The article in the url below demonstrates how the concept of value is widely misunderstood – even among those, such as business journalists, who should know better. The author, adopting the stereotypical stance of a Wall Street Journal journalist, equates the creation of value with the largest dollar amount. That is, he suggests that for an investor in a socially responsible investment (SRI) fund to accept a lower return is for that investor to receive less value:
"Wall Street considers it a truism that money sloshes around the globe seeking the highest return. But there are countless investors, believe it or not, who are willing to accept lower returns. P.T. Barnum supposedly said there's a sucker born every minute. Many of them go into so-called socially responsible investing. … the basic idea is to throw money away. In reality there is no trade-off of Vice vs. Nice. There are only returns."
Putting aside the contentious issue of whether SRI funds are able to match the performance of the market, let's assume SRI funds perform at a lower rate – say 1, or 2, or even 3% below the market as a whole. This doesn't mean that the investor is receiving less value. If the value I get from knowing my funds are supporting companies/issues in which I believe (and, to some extent, build my identity around), then that could easily compensate for any lower financial return, and will probably exceed it. Instead, this journalists resorts to the well-trodden, knee-jerk ground of Milton Friedman's quotes about CSR (which, in my opinion, are also misunderstood – see Chapter 5, pp. 90-92 + Strategic CSR – Bill Gates) to undercut his own argument:
"Profits are the best measure of a business's value to consumers—and to society. No one holds a gun to the customer's head. If the buyer weren't glad to pay the free-market price, he would make the product or perform the service himself. Yet this idea is questioned all the time."
I agree that "profits are the best measure of a business's value to consumers—and to society," but that is exactly why SRI funds exist. If an SRI fund is profitable then, by definition, it is creating value for the investors who select it over other, more conventional investment options. To see what this means at the societal level (i.e., the population of all firms), it is instructive to look at the makeup of those companies that are considered 'successful.' The fact that many of them are global brands that persuade consumers to pay a significant premium for the 'lifestyles' that accompany their products disproves the author's point about SRI funds. In other words, he cannot say SRI funds are a waste of money because they deliver returns that are below those of other competing investment options, yet also say that a consumer is demonstrating Nike's 'value' by paying a significant price premium for those parts of sneakers (e.g., design, logo) that do not serve a functional purpose. In both cases, consumers are receiving something other than functional value in exchange for the 'price' they are willing to pay. Why is there even a market for $150 sneakers if it is not to provide some value to those who are willing to pay that much? If this argument applies to Nike, then, by definition, it applies to SRI funds. The Wall Street Journal cannot have it both ways.
Take care
David
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Stocks Weren't Made for Social Climbing
By Andy Kessler
January 22, 2018
The Wall Street Journal
Late Edition – Final
A15
