The Resilient Investor (2015)

CHAPTER 3

Weaning off Wall Street

The Three Investment Strategies:
Close to Home, Sustainable Global Economy, and Evolutionary

AS WE TURN OUR FOCUS TOWARD THE COLUMNS OF THE RESILIENT Investing Map, it is time to recall our quick survey of the VUCA world—volatile, uncertain, complex, and ambiguous—in which we live. There’s an unfathomable intertwining of relationships that underlies the global economy and the physical world, making predictions virtually impossible. As financial advisors it has not been easy for us to overcome our desire for certainty about where the world is heading. But once we acknowledged that the world as it is may not be sitting on the most solid of foundations—and that our clients hold a range of views about our possible futures—it became essential to explore strategies that speak to both emerging innovations and local resilience.

Even a few years ago, such a multifaceted approach would have been impractical, as there were few opportunities to invest our money in either the close-to-home or evolutionary strategy. Now we are energized by the explosion of creativity taking place in virtually all the RIM zones—particularly for one’s financial assets, where it is increasingly possible to select options that do not come from Wall Street. In recent years formerly obscure niches, such as international microfinance, local food systems, and “social purpose bonds,” have catapulted into categories recognizedby institutional investors. The World Economic Forum describes these outside-the-box approaches as moving “from the margins to the mainstream.”¹ And while some of the ways to invest in personal and tangible assets are timeless, here too there have been exciting innovations, many of which—such as the sharing economy—have been empowered by technological advances.

In this chapter we look at how each of the strategies has a unique mindset, one derived from, but not locked to, the scenarios we explored earlier. In chapter 4 we flesh out the nine zones with a few examples so you can get a taste for how each strategy suggests different ways that you can grow your personal, tangible, and financial assets.

STRATEGY 1

Investing Close to Home: Strengthening Our Foundations

Home is where the heart is. And the hearth, and the art, and where the health of the whole earth is tended. Eco, the root of the words economics and ecology, comes from oikos, the Greek word for “home.” The close-to-home strategy brings economics back to its roots, to the household, community, and systems that support our most fundamental well-being. Close-to-home investing recognizes that much of what we already spend time, money, and attention on are rightly considered investments. Our personal health and skills, family and home, community organizations, and intimate, professional, and community relationships—all are addressed in this strategy. (Today many of us have nourishing family and community ties both where we live and in other places as well; these more distant relationships may be part of your close-to-home strategy, though we focus on the local in this narrative.)

If this strategy seems familiar, it may be because it’s in our bones, as this is what all investing was for most of human history. Although it is common in the modern age to not even consider investing in one’s hometown, in the past this was the only place that most people spent, loaned, and invested their money; even our time at work was usually at a local business rather than as part of the global economy. Now, as then, the lion’s share of our time (at least away from work) is spent close to home, and a big chunk of investment wealth may be here, as well: our literal home—a house and land—is the largest (and often only) asset many people own.

Beyond this, remember that we all begin close to home. When you are young and just starting out—or if you are recovering from a setback or don’t have many financial resources—focusing your attention here is likely your best strategy. By close to home in this context, we mean veryclose! We think of Warren Buffett’s comment: “Investing in yourself is the best thing you can do.…If you have true talent yourself, and you have maximized your talent, you have a terrific asset.”² Invest in yourself, in your knowledge and skills; use your time and focus your attention toward improving your own ability to create value for other people. Because the return from such activities can be significant, this personal initiative can be your biggest source of wealth—and it is almost always your first.

A simple guideline for the close-to-home strategy is to invest in what you know, in what you can see and touch, and in who and what is around you. As famed Fidelity investor Peter Lynch liked to say, “Never invest in any idea you can’t illustrate with a crayon.” (We imagine close-to-home Lynch pointing to a child’s drawing of a house with a big apple tree, a smiling neighbor, and yellow sun rays reaching down to some solar panels.) Local investments that are close at hand are easier to track and influence; when you are close to what you are invested in, you can intervene if there is a problem and weigh in on positive change. Try that with a mutual fund!

