Alpha

Who does not want to make money?

That shouldn't be the question. The question to ask is how much more does one want to make.

Most of us are always on the look-out for a little bit of an edge, a small opportunity to make a bit more….at least.

From a homeless person to Warren Buffet, everyone wants to make a bit more money. It’s in our nature.  Why it’s in our nature is a topic for a different conversation.  This conversation is acceptance, and an exploration on how we go about doing it.  

In the investment business the term Alpha refers to the amount greater than the broad market or index that is made or can be made. Broad market is defined as a combination of all publicly traded companies without discrimination. So in other words, if $1000 was invested in the S&P500 or the Dow Jones Industrial average 10 years ago (May 2006), its value today would be about $1,600.  If another $1,000 was invested the same time with a money manager who used their own proprietary creative strategy and analysis to invest, and its value today is $2,000 then the difference of $400 is Alpha.  Essentially, Alpha represents an intention to make more then the board market or everyone else.  Or….”How can I make more”.

Research is clear that over the long run 10-30 years plus, very few money managers, if any, are able to produce Alpha.  In fact, the broad market has returned roughly 8-10 percent annually for the last 20-30 years while the average investor a returned 2-3 percent.

So as we try to make more we end up making less.  

Which brings us back to how can we get what we want.  How can we make more?

We are all investors even though the financial services industry has complicated to the point of scary most of us away from the term “Investor”

So let’s start from the beginning and then explore the hierarchy of how we might maximize our Alpha.

As Warren Buffet says, “You need to divorce your mind from the crowd.  To be a successful investor you must divorce yourself from the fears and greed of the people around you”.  Said differently successful investment requires mindfulness and consciousness.

Each moment is an investment and to become mindful will lead us to alpha.  This is much easier then it might sound.  All we need is patience, or mindful impatience.

We tend to want short term gain.  It feels a bit better and safer to get a chunk of money quickly.  But that mentality gets in the way of us realizing a sustainable income.  Our behaviour is what helps us find sustainable long term alpha.  If we think short term, we will always feel like we are struggling.  Think long term.

And think about what we believe in.

In order to Invest we need capital.

We are born with the most valuable capital.  Time.

How we spend our time is our primary investment and will be integral to the quality of subsequent investments.  

To produce Alpha requires behavior that stokes our energy, and our hope.  If we tirelessly chase money the opposite will happen.  Enantiodromia, a principle introduced by Carl Jung is that the superabundance of any force inevitably produces its opposite.  In our quest for Alpha we need to turn our focus to those activities that make us creative, and feel good.  Only then will we be in a position to make more money.

Breaking down how we spend our time can is not a matter of circumstance but shared experience.  So how much time each day do we spend with work people, family, friends and self is out first asset allocation.  What is the allocation that gives one the most energy.  In order to effectively figure this out we must “divorce ourselves from the fears and greed of the people around us”.  We need to bow out of the race for alpha, take our own path.  Take two steps backward so we can take three steps forward.  Subtle changes like leave work earlier or arrive later, or make “appointments with myself”, appointments that cannot be broken.  Meeting friends for coffee.  Hanging out with family without firing off emails.

Time is our most precious capital.  As we start to produce more of this capital, one way or another we will start to get a paycheck.

The second level of investment is how we spend this paycheck.  We should to look to Maslow’s Pyramid for some guidelines on this asset allocation.

1- Physiological - food, home , car

2 - Safety - Health insurance, Gym, Bike

3 - Love/Belonging - Social Life, Travel

4 - Esteem - Yoga class, hobbies

5 - Self-actualization - Ongoing Education, work we beleive in.

Now what’s left?

Somewhere in between 1 and 4 we can start to think about how we might turn our money into more money.  The further up Maslow’s pyramid we go the better the investment.  The more potential for Alpha we find.

“Money is a reward for self-actualization” - Tal Ben-Shahar

Self actualization can seem bit far fetched at times, so to stay grounded we can get back to some of basics.

So how can we make more with the money we earn.  

The best opportunity is to invest in our-self.  The most obvious way to do this for the sake for making more money is start a business.  The best investments are the ones we play an active role in.  

A more subtle way to invest in ourselves is by going back to school.  Not necessarily in the traditional way, but anyway that makes us better.  Could be a degree or a certificate.  It could be volunteer work.  Anything that is interesting and challenging that makes us smarter.  

This will lead directly or indirectly to Alpha.  Directly if it gives greater skills in our business or work, indirectly if it makes us more productive.

“Everyone desires progressively to raise the threshold of their intelligence and to reap the benefits” - Iyengar.

Not all of us are in the position to start a business or work for ourselves, so our business reinvestment can be to make us more productive at our jobs so that we may earn more money or bigger bonuses.

The next level of investment is investing our money in a private transaction.  In a company we know well and believe strongly in its mission.  Perhaps we are an active partner and play a role in the day to day management and operations or serve as a board member.  We could also be a passive investor but then we are less in touch with the company’s operation and the mission could diverge from our values and beliefs and the potential of our investment is diluted.

