- Add diversity to your investment questions along with valuations.
- There is overwhelming evidence of an uneven playing field.
- Diversity has been proven to be an outperforming indicator.
The investing world makes little sense today. Valuations seem increasingly disconnected from reality. To understand this point, look no further than Facebook (FB). On a day where news was released of an employee walkout and civil rights criticism of Mark Zuckerberg, the stock was up 3% on the day.
The market keeps rising even as unemployment is reaching historic levels due to the pandemic, China is exerting control over Hong Kong, and there are riots in the United States over social injustices. People are less willing to spend and businesses are less willing to invest.
When I vet an investment, I believe financial models are necessary to understand valuations and I spend a great deal of time creating them. I also believe they don't tell the full story. I prefer understanding the world we live in, the potential markets for products and services, and the overall story of a company. The best way to understand this approach is through questions.
Think about Game Theory for a second. I spend a lot of my time figuring out who owns what and what are the incentives for management, investors, and even governmental policies.
When I look at securities, I care who owns it. Why do they own it? Are they only invested in that part of the capital structure? For example, some investors will lose on some securities to gain on others in distressed situations. Can the investor exert power over decision making? Is this a big allocation of their portfolio? What are the incentives and compensation of company management? What's the public's opinion of the company and sector? Will the government be involved? The list of questions is endless.
And I've just added a new and powerful question. Is the company diverse?
This will make more sense later.
As investors, we need to be "greedy when other's are fearful" and limit our own investing biases. There is civil unrest in America, from an investing standpoint, I've heard it all, from shorting property insurance companies, shorting publically traded prisons, to going long social media as people spread awareness and are more engaged.
I am not smart enough to know all the socio-economic impacts or how we fully got to an uneven America. Even if you are a skeptic, the data is powerful and you can google peer-reviewed studies that lay it out with tangible evidence.
Here are some reasons to help you understand how we arrived at the current climate:
1. The end of slavery with no governmental support or reparations. The wealth was accreted to Whites off the backs of others. No money was dispersed. There weren't any government incentives to help accelerate education, equality, and wealth for African-Americans.
2. Modern-day racism and polarization. NJ raised its threat level from White Supremacists above ISIS and Al Queda.
3. Redlining. The largest generational wealth creation is transferred by owning property. To simplify this, home-owning is forced savings (after taxes, maintenance, and interest). When you pay down the principal and as a home appreciates, that's how wealth can be created. Redlining made it difficult for blacks and minorities to participate in this essential American dream and transfer money to future generations.
4. Job Opportunities. There is overwhelming support that Americans do not have the same opportunities in the job market, even on Wall Street where minorities make a small percentage of senior-level jobs.
7. Unequal Healthcare Treatment. African-Americans do not get the same care as their White counterparts. Doctors and Insurances don't treat them the same. This is a reason why Covid-19 mortality affects them more.
THE LIST GOES ON.
I think it's very important to understand just the tip of the iceberg how we got to an unequal America in order to make better investing decisions and invest in the change that will happen.
The pandemic has created a world that can be a catalyst for change as more people are home with the ability to protest because either they are working from home or unemployed. More people have the ability to watch the news during the day and keep up with the current events.
Where's the investment value? It's in change and diversity.
Diversity is now high on my investor questions. It has shown to be an indicator of better ROI.
Fundamentals matter to sizing up investment opportunities. I now argue diversity should be apart of the business fundamentals. There are logical reasons why this helps grow performance.
A quick diversity screener is to find companies that are MBE certified.
Minority Business Enterprise (MBE) Certification is a denotation that is given to businesses that are majority-owned by Minorities or other economically disadvantaged segments within the American population.
Impact Shares NAACP Minority Empowerment ETF (NACP) tracks the Morningstar Minority Empowerment Index, which is designed to provide exposure to US companies with strong racial and ethnic diversity policies in place, empowering employees irrespective of their race or nationality.
Its holdings show an extremely diverse portfolio and has outperformed the S&P500 by over 5% since inception.
There are ETF's for everything. There will be more to propel investment in minority-owned/operated businesses.
The bottom line, diversity is good for business.
Catalysts are coming, laws will be changed, the government should and will make capital cheaper for minority-owned companies. Diversity should finally be investable.
As for the overall market, valuations will come back to reality. If not, then what's the difference between owning a stock that produces earnings or the perceived value of Bitcoin (BTC)?
This article was written by
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