What “Value” Does Investing Create?
I attended the CFA Institute annual conference in Hong Kong May 13-16. I was pleasantly surprised to find it interesting, thoughtful, and stimulating. The theme of the conference was “Measure Up.” It was posted everywhere and written on conference materials. When I asked Paul Smith, the CFA Institute’s CEO, how they came up with that theme, his answer was, simply, “Ogilvy & Mather” (the advertising, marketing and public relations firm). I took this to mean that it was a consequence of the finding, in a CFA Institute survey (most likely conducted or commissioned by Ogilvy & Mather), that like so many institutions and professions these days, financial advisors and asset managers are – as a group – held in low esteem. The conference theme’s implicit message was that this needs to improve. There may be a subtle reform movement afoot, with the CFA Institute trying to lead it.
Back to basics
How would it improve? This was not explicitly – or even implicitly – identified at the conference. But I believe there was a nascent theme. It can be gleaned from a few of the events at the conference, together with some peripheral developments. That theme is: the financial industry can measure up by conveying capital to improve the future of humankind; in short, by creating value.
What kind of a platitude is that, you may ask? Well, it’s a platitude that has been forgotten. Most people’s definition of what investing is about is getting the best possible return on investment. Indeed, much of the CFA training program supposedly aims at that goal (more about that later).
Getting the best possible return on investment is not the same as conveying capital to improve the future of humankind. In fact, getting the best possible return on investment is a goal that may be impossible, teleologically. Those who misinterpret Adam Smith may argue that if everybody pursues that self-serving goal, the invisible hand guarantees that the optimal future of humankind will result. But those who see beyond the mythical version of Adam Smith will find that hard to believe.
Creating value requires something more – something a little more realistically goal-oriented – than getting the best return on investment. The invisible hand might even work backward. Creating value – value for humankind in general, and for the natural world too – may itself result in the best possible return on investment. And why not, given that we don’t actually know how to generate the best possible return on investment – we only pretend to?