Investment is reduced to “mere gambling” if savers use capital solely for wealth creation and fail to act as stewards of the companies they invest in, the 300 Club says.
The investment think-tank’s latest paper argues that investors need to fundamentally rethink the purpose of investment and how its success is measured in order to reconnect capital with its true underlying purpose.
According to 300 Club founder and member Saker Nusseibeh (pictured), this ‘purpose’ is for shareholders to control the companies that determine their economic social future rather than simply allocate capital to them.
Nusseibeh’s paper The Why Question argues that a ‘holistic return’ which includes the impact of investment on society, is the rational way to approach investment and measure the success of that investment.
He believes that by applying this approach, the financial world can be reconnected with its effect on people’s lives and futures.
Nusseibeh said: “That investing has become a glorified form of gambling on the roulette wheel of the economy is amply illustrated by the trading nature of active funds, the move to index funds, factor investing, derivative instruments and high-frequency trading, which are all treating the market as a directional bet.”
According to Nusseibeh, the problem stems from treating economics as a science, looking at the ‘how’ rather than the ‘why’ of things.
He explained: “Because of the enormous control quoted companies have over the lives of ordinary citizens who own their shares and over society, we must look for the social purpose – the ‘why’ if you will – in something other than capital-raising, dividend pay-out and capital accumulation.
“It seems to me that with the maturing of the capital markets, shareholding should serve a different purpose. It should be a tool for savers to exercise their democratic will as owners in directing this economic machine in a way that serves them collectively as well as individually in the long term.
“However, to accept this precept implies profound changes to the way we invest. It implies that a large part of the reason for investing in quoted companies is stewardship.”
Nusseibeh cited an example to illustrate the point. He said if Company A uses perfectly legal methods to pay less tax than it should, its earnings and share price go up. An investor has therefore made an economic gain equivalent to that rise. However, tax revenues for government will fall and, in turn, public services will need to be cut or taxes will need to rise to make the difference between what Company A should have paid and what they actually paid, a cost that is borne by the self-same investor.
He added: “If that investor lives in the developed world, they will retire with a lump sum of £300,000 to £500,000, which translates to about £11,000 to £18,000 per annum income. At this level of income, certainly in the UK, they cannot cope financially without the additional support of government tax breaks, services and pension of about £4,000 to £6,000 per annum. That is why it is so crucial to them that the collective tax take of the country is not compromised by economic misfortune or specific company action.”
The 300 Club is an independent group made up of investment professionals from across the globe formed to raise “uncomfortable and fundamental” questions about investing.