Close-to-home investing is fundamentally about relationships, asking us to enter into more intimate, face-to-face engagements. Returning more of our focus to this time-tested strategy represents a rebalancing as we step back from our immersion in a global system, which Don Shaffer of RSF Social Finance describes as “complex, opaque, and anonymous, based on short-term outcomes,”³ and we begin to embrace the virtues of local engagement, which is “more direct, transparent, and personal, based on long-term relationships.”⁴ Shopping at the farmers market, you exchange cash for carrots. You can see exactly how orange and crisp they are and talk with the farmer who grew them—if the carrots are sweet, you’ll be back for more. The close-to-home strategy seeks to apply the same immediacy and connection to its other investment activities.

In Local Dollars, Local Sense, a thorough survey of the local investment movement, Michael Shuman makes a compelling case that small businesses constitute about half the gross domestic product (GDP) of the United States, but most investors are completely missing out.⁵ Over-investing in Wall Street and underinvesting in Main Street (and other close-to-home strategies) is a diversification problem that this book, and especially this strategy, intends to help you overcome. As mentioned earlier, while this type of financial investment has been difficult at best for most of us, there are encouraging developments under way.

While everyone is involved with at least some, and usually many, close-to-home activities, there are two groups for whom this has become the main focus of their resilient investing practice. The first works to enliven local economies, primarily because of the positive effects that enhanced community resilience would offer in any possible future, and secondarily as a hedge against systemic economic shocks. They bank local, buy local, and invest in local businesses. Transition Towns and many other local and regional initiatives⁶ are engaged in such proactive “going local” efforts.

Others choose investments close to home to prepare for systemic breakdown, with an emphasis on personal and family survival, and in some cases to strengthen regional resilience.⁷ Their goal is to increase their odds of surviving “the end of the world as we know it.”⁸ Some are “preppers,” caching food, water, and ammunition on the edge of civilization, while others are deep ecologists who believe we have passed irreversible ecological tipping points and that their energy is best used in personal and regional preparedness.

We might playfully label folks from these two perspectives “bloomers” and “doomers.” For the bloomers, with the intention of building community resilience, the paramount goals are diverse local ownership, sustainability, and helping “dollars stay in the local economy to improve quality of life for all.”⁹ Doomers, who aim to ride out “the big reset”¹⁰ through personal resilience, see self-sufficiency and protection against threats as primary; some also stress moral integrity and charity.¹¹ Both perspectives put a premium on good soil, heirloom skills, personal health, and freedom from dependency. The close-to-home strategy includes both of these camps and more, including small actions taken as modest hedges against the possibility of systemic shocks and all the ways that engagement in community fosters cherished human values. As long-standing community activists, we are motivated more by the desire to be proactive, but we also resonate with the wisdom of being prepared.

True to its name, the close-to-home strategy shines brightest when we make investment decisions about our home itself: choosing a region, community, and specific location we feel good about and making our home and yard a reflection of who we are.

One example of how deeply engaging this process can be is perma-culture, a form of ecological design that integrates a host of close-to-home strategies, including home-scale gardening and agroforestry, renewable energy systems, community planning, and much, much more. A marriage of the old and the new, permaculture systems are a tangible expression of the close-to-home investing impulse. As permaculture co-founder David Holmgren reminds us, “In pre-industrial society, the nonmonetary economies of the household and community, based on love, reciprocity, gift and barter, were the bulk of the economy.”¹² Regardless of what camp you might be in or how the future plays out, who wouldn’t like more love, reciprocity, and gifts in their life?

STRATEGY 2

Sustainable Global Economy Investing: Raising the Bar

As exciting as it may be to expand your notions of investing to include the full range of strategies we describe here, much of the resilient investor’s focus is likely to remain in the familiar realm of the existing global economy. That is where most of us have sought to build our financial assets (via salary and investment gains), and it is where we purchase most of our tangible assets: our transportation (whether personal or public, via airplanes or kayaks), our nifty gadgets (from juicers to smartphones), our food, our clothes—the list really does go on and on. Few of us would opt to give this up; we actively enjoy the fruits of this consumer cornucopia, many of which enrich our lives and empower our work and social engagement in profound ways. The role of this investment strategy is to help you work within the existing system as effectively as possible, making wise decisions and sound investments that move you toward your life goals.

