Slow Money National Gathering, VT June 2010

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Miles Miller
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1 Transcript of Robert Zevin s keynote speech Slow Money National Gathering, VT June 2010 Robert: Thank you all. Speaking of Bill McKibben, I was thinking when he was speaking, that for the first time since my mother died some twenty or thirty years for the first time I was kind of glad that she was no longer among the living, so she wouldn t have to bemoan my fate at having to follow Bill McKibben in front of this audience. So, what he asked me to talk about, the history of the socially responsible investment movement, where it s leading, and what it had to do with Slow Money. Just in case something happens, I ll give you the bottom line first, which is I think where it s heading is Slow Money. That doesn't necessarily mean the organization Slow Money, that's up to us whether or not it does, but I think it definitely means the idea of Slow Money, which is as everyone has already said and as everybody in this room obviously already knows, is almost the exact opposite upside down of the world we now live in. But not the world we always lived in. So, I started in the social investment movement a few years before McKibben was eight years old. Those were the 60 s and I thought I d start by saying a little bit about who the people were who wanted to be socially responsible investors in those days. I think the vast majority of people who were my early clients were the 60 s generation of students- people who were then in their 20s or early 30s, and almost always had inherited money, and almost always felt some discomfort, I think guilt might be an even better word, about having that money and they wanted to wash their hands clean sort of all of the evils that they and I and all of you perceive in the system that we live under. Many of them were trying to lead lives that were clean of that entanglement as well, by living in cooperatives or communes in places like Cambridge, Madison, New York, and Berkeley often by living in agricultural communes, which were also very popular in the 60s. I have to say that almost none of them lasted more than five years, for reasons having to do mostly I think with unrealistic romanticism of the people who founded them without having had any experience at all growing things. So, what I said to these people was: Well you know capitalism s here to stay. It s been around for a long time, it goes up and it goes down, but it doesn t seem to ever go away. So, it s probably not realistic any more than it was for Lady MacBeth, to really wash your hands clean of it. The realistic thing is to say: since you have money, since you are an investor, what can you do on the margin to improve capitalism, to reform capitalism, to make life a little bit better? What can you do that would be effective in the same for what you do with your life, and your time and your talent? They bought it, and, of course, since I said it I believed it, too, and we did make some changes, I think. We did well by doing good, and the good was mostly at the level of reform: integrating corporate boards with respect to race and gender, changing corporate policies about sexual orientation, changing corporate policies at one level, at least, toward the environment- at least seeing some recognition on the part of many companies that they had a responsibility to the environment, and, of course, intervening sometimes in labor disputes and having an effect as shareholders on the outcome, and most important in my mind and also the thing that I spent the most time on, being one of a number of members of a broad coalition that helped bring an end to Apartheid in South Africa.

2 So we did good, and we did well also. I think on average many of us did a lot better than the stock and bond markets, and other financial markets. Some of us did worse, but on average I think we did at least as well. So, the fact that we were able to play a social role and match- most professional investors actually don t do as well, so do a little bit better than other professional investors and kind of match the index investor or the so-called amateur household investor. So, that was pretty good, too. That s the part that has worried me a lot over time because it seems to me the way we matched it is getting sucked into the fast money game- which of course as everybody knows grows faster and faster in the financial world than anywhere else. So, for example, for a long time social investors have faced the question: How should we vote when there is a resolution brought by, often by management, to have two different classes of stock with different amounts of votes, so that a family or any patient investor who is willing to hold the stock for more than a year, or more than two years has stock with more votes than other people have. And how should we vote when the corporation wants to have a staggered board of directors, (only) something like the US senate, only one third coming up for reelection every year. And for the most part, the way social investors have voted is against those resolutions, and in favor of what corporate America and social investors, alas, call corporate democracy, which really just means plutocracy because all corporate democracy means is that anybody with enough money to buy more than 50 percent of the stock can do whatever he or she wants because they can replace the whole board immediately- they have all the votes they need to do whatever they want to do. We know what they do. They try to break labor unions, they try to move factories to low wage areas or countries, they cut back on employee benefit programs. They eliminate research and development. They cut back on all other investments in the future of the company. Because they ve cut all these expenditures, they report suddenly very much enlarged profits, and about two years later they turn around and they sell the company back to a gullible stock market, but it s a ruined and gutted company. It seems to me profoundly wrong that we should have played, whatever, minor role we played in that, but we have, by it seems to me voting on the wrong side of that issue. Of course, the reason investors vote for corporate democracy is they re hoping that the next company that somebody comes along and buys at a 50% premium over today s price is gonna be the one they own in their portfolio. Why not? So, that s a problem I think, and the answer to it, of course, in terms of how we vote our proxy resolutions is pretty straightforward. That s the way I ve always voted, and I don t know if there are any other social investors who vote that way- I assume there are, but not too many. In general, social investors don t seem to put their minds to trying to disentangle themselves from fast money in all the different ways that it dominates the stock market. Woody talked this morning about the so-called Flash Crash a couple weeks ago maybe a month ago, in which the Dow Jones Industrial Average fell a thousand points in ten minutes and some stocks fell from 40 or 50 dollars to one cent and then all the way back again. This is a reflection of the fastest of the fast money- so called high-frequency trading, which is now more than half the volume on the New York Stock Exchange, which consists of people buying and selling a position in a stock within one second all day long. And so, you can see the potential for disaster in that kind of a highfrequency system if somebody just doesn t happen to be there to buy what somebody else is trying to sell. And they buy and sell in very large volumes.

