A Challenge to the Oracle of Omaha

A few months ago, a number of my classmates flew to Nebraska to have lunch with Warren Buffett. After the meal, someone asked him his opinion on impact investing. His response was similar to the one he gave at the Forbes 400 Summit and equally disappointing. Buffett felt that investing and philanthropy should remain separate. “It is sufficiently challenging to succeed in either sector,” he said, according to my classmates. Trying to balance multiple objectives was too difficult.

While I do not doubt the commercial acumen of the Oracle of Omaha, I am frustrated that this is the opinion of someone with such sway over the investment community. Therefore, as a person with a keen interest in impact investing and a bit more faith than Mr. Buffett, I want to share my thoughts.

1) Impact investing is new

The concept of Value Investing has existed since the 1920s. Academics have written countless books and published hundreds of studies on the topic, and it has a champion in Mr. Buffett. The term Impact Investing did not enter the general lexicon until 2007. There is still debate about whether certain assets or portfolios are socially beneficial or just another form of investing in emerging markets. Warren Buffett has predicted success and failure before, but judging Impact Investing feels premature since few funds in this category have closed.

2) Impact investing is small…but growing

According to JP Morgan, the market capitalization of impact investing funds is expected to grow from $36 billion to around $700 billion by 2020. That is a 20-fold increase in equity. Funds will have more money and the ability to experiment with new strategies to generate financial and social returns. Impact Investors represent less than 0.1% of all financial assets. They should have the chance to grow to see if they can deliver.

3) Impact investing is exciting

Just because something is hard, doesn’t mean it isn’t worth doing. Philanthropy is a noble cause but it could benefit from the rigor and scrutiny of the financial world. New financial mechanisms such as social impact bonds are being used to address issues ranging from prison re-admission rates to malaria. I imagine the billionaires Buffett and Gates are asking to donate half their net worth to charity would appreciate being treated more like shareholders than benefactors.

It can take years for new concepts to be accepted and considered successful. I can only hope that I can one day use this anecdote as a comical example of how one of the savviest investors missed out on one of the great opportunities of our generation.

Isaac Gross is a member of the 2015 MBA class at London Business School. Before coming to London Business School, Isaac worked for the Clinton Health Access Initiative in West Africa and the USA. In Africa, Isaac managed a $10 million HIV medication donation, which provided lifesaving medication to over 50,000 people. He also advised governments on cost reduction strategies. In one instance, he helped Ivory Coast save over $3 million by convincing policy makers to update their HIV treatment protocols and buy medication from low-cost generic manufacturers. Isaac is at London Business School because he wants to transition from public health to development finance. He is on the executive committees of the Africa and Net Impact Clubs at London Business School and enjoys playing golf, tennis and rugby. Isaac graduated from Brown University in 2007 with a Bachelors in Science in Psychology.

 

I think Phil sums it up nicely here: Is Impact Investing Just Bad Economics?

...socially conscientious investors are playing for non-economic stakes, yet they compete against investors who are serious. This result is a transfer of wealth from the former to the latter. I encourage my clients to avoid all this metaphysical hairsplitting and high consciousness one-upmanship. Invest in companies to make money, not to feel virtuous...
"Everybody needs money. That's why they call it money." - Mickey Bergman - Heist (2001)
 

He makes some good points, especially regarding the need for better program evaluation of initiatives such as micro-finance. Has anyone actually tried his long "vice"/short "socially conscious"/donate the proceeds strategy? The social sector is desperately in need of better benchmarks. Organizations such as Give Directly (http://www.givedirectly.org/index.php) or the fund he suggests could be interesting references for social returns

 

I did laugh at that part of the column. It reminded me of the "buy term, invest the difference" advice for life insurance. How many people actually do that? Very few I'm sure.