Our approach to engaging with the global economy is, as the strategy’s name suggests, oriented toward nudging it into higher standards of environmental ethics and social justice—two key elements of sustainability and resiliency. We are asking more from all the players—governments, corporations, and individuals—because our world needs us to do more. By making sustainable choices as we engage with the global economy as citizens, consumers, and investors, our actions within the global economy will be aligned with our activities in the other two strategies.

But do not let our talk of ethics and standards mislead you—the quintessential goal of making money remains central here. Successful engagement with the global economy provides a billowing tailwind that helps us sail into a more abundant future. As we grow our financial assets, we may choose to convert a portion of them into tangible and personal assets, and we can save for major expenses: retirement, house purchase, kids’ college education, vacations, charitable giving, and the like. And while we agree with the critiques of equating GDP growth with societal well-being,¹³ it is also clear that the surplus generated by a thriving economy could be harnessed to reduce poverty and address environmental concerns.

Just as with the other two strategies, there is lots of room for making personal choices that reflect your own particular areas of interest. Some of you may be adamant about reshaping the corporate structures and priorities that underlie today’s global economy. Or you might diligently consider the climate, habitat, or social impact of your purchasing decisions. Others will focus on investing in particular green sectors (such as renewable energy, natural foods, and worker-owned businesses), or will prioritize building a career that expresses their values. While a full-on sustainability warrior may do all of this, most of us are likely to pick a few fronts on which to add our two cents to the direction of the global economy.

This strategy is rooted in the muddle-through-up scenario, one in which the world moves toward a more prosperous future. Herein lies one of the trickiest realms for the resilient investor to navigate: our efforts to achieve sustainability (so that we can muddle through up) are taking place within a market-driven economy, one that entices us with “low prices” but does not account for social and environmental costs (and so pulls us toward muddle through down). Every time we buy gas for our car, patronize a chain store, or go out to eat, we are straddling the line between our ideals and what is readily available today. Buy your shoes at a locally owned shoe store: the shoes still came from somewhere, and it was probably not a local cobbler; that smartphone you rely on could be filled with the spoils of remote mining activity and oppressive working conditions. And even when there is a greener choice, it may cost more, so you might not be able to afford it!

Indeed our sustainable global economy strategy coexists uneasily with the status quo global economy; suffice it to say, you will find lots of opportunities for honesty and self-reflection as your well-intentioned actions leave you short of where you would like to be. Often you’ll have tosettle for taking incremental steps. The best advice we know of to resolve these sorts of quandaries comes from a line in a Jiminy Cricket song, the one where he teaches Pinocchio how to make tough decisions, which is to “always let your conscience be your guide.”¹⁴

Perhaps the most significant personal-level engagement we have with the global economy is our career choice. To what degree are you able to make a living while also gaining inner satisfaction from this huge investment of your time and attention? What aspects of your resilient life goals can you bring to bear in your work and with your work colleagues? How do you strike a balance between the demands of earning money and all of your other interests? Asking questions like these taps our desire to play a meaningful role in people’s lives and to participate in the creation of a better world.

This same sense of personal connection can come into play while making financial investment decisions, a realm that has traditionally omitted this sort of reflection. Once we recognize that we have some leverage as stock owners, we can use it to effect positive change within the companies we invest in or to urge more-responsible corporate practices within the system as a whole. This has become somewhat easier to do as more corporations issue disclosure reports about their environmental, social, and governance (ESG) practices.

One result of our instant access to information is that we are increasingly aware of the consequences of our actions—and our inactions. This can lead people to decide not to invest in—or to boycott—the products of certain companies or even entire industries.

When garment factories in Bangladesh catch on fire or collapse, we learn which clothing brands ultimately bear responsibility for those deadly, inhumane working conditions.¹⁵ Exploding oil wells and the relentless progression of extreme weather events has led to calls for institutions to divest from fossil fuel companies¹⁶ and to the creation of a new category of sustainable mutual funds that are fossil fuel-free.¹⁷ And when the big banks’ risky and unethical practices caused a systemic financial meltdown, erasing a decade of market gains and putting millions of people out of work or their homes, the notion of “too big to fail” led to the “Move Your Money” campaign¹⁸ that helped people switch to local and regional banks so that their savings would support communities rather than foster reckless speculation.

