Wednesday, June 4, 2008

Investing and Ethical Investing (Part I)

Quote of the week:
'It is what you read when you don't have to that determines what you will be when you can't help it.' - Oscar Wilde

The Ittihad Weekly Briefing is now archived at:

Commentary of the week:
Difference between Investing & Ethical Investing (Part I):

For regular readers of the briefing, you all know how I usually nitpick and split hairs in order to arrive at any deep insight (or any insight for that matter). This week is a bit different, and it is not some esoteric minutiae of finance that is under discussion but rather what we do with our money on a practical basis all day, every day, all night, every night - for even though we are all sleeping, the stereotypical financial corporation is wide awake and thinking of your money. I don't mean this is a bad way of course, you all know by now how deeply I respect the world of finance (hmm). I just mean that even though you think your money is safely laying golden eggs in a bank account, GIC, mutual fund, hedge fund, LP, Stock or Bond, it is actually nowhere close to any such entity. It is lost in a sea of electrons, moving from your corner bank branch, brokerage or financial advisor, through public markets such as the TSX and into and out of the pockets of actual people and companies again somewhere else, only to show up on your bank / investment statement at the required end of the month exactly as scheduled. In this sense, your dollars are like me when I was in high school: registered, but not always present (ah, those were the days).

For example, if you invest in a mutual fund and the mutual fund participates in the IPO of a mining company, then a portion of your money has actually found its way into the coffers of the mining company. Let us then also suppose that this Gold Mining company is imaginatively called Company G. A portion of that portion then, went into the purchase and use of cyanide (yes, the poison) which is used in the separation the gold from the sulphurous rocks in which it is usually found. This cyanide then, after the gold has been extracted, then finds its way sometimes (some say always, it is only a matter of time) into the local water supply. Company G then gets sued and in order to protect your hard earned savings from seizure in legal claims, you now find yourself on the wrong side of a legal case involving poor farmers from some foreign country whose livestock and children are sadly no more and whose lands are no longer safe for the growing of food. Your financial health and moral imperative are now in conflict and this causes you great trouble. You read about the issue, go the Annual General Meeting (AGM) and demand that the company change its practices and begins to use a safer chemical than cyanide for the extraction of Gold. But wait a second, you are not a shareholder of the company. What!!!, you ask? How can that be? They have your money after all and surely you can do something to make them stop poisoning the Earth, can't you? Alas, my friends, you invested in a brand name mutual fund, not in Company G. Not only do you not know which companies you have invested in beyond the top ten, you also do not know which countries each of those then are involved in and what it is that they do once they are there. After all, you need to see the 10+% return on investment every year that the Financial Advisor promised you and also, you are not in finance - so how is all this your problem? Surely, someone else is supposed to be making sure your money is spent in good things while making good money. Isn't that why you pay your advisors? (and trust me, you do pay).

Excellent answer. This is indeed not your problem because you cannot solve it. Your mutual fund solves this dilemma for you quite neatly. You neither ask what it is that they do with your money and they oblige your intense curiosity by not telling you. But even if they did tell you, what could you do? You are not a full shareholder in the companies in which you have invested. You are just a unit-holder of the mutual fund. The mutual fund doesn't have the mandate to actually prevent the use of cyanide even if they knew what the devil it was; the mutual fund wants the company to extract as much gold as possible for the least amount of costs without getting into too much trouble with the authorities. You provide the money, the bank provides a loan, the mutual fund provides 'intermediation', the government(s) provides the mining license and company G provides the returns. The farmers provide just collateral damage. Since they are not Canadian / American / European and they don't make the 6:00 pm news and because Company G has great lawyers and a large advertising budget that keeps the story from getting to us - you and I don't have to think about where the returns came from. All parties are able to sleep at night without use of Xanax, except for the poor farmers for whom all sleep is short and whose insomnia is spent in remembrance of that which brought them such joy in a land that existed a long time ago.

