It is sort of a shame how capitalism is clearly so powerful in the world, and we would like the world to be a good place where virtues like honesty and fairness and humility and justice are rewarded, and yet capitalism isn’t really fundamentally based on any of those things, it’s based on chasing after money. It can feel weird to believe in lots of virtuous things, and then invest your money in a way that ignores all that. So maybe there is some compromise where you overall try to invest your money intelligently, but somehow “slant” your investments towards things that are good for the world?
In general the name for this is socially responsible investing.
Socially responsible investors encourage corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity. Some avoid businesses involved in alcohol, tobacco, fast food, gambling, pornography, weapons, contraception/abortifacients/abortion, fossil fuel production, and/or the military. The areas of concern recognized by the SRI practitioners are sometimes summarized under the heading of ESG issues: environment, social justice, and corporate governance.
This is probably a good thing, according to the Occamian logic of, trying to do good is generally good. You might make a little less money, since you’re less focused on profit, but it’s worth it because you make the world a better place. Financial markets are weird, though. I wonder if there is more to this sort of investing strategy.
In particular, I theorize the existence of the opposite type of investor: the socially irresponsible investor. The socially irresponsible investor actively seeks out investments that are making the world a worse place. They invest in companies that harm the environment, disregard consumers, break the law, ignore social justice. A socially irresponsible investor wouldn’t proudly issue press releases about their great strategy, so you wouldn’t naturally hear about this strategy, even if it were super-popular. So don’t disregard this theory just because you have never heard of such a thing.
Why would someone do this? Well, let’s try to model this. Let’s say there are three types of investor: the responsible investor, who is willing to make a bit less money in order to invest in companies that help the world. The neutral investor, who just focuses on which investments seem like good investments, and the irresponsible investor, who invests in precisely those companies that are evil, the ones that the responsible investor avoids.
Who makes the most money? Well, the whole point of responsible investing is that you’re willing to make a bit less money by having priorities other than making money. So you might expect the responsible investor to make a bit less money than the neutral investor. But the neutral investor’s strategy is basically an average between the responsible investor and the irresponsible investor. So… the irresponsible investor must be making the most money of all of them?
For what it’s worth, I wasn’t the first person to think of this. For example there was the Vice Fund which publicly tried to make this sort of evil strategy work.
Vice Fund, a mutual fund started 14 months ago by Mutuals.com, a Dallas investment company, is profiting nicely from what some would consider the wickedest corners of the legitimate economy: alcohol, arms, gambling and tobacco. So far this year, Vice Fund has returned 17.2% to investors, beating both the S&P 500 (15.2%) and the Dow Jones industrial average (13.2%) by a few points.
In fact, all four vice-ridden sectors have outperformed the overall American market during the past five years. “No matter what the economy’s state or how interest rates move, people keep drinking, smoking and gambling,” says Dan Ahrens, a portfolio manager at the self-described “socially irresponsible” fund.
It seems dangerous for the best moneymaking strategy to involve being evil. People who care a lot about money would come in, start looking around, realize the best strategy was evil, and evil behaviors would spread.
But honestly, I don’t think this model is accurate for the general stock market, because I don’t believe that any of these investors are doing better than monkeys throwing darts. Like more and more people nowadays, I am dubious of active stock-picking and personally aim for a pretty conservative investment strategy with lots of index funds.
For venture capital investing, though, I do believe that there are different types of investors and that their decisions are different than random guesses. There are certainly a lot of groups who are trying to be socially responsible investors in venture capital, focusing on women, underrepresented minorities, or some more-general notion of doing good:
The NYT says that Nancy Pfund of DBL Investors has “quietly built a reputation as the go-to venture capitalist for companies looking to make a social impact.”
The Women’s Venture Capital Fund “capitalizes on the expanding pipeline of women entrepreneurs leading gender diverse teams.”
City Light Capital “aims to generate strong returns while making a social impact.”
The Catalyst Fund was “established to invest in technology companies founded by underrepresented ethnic minority entrepreneurs.”
Solstice Capital “is committed to investing 50% of its capital in socially responsible companies that are currently not well served by the venture capital community.”
Well, that’s cool. So… are there socially irresponsible venture investors, who seek out the opposite sort of investment? Worse, are the irresponsible investors making more money?
I was going to put together a list with some bullet points, but I really don’t want to be calling people out and naming names, especially when really I know so little about the details here and this is more some idle abstract theory than a concrete proof. The convenient thing about venture capital, though, is that success is really defined by hitting a few winners, rather than performance of your median investment. So you can investigate yourself, look through the billion dollar club, and see how many of the most successful tech startups are famous for breaking the law, being run by social injustice warriors, helping the war machine, or “multiple of the above”. And see who invested in multiple of them, and come to your own conclusions.
Of course, I’m sure nobody would never write a blog post talking about how their socially irresponsible investing strategy was the key to their success.