocks for me as it is. The last thing I want to do is run the risk of that person injecting more than a natural and expected amount of bias into the process, particularly if they're buying the "hated" Starbucks and allegedly sweatshop-loving Nike (NKE).
We all have biases. That's a part of being human. These things work their way into practically every one of life's dealings. The investment choices we make are not an exception. As such, it makes sense to check your political leanings at the door.
As a proud member of the left, who has come closer to the middle on many issues with time and experience, I feel like I can safely say that investors tend to do themselves a big favor when they approach the investment process as objectively as possible, but with at least a hint of conservative influence. It's folly to think you'll change the world by not buying Starbucks. But you could change your life by skipping the coffee, purely on fiscally responsible grounds, and buying one share of the company's stock per week. For a true coffee addict that could amount to like four shares a month and roughly 50 per year.
Additional disclosure: I am long LULU.