The psychology and ethics of investing?

I want to take a side step today from my series on the social innovation process and look at investing from a social innovation perspective. I just read a book called ‘What I learned losing a million dollars’ by Jim Paul and Brendan Moynihan. You might be wondering why I read a book like this, what does investing or trading have to do with social innovation? Well, lots.

Firstly, to preface this post, I should point out that when I was 15 I wanted to be stockbroker. Once I gained a social conscience at about the age of 16, I quickly changed my mind and took the path towards using business and economics knowledge to make social change. Many of my friends have gone on to become successful traders.

Since growing a social conscience and understanding the markets, I have had a general disdain for the financial markets as I saw them as gigantic wastes of human ingenuity and energy. All these people engaged in speculative transactions that don’t create any real value, what a colossal waste. For this reason I have also thought it would be unethical and hypocritical for me to invest or trade in the financial markets. However, I always thought I would be good at. So it has always seemed like a bit of a forbidden fruit.

I feel like I have a grasp of the global economy and general business trends so I’ve always thought with some thoughtful research I would be able to pick winners in terms of company stocks. However, I always stop my wandering thoughts about investing in the markets. I slap myself on the wrist and say, don’t even think about it! That’s wasteful and speculative, do something meaningful and productive. And I go back to working on the various social enterprises I’m involved in.

The book ‘What I learned losing a million dollars’ was brought to my attention by Tim Ferriss. I’m very intrigued by pretty much whatever Tim Ferriss is intrigued by and he gave this book a huge wrap. Feeling my 15 year old stockbroker kick inside me, I thought, well it couldn’t hurt to just read the book. I’m definitely not going to invest, don’t be crazy, that’s speculative and wasteful, I’m just going to read the book, I’ll just skim it… I said to my self.

I ended up getting the audio book because of kerfuffle with Amazon where I tried to purchase the audio book and the ebook at the same time so I could Whispersync. I didn’t receive the ebook. So I listen to the audio book. In two days.

The book itself is fantastic. It is really engaging and fun to listen to. It is full of great stories about Jim Paul, the investor the book is based on. The crux of the book is — to not take investing personally and to not let emotions or your own psychology get in the way of your decision-making. Making money does not make you smart. Losing money does not make you dumb. No one knows what the future holds, the financial markets are extremely volatile. It’s not about being right or wrong, it’s about good and bad decisions in hindsight. There are an infinite amount of ways to make money in the financial markets, but there is only one way not to lose a significant amount of money.

Before starting to invest, you need a plan. Pick the amount of money you want to invest, say $5k, pick the amount of money you are willing to lose, say $1k, pick the amount of money you would be happy to make, say an additional $5k — a 100% return (that’s 5 times what is consider a good return, which is usually around 20% for managed funds I believe). Have a look at the stock or futures markets. Do your research on the companies or options you want to buy and then pick an entry and exit point. For example, if you buy a share at $10, you can by 500 shares for your $5k. Your exit points are at $8 and $20. If the share goes down to $8, no matter what you sell. If the share goes up to $20, not matter what you sell. That’s a plan. You can have rules and controls which allow you to stay in the market longer if you are making money but you cannot move your bottom exit point. That was the point of the book as I understood it.

Now I don’t know whether I’m just trying to justify getting into the financial markets or if the following argument is legitimate, but this is what I have been thinking. Excuse the rambling. I’ll try to fashion this into something easier to understand as I explore the idea more. I just want to publish and ship now (see note at end of post).

What if I invested some of my money in the financial markets, made a financial return and used that return to fund social enterprises? Wouldn’t I be taking money from speculators and destructive companies and redistributing it towards meaningful and productive initiatives?

This is what I wrote to myself in my morning free writing ritual earlier this week:

“I spent a lot of the weekend thinking about investing and speculating. I’m listening to a book called ‘What I learned losing a million dollars’ and it is a great book about the realities of investing in companies and markets. I also read an article about Charlie Munger this morning. Charlie is the brains behind Warren Buffet. It has me thinking about investing. I know I have always been against investing, well not investing per se, I’ve been against investing in unethical and unsustainable companies and I’ve been against speculation as it does not generate any new value in the economy or society. Speculation is really redistributing money within the market to the people who made ‘good’ choices or got lucky. I have been against the first kind of investment for obvious reasons. I don’t want to support or be a shareholder in a company that is destroying the earth. Even if that means I’m foregoing the ability to make money which I could put to good use. I may think that if I buy stocks in a gas company now, that’s a good idea as they are well placed to benefit from the move to gas as a source of energy in the future. But I won’t invest in them because I would feel like I am supporting them. I don’t want to support a gas company.

But would I be supporting them by owning shares in them? My goal is to redistribute money in the economy to reduce inequality and to move money away from destructive enterprise towards investment in social enterprise, or into impact investing. If I invest in a gas company and make money and use it to set up an impact investment fund, is that not a good use of my time and a good way to make a real impact? By generating money that makes a difference. Not measly money, not thousands of dollars, I’m talking millions of dollars.

So the question is for example, is it ethical to invest in a gas company, to make money, to use to invest in social enterprises? Well how do we go about judging this question? Well, is the money you are putting into buying the gas company shares going to support the company in someway? I don’t think so, they have sold the shares, they have raised their equity long ago. The shares I would be buying are from people holding the shares and earning a dividend. So you would be essentially profiting from the gas companies activity. Well no, I would be taking the money, taking some of the gas company’s profit and investing it in social enterprises. So what is bad about that?

Is it the feeling or idea that you own part of a company that is environmentally destructive? That is certainly part of it, I feel like I don’t want to have anything to do with a company like that let alone own shares in it. But you would be buying the shares so you could redistribute the profits, their profits, into productive enterprises. You are simply holding the stock (although you may then be driving up share value), taking the dividend and then investing it, maybe against the companies own values, for example in electric cars, in Tesla. I guess I would be creating a funny loop where I could potentially speed up the demise of the gas company and companies like it and speed up the growth of Tesla and companies like it and thus help move society to a more sustainable world quicker. I need to think about this more.”

I know I could invest in ethical companies only, but would I have the same impact? Would I be redistributing money in the economy away from destructive enterprises towards social enterprises?

This post is part of a series of posts I have written in 40min and edited and published in 40min. I’m pushing myself to write and I’m going for quantity over quality. Hopefully the quality will come. Feedback very welcome ☺