The following is an exclusive excerpt from Uninvested: How Wall Street Hijacks Your Money & How to Fight Back, a new title from Penguin Random House, out August 4, 2015.
Investing in One Dimension
Third-party analysts, such as Morningstar, credit- rating agencies, traditional accounting firms, and the financial media, have trained investors to consider their investments in exclusively financial terms. Mutual funds, in particular, encourage this one-dimensional perspective. Because funds and pundits are most comfortable with conventional metrics such as earnings per share, market capitalization, and quarterly returns, they emphasize these topics in their assessments. The success of an investment is nearly always measured by its return.
This highlights one of the major sacrifices one makes by investing in mutual funds and underscores a major missed opportunity for many kinds of investors. Though the financial component of investing is critically important, invested capital can also be a powerful way to influence social, environmental, and economic issues that are important to you.
Investment must be seen as an endorsement of a corporation's practices, activities, and values. Investing in a company is like voting with your dollars. Doesn't it make sense to support the companies, products, and services that you like and believe in? And to withhold your capital from corporations that you don't like or believe in?
Mainstream mutual funds make selective, values-based investing nearly impossible, given their typical blanket approach. There is, however, a small and growing subset of funds that do acknowledge issues-based investing; the number of "socially responsible investing" vehicles increased from 55 in 1995 to 493 in 2012.41 Still, these types of funds account for a relatively modest share of the market overall, and they don't resolve many other issues inherent in mutual fund investing.
Funds require a transactional type of investing: an investor's involvement begins with handing over her money and ends with a quarterly statement. Though mutual fund investors have been trained to stand on the sidelines, their money connects them to hundreds of companies and makes them complicit, consciously or not, in their activities. The most rewarding (and financially productive) investments offer investors the opportunity to open a dialogue, exert influence, and express an opinion. When you buy a share of stock, for example, your investment entitles you to attend the company's annual meeting and vote on important corporate issues such as executive compensation and who sits on the company's board of directors.
If you can't attend the meeting in person (few investors do), you can vote by proxy- sort of like absentee voting in a political election. This proxy voting is a major opportunity for investors to advance their own agendas and influence the decision making within corporations in which they've invested.
The potential of this mechanism for influencing corporate behavior remains largely untapped, however. There is a critical difference between owning stock outright and "owning" a stock through a mutual fund. When you buy a stock outright, you are eligible to vote your proxy. When you buy into a mutual fund, you are not. While the vast majority of stock is "owned" through mutual funds, the fund managers vote on the investors' behalf- usually without their input- on corporate issues with social, environmental, political, and financial implications.
Though some funds may solicit opinions from their shareholders on proxy issues, ultimately fund managers have full discretion over the vote. When you buy into a mutual fund, you surrender your vote and your voice.
This excerpt appeared on TheStreet.com in agreement with Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House LLC. Copyright © Robert C. S. Monks, 2015.