What about the fundamentals? There is certainly nothing to suggest GameStop is worth $300. There is an underappreciation of the fact that the stock can go south very quickly when there are no buyers. What about other aspects of behavioral finance? Seems that a lot of people are engaged in the Gambler's Fallacy - betting that this is never going to end. Follow your values, but keep your eyes open.First there is a need for belonging. People want a group of friends they can get rich with. They want to feel like winners. People don't post their failures. They don't brag about losing money. There is a lot of FOMO - a lot of people are trying to avoid regretting not being a part of this. It only helps fund managers sell products and companies polish their reputations while avoiding hard choices.
Society receives no benefit, however, from the Panglossian do-well-by-doing-good story. Indeed, accepting the possibility of lower returns in return for the promise of positive social outcomes, such as a healthier environment or less poverty, can make a positive impact by putting resources to work where an “efficient” market would not, providing subsidised capital to projects that are very risky but could have a big upside for society. It means only that they should not think of this as a wealth maximising strategy. None of this suggests that investors should not put their savings behind the things that they care about. But has ESG, really? And if tech stocks become overpriced and their prices crash, does that mean ESG is suddenly a bad strategy? RecommendedĪccepting the possibility of lower returns in return for the promise of positive social outcomes, such as a healthier environment or less poverty, can make a positive impact by putting resources to work where an “efficient” market would not The top seven holdings, accounting for a quarter of the funds’ value, are Apple, Microsoft, Amazon, Facebook, Google and Tesla. Look, however, at the holdings of the ESG fund. Since its inception in late 2018, for example, Vanguard’s US ESG exchange traded fund return of 28 per cent has whipped its broad-market ETF’s 17 per cent. Illogic is not the only problem with the win-win story. Sometimes investors have to choose between their values and their pocket books. Putting aside the question of growth, to argue that (say) a carbon, tobacco, and gun-heavy portfolio cannot outperform over the long term is to argue that it will never be bought cheap.īut of course it is the goal of the ESG movement to push investors away from “wicked” portfolios - making their prices cheap, and setting them up to outperform “virtuous” portfolios over time! The win-win pitch is a fallacy.
There are two ways investments outperform: either they generate greater than expected cash flows over time (growth), or they are bought at a cheap price (value). Over a realistic time horizon, a wicked or “anti-ESG” portfolio perfectly well might offer the best available return. For news and analysis about the fast-expanding world of socially responsible business, sustainable finance, impact investing, environmental, social and governance trends, visit FT.com/moral-money
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