Investors need to stop treating stocks as a ‘beauty contest’ and follow the difficult investment style of Keynes, global pension expert Keith Ambachtsheer said.

Data produced in a working paper from the Harvard Business School showed that portfolios built on firms with a good material sustainability rating outperformed those that had a poor rating, an aspect not considered enough by investors who were caught up with quarterly returns, Ambachtsheer said at a Chartered Financial Analyst seminar in Sydney on Monday.

“What I see happening out there is largely speculation – what Keynes called ‘beauty contest investing’, where everybody tries to figure out what the most popular stocks are going to be in six months, buys them and when they become really popular sells them,” Ambachtsheer said.

He added the implications of this investment style as an aggregate was a zero sum game, whereas investing should be taking savings and turning them into wealth producing capital.

“The key thing is you need to look beyond the next quarter; you look at the long-term sustainability of the business model of the corporation, as well as the people behind it in terms of how it is being managed.”

The Harvard Business School (HBS) working paper superimposed the Sustainability Accounting Standards Board materiality map (which identifies likely material sustainability issues on an industry-by-industry basis) onto 400 common US stocks identified through sustainability metrics from Kinder, Lydenberg, Domini Research & Analytics.

They examined what effect materiality would have over the long-term (starting from the 1980s) and found the top 10 per cent of firms that scored strongly on material sustainability outperformed the bottom 10 per cent, by nine per cent over a rolling twenty-year period.

“The practical question is, can you actually manage money this way in the real world? And the answer is yes, but it’s very hard, because you are doing unconventional things,” Ambachtsheer said.

Real-world Keynesianism investors – such as Warren Buffett and the Ontario Teachers’ Pension Plan – are in a minority despite outperforming over the long-term. In chapter 12 of his seminal work The General Theory of Employment, Interest and Money, Keynes explained the reason for this was the essence of long-term investors meant their behaviour would be eccentric, unconventional and rash in the eyes of average opinion.

“Most organisations can’t function like this,” Ambachtsheer said, as they were too focused on the present.


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