From here we can turn our attention to the capital markets.  Stocks, bonds, mutual Funds, ETFs and other similar investment vehicles. As described earlier, in the capital markets if one is investing for the long run - 10+ years - then it’s almost impossible to beat a broad market index.  It’s almost impossible to find Alpha.  Money managers may produce alpha, for a year or two or three, but as the time frame gets longer so chances of Alpha gets smaller.  Money managers retire, or change companies, their analysis and creativity is no panacea.  Like they say in Vegas, the house always wins.  In this case the house is the broad market.

There is another investment option that can refine the broad market.  Investing in companies that have missions and operations that are in line with our values and ethics.  Social and environmental responsible investing has become a popular way to do this. There are many funds and money managers who use various research analytics to discover socially and environmentally responsible companies.

We can take this a step further.  Being “Responsible” implies obligation.  How about finding companies that don’t act out of obligation but whose primary mission is to improve the wellbeing of people and the environment.  A more refined social and environmental investment if you please.

What does this have to do with Alpha?

Do you notice that the people and organizations around you that are the most altruistic end up being the most successful.  If not there is plenty of research, from both the ivory tower and from Wall Street showing that humble companies that are built to improve lives and preserve the environment and to last 100 years enjoy more sustainable profits.  

And if that’s not enough, won’t we sleep better at night knowing we are invested in companies we understand.  If you love animals, wouldn't you rather have an animal lover making decisions about how your investment uses resources, or is possibility of more money more comforting.

Finding Alpha comes from maximizing one’s productivity, pursuing passion and sharing experiences.  If we look around us, we see all those successful people who make more over time are those who do just that.  If you hear someone talking about how much money they made in the stock market, consider the whole story.  How much did they lose, how much have they made since they made their first investment.  

Research and experience has taught us that that the silver bullet for making Alpha is the holistic approach of self-investment.  

Need to have vs. nice to have vs. neither

Take just as much as we need, and no more. I think that natural selection allows for some to have more than others, but those with more should not take more than they need. And only they know how much that might be.

Ten years ago, I was driving around a very nice four year old Nissan Pathfinder and really wanted a Land Rover. The big one. I was making enough money by then so I decided to go for a  test drive. I loved it. Such a machine. I decided to sleep on it and driving home, it struck me. What struck me was the question "Why do I need it". This question and also a disturbing self-reflection started a delightful falling of dominoes...starting with the job that would have afforded me the new car. I still notice though that there is plenty of opportunity to regulate my consumption. That extra latte or random shiny object in the store window, they all add up.

The markets and investing appear to work within these rules. Just think about all the people and companies that get greedy. We end up hearing about them on the news. And moreover, in this age of social and environmental awareness we are seeing that it is more profitable to not take more then we need. Put so eloquently in economic terms by Raj Sisodia -

"We have been working to understand how conscious businesses are able to operate with superior financial results while creating many forms of wealth and wellbeing for all of their stakeholders, including society. It boils down to something quite simple: these companies knowingly operate with lower gross margins than they could achieve, but are still able to achieve higher net margins than their traditional competitors."

Enantiodromia, a principle introduced by Carl Jung says that the superabundance of any force inevitably produces its opposite. Again we have seen this over and over with corporations, Enron being the poster child. Hedge funds are also known for going through months and sometimes years of massive profit taking, but are most always offset by equivalent or more in losses. Humans are as subject to the laws of nature in our inter-human capitalist activity as we might be if we are living in the wilderness. Climate change is a recent indication of just this. Our lesson how we handle each transaction. It’s ok to take, but we must not take more then we need so that we don't upset the equilibrium.

Warren Buffet is an extremely wealthy individuals who has worked the capitalist system as well as anyone. Buffet has a reputation for the same old house, the same old car. He certainly does not take more then he needs even though he is in a better place than anyone on the planet to do so. His money is the reward for self actualization. Yes, he's probably a rare exception. He exhibits that self-regulation that is so necessary for the sustainability of our existence.There are many other super rich who might be buying more planes than they need, more houses and just more stuff. But that is also the case for each of us. Every day we have the opportunity to check our consumption.

We need the super rich and mega corporations just as we need the ocean, the elephant and baobab. We need the poor like we need algae and bees. The elephant doesn't knock down trees it doesn't need. 70% of the food that we eat depends on the bees. This natural selection depends on each of us taking just as much as we need and for some it’s more than others. We should not look outward and ask,  “he or she has that, why can’t I?”, we should look inward and ask, “what is it that I need?”

As business people if we want to build companies that are going to last 100 years, and enjoy sustainable profits we need to look no further than our bottom line. Offer products must be promote well-being. Take low margins, so our net is wider.. As CEO's and owners, take less and give more. Increase employees pay. Take a lesson from one of the original capitalists Henry Ford - if not for compassion then certainly for profit. Increase in pay reduces turnover and increases a sense of being part of the company's mission. Research is clear that our productivity is optimized when we feel like we are playing a role in the mission.