The global economy has clearly produced remarkable social progress, but today there is a sense that things are stagnating, as if the economy is suffering from chronic fatigue syndrome. From 2003 to 2013, the inflation-adjusted net worth of the median household in the United States fell 36 percent.¹⁹ There is widespread doubt about whether the youth of today will have lives that are as good as their parents’. Concern about income inequality has soared as we watch the rich get richer while the middle class stagnates and the poor suffer the brunt of every downturn. And although the environment usually does not rank as high in polls when compared with these pocketbook issues, science is telling us that we really ought to be alarmed.

Many citizens are eagerly looking for strategies—both political and economic—to address these threatening storm clouds. The sustainable global economy strategy offers just that. It is based on the premise that our economic system can be changed from within, making it less exploitative and better able to meet human needs. Business-as-usual has a lot of momentum, so it’s not going to reorient itself overnight; moreover these sorts of changes will not happen without effort. They require an engaged populace, working with persistence and using every possible leverage point to nudge the global economy toward a brighter future. Fortunately, there is plenty that you can do right now.

STRATEGY 3

Evolutionary Investing: Transformative Solutions

Evolution. The word conjures up images of strange creatures on the Galapagos Islands or perhaps of fundamentalists in Kansas trying to ban the study of Darwin’s ideas. But our choice of this word to describe our most visionary strategy transcends biology. In Evolutionaries: Unlocking the Spiritual and Cultural Potential of Science’s Greatest Idea, Carter Phipps defines evolution as “a broad set of principles and patterns that generate novelty, change, and development over time.”²⁰ Since the nineteenth century, practitioners from many fields of study have found that an evolutionary framework helps explain the directional trajectory of knowledge—and that direction is ever forward!

Evolutionary investors are fueled by a conviction that “the principles of evolution are at work in our world today, helping to shape a future that will be better than the past.”²¹ The irrepressible human urge to experiment, make progress, and, yes, evolve is as strong today as it was in the twentieth century, a time when many science-fiction dreams became reality. At this very moment, people are working on breakthrough innovations that could address our most intractable problems: poverty, energy, the state of our planet, how to make our governments function better—in short, how we can live happy, fulfilled lives within a stronger, more resilient civilization.

Putting at least a slice of our pie into evolutionary directions is, in part, simply a wise, forward-looking approach to investing. It prepares us to take advantage of opportunities that others might miss, and it positions us to prosper in a world where humanity’s higher aspirations begin manifesting. Today’s most visionary investors are looking for exponential breakthroughs that may take a decade or more to come to fruition.

But let’s not pretend that the only reason to invest with an evolutionary eye is self-interest. Its brightest allure is that it offers us ways to actively participate in the progression of culture, science, politics, economics, and, perhaps most challenging, ourselves. Here we can satisfy our yearning to create a legacy for future generations, to “place our own hands on the levers of [evolutionary] processes and make a positive impact.”²² Thanks to the access that we now have to information, and to crowdfunding tools like Kickstarter, we can learn about and fund projects that spark our imagination; likewise, online collaborations are opening ever more opportunities to design our own livelihoods.

This strategy goes well beyond the sustainable global economy strategy, in which we focus on ways to incrementally improve the effectiveness of today’s existing structures. With evolutionary investing, we are working with a fresh palette. The invitation is to create a new vision of the world we wish to see, and then to invest our time or money into creating that world. David Korten calls for “a deep cultural and institutional transformation grounded in a story of unrealized human possibility.”²³ Charles Eisenstein guides his audience to reach for “the more beautiful world our heart tells us is possible.”²⁴

Be alert for the little synchronicities of life that might be showing you the way. Perhaps you will meet someone whose wisdom and insight stop you in your tracks. Maybe it’s an article you read or someone who touches you directly with their inspired actions. By having your evolutionary antenna up, you’ll be ready for those moments.

