A Stockpicker’s Market in Philanthropy

In the stock market, there are times when most companies are able to ride a booming economy and produce good results. In these markets, it often seems as if investors can pick just about any stock and do well. At other times, the economy is so turbulent that only really well run or uniquely positioned companies are successful investments. These turbulent times are often referred to as “a stock picker’s market.” This phrase is meant to suggest that someone who can differentiate between stocks has an advantage over someone who simply positions their assets to participate in line with how the overall market behaves.

I think we’re in a stock picker’s market in philanthropy.

During the last six years we’ve seen a strong economy and growing interest in philanthropy. We’ve also seen a burst of new nonprofits with new ideas. As long as the economy and charitable giving chugged along, many nonprofits were able to stay in business and start new projects.

Today we’re seeing what many experts believe will be the deepest and most abrupt recession in decades. Since few nonprofits are able to build “equity” to draw on during tough times, they have little to no ability to withstand drops in funding without dramatically pulling back on their programs.

So we seem to have a number of convergent forces that will make it more important than ever for donors to fund the right organization and not just throw money at a cause. For the last few years, if a donor funded any nonprofit that was working on a cause they cared about, the donor could at least expect that the nonprofit would still exist in a year. Today, donors need to question whether the nonprofits they plan to fund are even a going concern. Nonprofits do not face strong market forces when you look at their programs. As long as they are good fundraisers, a nonprofit can run ineffective programs and still stay in business. But nonprofits do face harsh market forces on the fundraising side.

We’re in the early stages of seeing how this plays out. But I think that we are now in an environment where donors who attempt to pick the best nonprofits to fund rather than being content to give to nonprofits simply because they focus on a cause the donor cares about will see the fruit of their discernment through obviously superior results.

The fact is, tough times are when great organizations differentiate themselves. If you’re a Seth Godin fan, you’ll know that the economic turmoil is a “dip” that great organizations will roll up their sleeves and lean into.