Friday, June 08, 2007

Warren Buffett's Value Investing for Sustainability

I recently finished reading the Warren Buffett Way by Robert C. Hagstrom. For anyone interested in a fairly understandable analysis of the background of Buffett's incredible success with Berkshire-Hathaway, it's a good read. Given the growing influence of social imperatives associated with allocation of investment capital, understanding more about the world of investing can only be helpful to anyone interested in sustainable business.

I characterize myself as a "ignorant investor". I have scurried away money regularly (omitting a few years from 2001-2006 when I was "lost" in the bike biz) in my 401k and have a selection of long-term investments I rarely look at. Mr. Buffet and other value investors make this point; do your homework...diligently...make a choice, make an investment, and stick with it for the long run. The rarely look at part is in line with Mr. Buffett's thoughts, but the ignorant part is not. What we have not done, which is a great example of consumer inertia or simple hypocrisy, is to investigate the socially responsible investment options out there. There are a number of companies and funds out there that employ various analytical tools to toss out the environmental laggards and focus on the environmental, and/or social, leaders. A few of them are listed in the right hand column.

In any case, Mr. Buffett's investment tenets come down to a basic foundation, the Warren Buffett Way (reading the book might make this more digestible):
Business Tenets:
  1. Is the business simple and understandable?
  2. Does the business have a consistent operating history?
  3. Does the business have favorable long-term prospects?
Management Tenets:
  1. Is management rational?
  2. Is management candid with its shareholders?
  3. Does management resist the institutional imperative?
Financial Tenets:
  1. What is the return on equity?
  2. What are the company's "owner earnings"?
  3. What are the profit margins?
  4. Has the company created at least one dollar of market value for every dollar
Value Tenets:
  1. What is the value of the company?
  2. Can it be purchased at a significant discount to its value?
Even more simply:
  • Step 1: Turn off the stock market.
  • Step 2: Don’t worry about the economy.
  • Step 3: Buy a business, not a stock
  • Step 4: Manage a portfolio of businesses.
So, what does this all have to do with SRI? I don't know, but what I wonder is whether companies that start integrating sustainable business practices into their core operating philosophy will present better long-term value propositions for investing organizations like Berkshire-Hathaway.

I happened to catch an episode of Charlie Rose featuring an interview with Mr. Buffett. It was an interesting conversation. What impressed me about the interview was Mr. Buffett's straight-forward and honest demeanor. He truly enjoys what he does and counts every day as a blessing. One of the topics covered in the interview was our nation's increasing trade deficit and foreign debt. We are essentially transferring assets from our country to other countries. That makes the US less attractive as a place to invest, and is one of the factors driving Berkshire-Hathaway to look overseas for investment opportunities more than ever. Slowly, over the next 20-50 years, our children and grandchildren will be spending more to service that debt.

Can't we also apply that same thinking to environmental debt? We are buying other nations natural resources that cannot be paid back.

For every report on how many billions are pouring into ESG/SRIs, there is another one that addresses institutional investors' antipathy to things climate related or ESG/SRI related. Climate change has 'no influence' on fund managers. With comments like this, you can see why climate change is something too "big" for investors to worry about.
A lack of interest from clients, no clear regulatory framework and the long-term nature of climate change effects were the main reasons cited by the asset managers for their dismissal of the issue. Fiduciary duties dominate investment strategies and, unless there is a specific and immediate event, climate change is not a central concern to asset managers, said the London-based HeadLand Consultancy in its report
One fund manager quoted in the report said: "We are not factoring climate change into mainstream investment risk because it is too long-term." Respondents defined long-term as three years.
Three years. What about the whole children and grandchildren thing?

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