This does not mean leaving pragmatism out of the picture, but it does ask us to stretch into our most imaginative and innovative selves. Remember, what may seem impractical right now may prove to be viable, and profitable, if it truly meets the needs of our times. Who would have thought that we would see someone like Elon Musk set two companies—a car manufacturer and a solar installer—on a disruptive course aimed at enabling people not only to avoid gas stations but also to unplug from the electric grid?²⁵ Or that two young design graduates would found Airbnb, which now books more rooms than most hotel chains? Less well known but perhaps even more remarkable is the leaderless, bottom-up emergence of over a million organizations working to advance human society, as documented by Paul Hawken in Blessed Unrest.

Broadly speaking, there are two major tributaries feeding the evolutionary river, and both are swelling with fresh ideas. The evolutionaries riding these currents are engaged in the core activities of this strategy: the redesign of existing social and technological systems and the creation of brand-new ones.

On one stream you will find the “new economy advocates.” Paddling hard through treacherous rapids, these pioneers sense that the only way we’ll achieve long-term, shared prosperity is by making structural changes to the economic system. People like Marjorie Kelly of the Tellus Institute, Hazel Henderson of Ethical Markets, Gar Alperovitz of the New Economy Coalition, and John Fullerton of Capital Institute, to name a few, point out that the current system skews toward those who control vast amounts of the world’s wealth and, if left unchecked, will take us over a waterfall. They cite real-life initiatives aimed at meeting human needs and creating the conditions that will allow life to thrive for generations to come.²⁶

Sailing along the second branch is a flotilla of elegant, traditional craft and futuristic vessels. They are ferrying the planet’s “research and development team” into uncharted territory, tackling the dysfunctions of government, education, healthcare, and virtually all the systems on which we depend. Running this stretch of river can provide some real thrills! Finding it can be as simple as following a new tech site²⁷ or viewing a TED talk, which can open your mind to ideas and innovations that you never imagined. Perhaps you will catch someone like Amory Lovins, who for decades has been reinventing our energy and transportation systems, showing us how to wean off oil and coal and revitalize our economy.²⁸ Or Peter Diamandis, who says that “abundance for all is within our grasp” and maps out plausible steps to get there.²⁹ But today’s leaders are following in some big footsteps. Buckminster Fuller’s books and inventions have inspired generations of innovators. He summed up the evolutionary mindset in this way: “You never change things by fighting the existing reality; [instead] build a new model that makes the existing model obsolete.”³⁰

At the confluence of these branches is the capacity for inward reflection, the ability to view not only the outer world but also our interior qualities as a system that is capable of evolving. Albert Einstein, who would certainly qualify as an evolutionary, said it best: “We can’t solve problems by using the same kind of thinking that we used when we created them.” People who embrace this path take time to unplug from daily distractions so that they can consider a bigger perspective, have the courage to see their own strengths and weaknesses, invest some time into practices that can help them grow, and, last but not least, take action. It is all well and good to learn about cutting-edge projects, but when you come across something that compels you, it’s time to stop naval gazing, grab your paddle, and get into the flow. (Extra credit if you caught that pun!)

As we have emphasized throughout, this strategy does not depend on having the world move decisively toward its related breakthrough scenario. If muddling through remains the dominant scenario, or if we slip into a version of breakdown, you may still reap tremendous value by allocating a portion of your resources using this strategy. Just as, for example, there have been many successful investments in renewable energy, even while the energy system is dominated by fossil fuels, there is plenty of room for innovative, effective ideas to flourish within less-than-ideal circumstances. And as we will see, investments of your personal and tangible assets using this strategy make sense regardless of how things unfold in the near future.

In the investment world, the earliest investors in startups are known as “angel investors”; they are willing to take a chance on someone’s new idea because they believe in the person and want to help the innovation succeed. Evolutionary investing is where each of us, to subsume a term that is generally reserved for wealthy investors, can become angel investors for the future, helping foster novelty, change, and development. We hope you see this as a delightful prospect! But it’s also our duty to remind you that investments using this strategy often entail a high degree of risk. Whether you are personally trying new things or investing in people doing something that has not been tried before, you will want to keep your feet on the ground even as you aim for the stars.

The Missing Fourth Strategy: Show Me the Money!