3 So, the solution to that problem has been known for a long time, even after the stock market crash of 1987 the very conservative economists, who were called to study the reasons for that crash by Reagan s Secretary of the Treasury Simon, concluded among other things that stock markets were always dangerously volatile when commission levels were low and it was very inexpensive to trade. That s why foreign exchange markets are now a casino, and that s why derivatives markets are now a casino. It s very, very inexpensive to make multi- billion dollar bets. Every day the trading in global currency is more than a year s worth of global trade. So, that s crazier than the stock market. But, what can we do to stop it? A lot of it is government policy. You could have a so-called transaction tax, which has been bandied about and supported on-an-off by the governments of the UK and Germany and a few other places and resolutely opposed by the United States government and of course by the banks and the brokers. But we can do other things as investors it seems to me. We don t have to let our trading volume increase with everybody else s. Not only have the high-frequency traders increased the volume on the New York Stock Exchange, but even if you take them out you have turnover on the value of the whole stock exchange about once a year in the remaining trading besides high-frequency, which means the average investor doesn t hold an investment for as long as a year. Unfortunately, I think social investors have allowed their own inclination to buy and sell a lot to go up as part of that rising level of speed and insanity. But we don t have to do that. We could do a lot of things. If a client comes to us and says these are my assets, we don t have to do what we often do do and say: Oh boy, you have too much in real estate, you should borrow some money against your house and your farm and we ll invest it in stocks and bonds. Or if a client comes with a lot of stock in a family business that has been inherited- it could be a big family business or it could be a small family business, we don t always have to say you need to diversify, you need to sell some of this. Very often it s equally good, very often it s better advice to say: This is a good company, you know it well. You are emotionally attached to this company, why don t you just keep it? You don t need to be my client, you re fine. That s often the slow money answer I think, which we all too infrequently give. The truth is that while the stock market sometimes does pretty well and sometimes doesn t as we all know, there have been at least two decades out of the last 50 years when the stock market has made nothing for the whole decade. It s not such an open-and-shut case that the smartest thing to do for a maximum long-term return is to always just be fully invested in stocks. It s also not such an open-and-shut case, that if you do want to have an equity interest in some kind of business, that the best kind of business to have an equity interest is a publicly-traded company. The evidence is that privately-owned businesses, worker-owned businesses and family-owned businesses all do better. They all have higher rates of reinvestment in the business, higher rates of growth, higher rates of employee retention and employment growth than publicly-traded companies on the stock exchange. The reasons are well known and they have a lot to do with fast money because what drives the managers of publicly-listed companies is next quarter s earnings report. They will do incredible damage to the next decade s opportunities in order to preserve a positive surprise in earnings for the next quarter. Of course, it s a loser s game in the end because everybody is playing the same game. Everybody can t have a positive surprise every quarter. So, it s speed just for the sake of speed in the end. There s no useful purpose served for anybody.