This, in a nutshell is called Investing. While I have picked (perhaps unfairly) on mutual funds and mining this week, this story applies to other sectors and savings / investment vehicles as well. Also, the major point here is not that mining is terrible (which it might well be), but that we are constantly plugged into a system (for lack of a better word that describes the movement of money) that has no moral values as such. I say this because any moral outcome that results is little more than an accident. As people, we all have some moral code we follow, yet our finances are strangely liberated from this need to be good. There is in the financial sector no aim greater than that of taking some money and making some more money out of it. This is the sole measure of success. Back when I was a psychology student a few decades ago, having no values was considered psychopathic. Now that I am a student of finance, having no values is called efficiency.

Nevertheless, I don't say all this to make you depressed. We have to get over ourselves and our petty emotions, we have to pray for those we have hurt unknowingly and think deeply about how we want to move forward (and then perhaps actually move forward). The whole problem with humanity is that when we see a complex problem, we lose heart even before we understand all of it. We need realistic, determined enthusiasm driven by something approaching Love to change the world (even if that makes you nervous). We do not need the half-hearted, depressional funk that people like me can get you into so easily. We must never allow the search for an accurate description of our circumstances to confuse our internal apparatus of hope - each has its place in life. Wake up, shape up & grow up - more rests on our attitude towards life than on our money.

Next, we shall have to tackle Ethical Investing - which some people say is the antidote to moral disintermediation in finance. In the meantime, enjoy the caviar at the next AGM - it is the least damage we can do to the companies we 'own' but have no sway over.

The IWB will return two weeks from now IA as I will be away on vacation. Be good, make me proud, write some responses on the Blog and start a conversation amongst yourselves.

Upcoming Events:

The Crescent Entrepreneurial Association (CEA) is hosting a business plan competition that I think many of you will enjoy attending. This is a volunteer organization that is helping the community get a better handle on its economic future. The exposure and insights gained at the competition will be quite priceless IA so if you have daughters, sons, younger nieces and nephews, cousins etc., try and bring them out to this event on the 31st of May. We at Ittihad are both fans and supporters of CEA and would like to see a large turnout. This wonderful organization will help the community build a critical mass of good, ethical businesses that will contribute to society IA. Please register here.

We have been invited by TARIC mosque (located here) to present our views on Islamic Finance on Saturday, the 21st of June at 7:00 pm. I encourage everyone to attend with friends as the discussion will focus on the place that Islam does or does not have in our financial choices. By the end of the discussion, attendees should have a good idea about how to judge the IF field for themselves. This is a discussion that will IA take place outside the logic of a sales presentation so you can leave your cheque-books at home, we will accept Halal Credit Cards instead (Relax, I'm kidding). Come with friends and come with difficult questions - hopefully, we will trade in good ideas that will profit our minds.

Finance News:

1. Five steps to a better financial future ... read more here

2. The Guardian's introduction to Ethical Investing (hat-tip Br. Alim) ... read more here

3. Investing in inflationary times ... read more here

Economic News:

1. The Fed raises their inflation projections. Did someone finally send them the Ittihad Weekly? ... read more here

2. An extremely disturbing (if you are a consumer) development on the Oil front. Seems that futures prices have increased so much that even the Oil companies want to start stockpiling oil rather than selling it ... this should be an interesting political battle. No way the consumer can win this one with the kinds of spineless politicians we have ... read more here

3. A great short article on the interplay between the US$ and Chinese Yuan ... read more here

4. Outlook for the Real Estate and Housing in different countries ... read more here

5. One usually doesn't publicize such things, but I feel a bit like Mary Poppins must have when she opened up her umbrella and flew around town. The IWB of three weeks ago makes the cover of the Economist ... read more here

Islamic / Middle East / Emerging Markets:

1. N/A

Interesting but not all Finance:

1. Is mining still ethical if some lakes are destroyed? ... read more here

1. This is what happens to fertilizers after we use them so liberally to grow mostly bland food ... read more here

2. Brazil's minister for the environment resigns, but her life story is quite inspiring (although too short) ... read more here

3. Getting energy from Garbage ... read more here

1 comment:

hisham said...

The 'Investing and Ethical Investing' was so well written.
I also wanted you to check out this link. I believe this man has a vision for Islamic Finance.

Thank You