Nusseibeh argues equity holdings should no longer be seen as a way to allocate capital, but rather, should be redefined as a method for owners to control the companies that determine their economic social destiny. This, he argues, is the whole reason (or ‘why’) for investment and means, the $75 trillion in savers’ capital should have a dual purpose of stewardship as well as wealth creation. Skipping out on stewardship reduces investment to mere gambling.
Looking at ‘holistic return’, which includes the impact of investment on societal outcomes, is the rational way to approach investment and measure the success of that investment, he argues, Further, by applying this holistic return approach, he hopes reconnect the financial world with its impact on our lives and our futures.
Saker Nusseibeh, 300 Club, said: “That investing has become a glorified form of gambling on the roulette wheel of the economy is amply illustrated by the trading nature of active funds, the move to index funds, factor investing, derivative instruments and high-frequency trading, which are all treating the market as a directional bet.”
The dysfunction experienced in today’s financial markets, Nusseibeh argues, stems from treating economics as a science, looking at the ‘how’ rather than the ‘why’ of things. If we continue to force observed financial market outcomes into our existing financial and economic theories and laws, rather than rethinking the purpose of investment and how we approach it, we end up in a nonsensical world.
Nusseibeh said: “The reason we ‘invest’ goes beyond the simple quest for wealth accumulation. If that were the case, we would simply do so through a poker ‘bot’ or with a top-seeded poker player because their ‘hit rate’ exceeds that of active managers or asset allocators. Instead, it has to do with the fact that we, as citizens and investors, shape the society we live in. In other words, the $75 trillion in savers’ capital is not separate from the economic-social fabric we live in, but is instead not only an intrinsic part of it, but also a tool to control it.”
The current misguided focus on the ‘how’ has led to a dislocation between capital and control, as the C-suite of large corporations has assumed the rights of owners and not the shareholders. Economically speaking, according to accepted theory, savers have only a tangential relation with corporates despite the enormous influence those corporates have on savers’ lives.
The capital markets system, Nusseibeh argues, has reached a stage where it is primarily self-perpetuating. The Brexit vote and the US Presidential election clearly point to a disenchantment of the majority with the way the free market model appears to be working.
Nusseibeh stated: “Because of the enormous control quoted companies have over the lives of ordinary citizens who own their shares and over society, we must look for the social purpose – the ‘why’ if you will – in something other than capital-raising, dividend pay-out and capital accumulation. It seems to me that with the maturing of the capital markets, shareholding should serve a different purpose. It should be a tool for savers to exercise their democratic will as owners in directing this economic machine in a way that serves them collectively as well as individually in the long term. However, to accept this precept implies profound changes to the way we invest. It implies that a large part of the reason for investing in quoted companies is stewardship.”
This is particularly pertinent, Nusseibeh argues, because the importance of the secondary and tertiary effects of investment on society, which are particularly key to the vast majority of savers, is not grasped by the financial services community.
For example, if Company A uses perfectly legal methods to pay less tax than it should, it earnings and share price go up. An investor has therefore made an economic gain equivalent to that rise. However, tax revenues for government will fall and, in turn, public services will need to be cut or taxes will need to rise to make the difference between what Company A should have paid and what they actually paid, a cost that is borne by the self same investor.
Nusseibeh concluded: “If that investors lives in the developed world, they will retire with a lump sum of £300-500 thousand, which translates to about £11-18 thousand per annum income. At this level of income, certainly in the UK, they cannot cope financially without the additional support of government tax breaks, services and pension of about £4-6 thousand per annum. That is why it is so crucial to them that the collective tax take of the country is not compromised by economic misfortune or specific company action.”
“By looking at both sides of the ledger, we can therefore demonstrate that the investor’s economic gain is a mirage. We need to incorporate the ides of calculating the effects of any investment to include secondary and tertiary effects on society within the parameters of traditional financial economics. This is holistic return.
“Looking at holistic return is a rational way to invest and to assess the success of our investments, and by applying it we will manage to bring the financial world back from the virtual, dislocated place it occupies at present to become relevant to our lives and our future.”