4 But we don t need to play that game. We have the capability of helping clients make slow money investments, private investments in farms, in the community, in co-ops, in community health centers. We have the ability to help clients decide to invest money in community credit unions or community development banks like Wainwright bank in Boston or Shore Bank in Chicago. We have the ability to spend more time than I think we do trying to understand extremely well the particular stock-market traded companies that we do buy, to make sure that they have sustainable, long-term growth in a financial sense as well as in an environment and social sense. If we bought companies like that, why would we need to buy them and sell them all the time? Why couldn t we just spend a long time picking the 20 or 30 companies that we like the best and making those a portfolio that we would leave alone? So, we would make another statement against fast money by having very low turnover in our equity portfolios. In sum by committing ourselves to play by the existing rules, we have signed up for fast money. We ve signed up sort of for the conventional investment wisdom, which is like most of the wisdom that economists learn and teach not necessarily wise or true. The conventional wisdom is you should always own stocks. It s possible to pick stocks, but it s not possible to decide when the whole stock market is cheap or expensive, which I think is just not true. The conventional wisdom is you need to have liquidity, which is another word for fast money in a way. You need to have something you can sell right away, otherwise it s worth less. I think we have an opportunity to play our part as social investors in the slow money movement by changing that direction in what we do, and by making ourselves more slow money investments. Thank you. Q & A following the speech: Q: What would be the investment tools for a non-accredited investor to invest in a local food system? What would that look like? Investment Club? Holding Company? Some other cooperative? How do people with average money put that out to average farmers and local food systems that doesn t get in trouble with securities and exchange commission laws? Robert: There are a number of people who have done it in a number of ways. Perhaps you are familiar with Accion, which borrows money from people in relatively small amounts, you know around $5000 amounts, and relends it to cooperatives originally in Latin America and now also in poor inner-city US communities and also rural US communities. There s an organization I helped start called Shared Interest, which does the same thing to support the informal economy in South Africa. We don t register our loans with the Securities and Exchange Commission. We found ways even to take in as little as one thousand or two thousand dollars through intermediate institutions like churches. So, there are a lot of ways to do it. I m a little out of my depth in terms of the exact legal distinctions and why you don t have to register. Non-profits in general don t have to register. If the Red Cross wants to borrow money, they don t have to register the debt issue exactly. Q: Is there a difference also, in that same regard, between lending money to these groups, these farms etc. and buying an equity interest in them? Robert: Yes, there is. Buying an equity interest certainly does raise more regulatory issues. If the number of buyers is less than some number like 30 or 35 and if the amounts are relatively small, which is to say you know less than $25,000 a piece or less than $10,000 a piece, and if most of the investors actually know the people who are running the business they are investing in, than it s generally exempt.

5 Q: Is there some manner of legal landscape that we could all have access to so that as we develop our local aggregating fund mechanisms or whatever it is in each of our respective regions, that we can have access to this kind of collective wisdom? Robert: I m not sure in terms of pure legal advice. There certainly are a number of people trying to develop difference systems for creating, that bad word again, liquidity in this market, so that if somebody does need to sell for whatever reason, there s a buyer that could be found. There are people trying to develop that. There are people trying to develop, actually, ratings for these privately-placed loans, so that somebody like me wouldn t have to do the due diligence every time. There d be a rating agency to do that due diligence. There would be some level of trust between the buyer and the seller that it wasn t like Moody s and Standard and Poor s, it really was disinterested analysis of the creditworthiness of the loan. Q: You didn t mention the concept of diversification and reduction of risk, and I was wondering if you could address that from the perspective of Slow Money? Robert: Yeah I think that it s badly misunderstood by the investment community. To be meaningful, diversification has to mean that in different macro political-economic environments where some things you own will do poorly, you have a high degree of confidence that other things you own will do well and offset that. For the most part, being diversified in the US stock market, and now with globalization and faster and faster money being diversified in the global stock market, in the sense that you own 40 or 50 different companies doesn t really help you that much in those terms. Another reason it doesn t help very much is Warren Buffett s famous point that he d rather own one company that he really knows and understands than like most investment managers 40 or 50 companies that he knows nothing about. The truth is that most investment managers don t know that much about the companies they buy. They think they re diversified because they buy 40 or 50 companies that they don t know anything about instead of buying even one they know very well. That s why I used that example- it s based on some real-world experiences. Somebody inherits a lot of stock in a company like Colgate, or once upon a time Campbell Soup, and comes to me and says you know what should I do? It seemed to me, especially when capital gains taxes were higher, that the correct answer was nothing. Just keep it, it s fine. You re OK. You know this company. Your family was in this company. It s a well run company, it does well on social criteria, pays a good dividend, is not overpriced. Just keep it. That s, I think, considering the cost of owning things you don t understand, of paying the taxes, of the transactions cost, those are all good reasons I think for not being diversified in the sense of owning a lot of things, rather than one thing you really understand. But of course, there s something to be said for being diversified in the sense of having cash or bonds, or real estate, or a farm in Vermont in addition to whatever stocks you own.

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ECO155L19.doc 1 OKAY SO WHAT WE WANT TO DO IS WE WANT TO DISTINGUISH BETWEEN NOMINAL AND REAL GROSS DOMESTIC PRODUCT. WE SORT OF GOT A LITTLE BIT OF A MATHEMATICAL CALCULATION TO GO THROUGH HERE. THESE