As we have built the framework for the RIM, you may have noticed that we laid out four future scenarios in chapter 1 but are offering only three investment strategies. What’s up with that?

There is indeed a strategy that meshes with a muddle-through-down scenario, one that is as familiar to us as water is to fish. But just as a fish might not realize that it’s surrounded by water, we seldom notice just how immersed we are in business as usual. With this approach, which we call show me the money, we do three things:

Position ourselves to “get ahead” in the job world

Seek to find a “good deal” when we go shopping

Select investments using solely financial metrics

Show me the money offers easy-to-understand guidance on how to allocate our personal, tangible, and financial assets. It comes across as a good and proper way to live in the modern world, so much so that it is hard to think of it as a strategy per se. It actually functions more as a subconscious default response; we rarely stop to consider that it is just one possible choice among many. Our purpose in shining a light on show me the money is to acknowledge how deeply this economic norm is embedded in our psyche and to help us notice how and when we use it. Being a resilient investor requires that we have the flexibility to choose among various strategies, depending on the situation, but we cannot do that if we are not even aware of our habitual responses.

Life was not always this way; and even today there are many indigenous societies and outliers of mainstream culture that have not bought into show me the money as an organizing principle. How did the rich diversity of human motivations, from altruism and empathy, to devotion and service, to love and the Golden Rule all become secondary to the pursuit of wealth? Simply put: it works—or at least it has worked, for lots of people, over the past couple of centuries.

Amid growing prosperity, the ease of going along with the dominant paradigm was one of its great self-sustaining virtues; those who looked beyond the simple bottom line or questioned whether a market economy actually does produce the greatest social good were easily dismissed. As millions of people were lifted from subsistence living, a great body of economic work emerged to justify the dominance of this single-minded approach. Foremost among these precepts is the dictate to trust the market.

For investors and corporations, this unquestioned faith in Adam Smith’s “invisible hand” justifies any and all pursuit of private gain, since the precept holds that this is the most efficient route to bring about the greatest good for all. Arguments abound about what Smith really meant and how his ideas play out in a world vastly different from the agrarian times in which he lived.³¹ Nonetheless, by focusing on their own gain, most Americans feel assured that they are just doing their part, for the economy and the country as well as for their families and community.

Another legacy of this approach is what we might call “bowing to the bottom line”: prioritizing the maximization of profits and the minimization of costs. This bottom-line focus is one that we can all identify with when we put a price on our services or go shopping for the best deal. With this strategy, issues such as how and by whom a product was made, or whether there was an effort to protect the environment or workers, are given lip service or simply ignored.

As show me the money has become more deeply engrained, its effects have become more insidious. David Stockman, who led the Office of Management and Budget under President Ronald Reagan, condemns the “financialization” of our society as “corrosive,” turning the economy into a “giant casino.”³² Its extreme excesses, such as the securitization of shaky mortgages, are widely cited as the trigger that precipitated the economic collapse of 2008.

The fundamental reason why we do not include this strategy within the framework of resilient investing is its lack of accountability for the many social, environmental, and even spiritual externalities that show me the money leaves in its wake. These costs may be unintended, but they are nonetheless severe and are indeed borne by governments, the nonprofit sector, and society at large. This blanket neglect of responsibility is why we cannot recommend it as a strategy. Today, with our heightened awareness of the ways in which our personal decisions play into the various crises of our times, it has become more and more difficult to pretend that we can wash our hands of the suffering of others.

On the other hand, we recognize that all of us are participants in business as usual; it is unavoidable. We must be mindful of our financial situation, stretch our dollars as much as we can, and make decisions that are smart for ourselves and our families. So although we are concerned—very concerned in fact—that show me the money is exerting a downward pull on a muddle-through scenario, we hold our criticism for the strategy, not for those of us who sometimes, or even mostly, have adopted this approach to life.

Fortunately, there are other choices. Our three resilient investment strategies—close to home, sustainable global economy, and evolutionary—all include a built-in ethic that encourages us to balance our financial considerations with a wider range of desired outcomes.

We need to work toward a time when more people feel empowered to make choices that do consider the good of society and the world. Every time we go against the grain and invest in ways that are not solely motivated by making the most money, we are helping to do just that.