I’m one of those people who uses words like “investing”, “leverage” and “impact” when I talk about philanthropy. For some people, this sort of language seems to imply a passionless approach to philanthropy. As if investing was nothing but a number crunching exercise.
But having spent part of last week at the Social Venture Partners conference, I can tell you that social investing is anything but passionless. The social investors who attended the conference (about 200 of SVP’s 2,000 members) are deeply passionate about philanthropy and the causes they support. They are so passionate that they want to be sure that the work they do actually produces results. The focus on results is a result of passion rather than a barrier to emotional connection. The front page of the Social Venture Partners International website reads: “SVP is a network of individuals who care passionately about making the world a better place.” Yet somehow, discussions of social investing, or for that matter any analytical approach to giving, is painted by detractors as lacking passion.
I’ve been steeped in the world of investing since I was a teenager. For me, words like “investing” are not dead and boring, but instead are full of passion and life. So I want to revive a conversation we had on this blog almost two years ago. In early 2008, I wrote a post about information sharing and efficient markets in philanthropy. My friend Phil Cubeta read the post and wrote:
The logic here can become relentless and destructive. What this tends towards a lists, like league tables in a sport, with the best at the top. It leads then to managing a nonprofit by the numbers, to get the rating, and it leads to shutting down those that don’t rank high. We then have the tyranny of the metrics, however much arbitrariness is built into them…
The world you want – are you sitting in corner office reading a spreadsheet?
I repeat my response to Phil then to add some color, some passion, to the debate about social investing:
Are the philanthropic capital markets I envision boring and lifeless with endless spreadsheets and numbers to crunch? Not in the least.
Economics is often called the “dismal science”. I know that many people think that finance is boring. But the vision of financial markets as nothing but numbers and spreadsheets does not capture the reality. Do investors buy stock in Apple because they spent hours and hours processing spreadsheet calculations? No. While at the end of the day, buyers of Apple stock believe that the return on capital being generated by the company will make for a profitable investment, the information they use to determine that are not just numbers. The way in which Apple has captured the imagination of the consumer, (an intangible piece of data that cannot be added to a spreadsheet) is by far the most valuable asset that Apple has and it is a major reason why investors have flocked to the stock.
Have you ever watched CNBC, the news channel of the financial markets? It is far from some kind of spreadsheet crunching lecture. Every day, investors or all types come on the show and make passionate arguments for why certain companies are good investments. While numbers and calculations underlie much of their thinking, it is the story, the human story of the companies they discuss that take center stage.
Warren Buffet is widely considered the best for-profit investor of his generation. Does he sit in a corner office reading a spreadsheet the way that Phil suggests? The quote below is from noted investor Whitney Tilson (Tilson is a huge fan of Buffet and a fellow columnist of mine at the Financial Times):
If the future were predictable with any degree of precision, then valuation would be easy. But the future is inherently unpredictable, so valuation is hard — and it’s ambiguous. Good thinking about valuation is less about plugging numbers into a spreadsheet than weighing many competing factors and determining probabilities. It’s neither art nor science — it’s roughly equal amounts of both.
The lack of precision around valuation makes a lot of people uncomfortable. To deal with this discomfort, some people wrap themselves in the security blanket of complex discounted cash flow analyses. My view of these things is best summarized by this brief exchange at the 1996 Berkshire Hathaway annual meeting:
Charlie Munger (Berkshire Hathaway’s vice chairman) said, “Warren talks about these discounted cash flows. I’ve never seen him do one.”
“It’s true,” replied Buffett. “If (the value of a company) doesn’t just scream out at you, it’s too close.”
Taking liberties with Tilson’s quote, I would argue that donors should not “wrap themselves in the security blanket of metrics” because “the lack of precision around measuring the impact that nonprofits achieve makes them uncomfortable.”
World-class investors do not sit in their office crunching spreadsheets all day. Neither should world-class donors. But the underlying logic of both should be that of achieving the highest return on investment.