We each need to be rational and realistic. Some of us are meant to have private jets, some are meant to find their way to work in a rickety old bicycle. But does the jet really need a hot-tub filled with champagne. And after that bike ride home a hot nutritious meal shared with the rest of the family might a lot better then sitting down to a Gordon Ramsay white table clothed no jeans allowed dinner...alone.

Until we each take responsibility for the regulation of our own consumption. Until we each become conscious of our place in the world. We won't have a chance against some of the greatest fears of our day - climate change, war, poverty.

Patagonia takes just what they need. A sales person at a Patagonia store might go as far as to discourage you from buying one of their products if you might already have a solution in your wardrobe. More and and more of the biggest companies are there as well, if not heading in that direction.  

Our personal ethics/values can be a helpful guide if it’s not clear whether we are taking too much. Ben Franklin tells the story about how he was offered money to publish something that compromised his ethics. Before he made the decision he went home, made himself a dinner of bread and water and then curled up on the floor with a heavy blanket for the night. In the morning he woke up to discover he could live in such a manner, he had no need "to prostitute his press for the purpose of corruption and abuse of this kind for the sake of gaining a more comfortable subsistence."

If we allow our values and ethics to guide us rather than our fears, research shows that we will enjoy a sustainable existence. And so will the everyone around us. Rather than help others out of obligation which I heard someone point out is the most selfish thing we can so, help others because we want to..

What is the lifetime to date performance of our investments?

This is one of many studies that come up with the same conclusion. So the question we must ask ourselves is why do we underperform. We should also consider whether we know what the performance is for the life of our investments, so that we can be clear about what we invest in and why.

Enriching Peoples Lives

"We produce products that give people the ability to do things they couldn't do before.  And in doing so, we helped change things," Apple CEO, Tim Cook

This is what it means to be a successful, sustainable company.  Its all about the intention and the motive.  Once we wake up in the morning with the intention of enriching others lives, we start down the road of long term success, sustainable profit and making world around us a better place for us to be.

We look for companies with this motive. Support them by investing in them and using products.  Benefit by sharing the fruits, and enjoying their services.  And then share this experience.

Put your money where your mouth is!

Tis the season to voice what we stand for...election season. How we believe the world should be. From dinner party arguments to the polls we stand by candidates or against others on the foundation of what we believe is right. From the basics of integrity to the the specifics of economics, from Roe vs Wade to healthcare - we take a stand and speak, write and vote accordingly.

The question we must ask ourselves is do we act accordingly?

There is no clearer way to examine or follow our actions then by paying attention to how we earn, spend and invest our money. I remember my aha moment of my own cognitive dissonance a few years ago when news came out about Apple's use of production lines that were less then optimal in the human rights department. I remember being disappointed and angry at Apple but I also noticed that I was passionately expressing my disappointment using an iPhone, a Macbook and an iPad. Which may have been ok, except I went on the buy more Apple stuff. Why...because I liked Apple stuff.

We have this opportunity of taking powerful action through the wheels of commerce. This action may seem subtle, but its not. We live in a world of stuff and we are not going to give it up. We like our lattes, our smart phones, our cars, our exotic food, our vacations. And if we look close enough we can see the dotted line between the things we like and the values and principles we believe in.

I believe that corporations are necessary because when I look around and notice all those things things in my/our life that seem integral to our success, creativity, well-being and fulfillment, I see the wheels of commerce. Yes, I also believe that corporations have tended to take the less then social and environmental road while making these wheels turn, however corporate strategy has evolved and there is plenty of evidence to show social and environmental mission(as opposed to obligation) within the corporate community.

We can effect change by standing behind the companies who have these missions by buying their products and investing our money and our careers with them. This togetherness will lead toward a powerful sea change, with downstream influence on the issues we toss back and forth across the political aisle.

Underlying our the decisions that drive the flow of our money is "not having enough", our most primal survival instinct lurks. So it’s good know that there is plenty of evidence these days showing that those companies who are faced with a decision between doing good or realizing profit, those who choose good are reporting that they end up making more. This reality which is expressed much more eloquently by Patagonia founder Yvon Chouinard has been noticed and adopted more and more by those in the C-suite. Sustainability is a panacea. It means preserving the environment as much as it means producing a profit again and again over a long period of time. Not to be confused to hauling in a short term chunk of cash with no succession plan.

So the good news is if we invest in and work with those socially and environmentally mission driven business’s, we will effect change, feel fulfilled and enjoy the fruits.

Express yourself!!

P.S. I write this from a Macbook and I manage a fund that invests in companies that have social and environmental missions. It invests in Apple. Since that aforementioned cognitive dissonance, my research has shown that Apple has realized the error of their ways and acted accordingly.