"Everybody needs money. That's why they call it money." - Mickey Bergman - Heist (2001)
 
Best Response

I just wish we would stop calling Buffett an "investor." He is a businessman who takes over companies and actively manages them, and he is an active government lobbyist. I think calling Buffett an "investor" clouds the investment analysis of everyone who follows this guy. I've said it a million times before--unless you can take over a company and implement your own management and lobby Congress, then what Warren Buffett does is irrelevant to how you should approach your own investments. "You" (generically, inlcuding me) are not Warren Buffett.

 

"It can take years for new concepts to be accepted and considered successful. I can only hope that I can one day use this anecdote as a comical example of how one of the savviest investors missed out on one of the great opportunities of our generation."

Understand where you are coming from since your opinion is particularly slanted here, but there have been countless articles trying to punch holes in Buffett's investment philosophy and whether or not he is "old news". I can tell you a whole lot about Warren Buffett, but I couldn't name a single one of those people who wrote those articles, and I never read any follow ups that screamed "I told you so." But, still, best of luck being the first.

"Decide what to be and go be it." - The Avett Brothers
 

And as an aside, I tend to avoid investing in any companies who push a social agenda as part of their mission, strategy, etc. above and beyond what is generically implemented at most corporations. I still don't see how trying to spend half of your time as a business trying to change the world can provide significant ROI for me if you are a chemical company, manufacturer of toilet paper, microchip producer, etc. The free lunch would be at my expense.

"Decide what to be and go be it." - The Avett Brothers
 

As someone else interested in impact investing, I like the tone of this article. I recently did a consulting trip to e townships of Johannesburg and I would like to say that I believe impact investing still does have a ways to go. At best, it is presently a slightly more efficient form of corporate social responsibility with a bent on entrepreneurialism and bootstrapping oneself out of poverty; at worse, however, it takes advantage of the eager aspirations of emerging market poor and once again siphons wealth off to the top of the pyramid. Base of the pyramid innovation is going to be big, indeed, with 4 bn people in that group and some 70+% of the worlds under 25 population, but we have to be very careful in this space...

"Apparently there is nothing that cannot happen today." -Twain
 

I'm going to take a go at this.

Impact investing can be perceived as investing in a company with 2 goals in mind:

1) Increase target company's sales, profits and market share to drive valuation 2) Target company has strong beneficial social impact or provides important services to an under-developed demographic

I think there's also two ways to spin or think about these impact investments as well. You can take the cynical route, and call it a company using its business model as a gimmick to grow and make money. Or you can take the objective stance, and describe the company as using its business model to provide necessary services to an under served demographic that would otherwise suffer without those said services.

Personally, I take the stance that I would like to grow my wealth by investing in companies that have a positive social impact.

 

this concept is not new, this flavor is new. people have allowed personal beliefs to invade their investments for years. look at islamic finance, kosher finance, catholic endowments, black enterprise, etc., it all depends on the degree to which you want to go. for decades after tobacco deaths became a thing, people would refuse to buy PM, RAI, or LO not based on economics, but based on personal beliefs. many people shy away from "sin stocks," or stocks of defense companies because they sell weapons to our enemies. you can take this to the extreme where you won't buy a large pharma company because 1 basis point of their sales is from birth control pills or because their CEO is protestant, or you can simply ensure that the companies in which you invest have environmental programs you support (which every single S&P 500 company likely has).

this is similar to the argument of the separation of church & state. value investing was founded on the principle being somewhat agnostic, if you have good business economics, who cares if you destroy the environment? on the other side of that, you have impact investing. in my opinion, there is definitely a place for it if you have a massive amount of wealth. it's rarely going to be the most optimal decision from an economics standpoint (because your portfolio would consist entirely of Tom's shoes and Bono's sunglasses), but if you want to create a legacy, it's a hell of a noble way to do it.

 

Multiple goals cloud your judgement. "Impact investing", under different disguises, such as stakeholder value, has been dismissed as suboptimal in Corp Fin textbooks for decades now.

The classic example is the car-boat. You got a crappy car and a crappier boat. What Buffet actually did is much more effective. Make a bunch of money and the give 37 BILLION dollars to the Gates Foundation (arguably the most effective "impact" organization in the world). That saves a lot of lives and you can do the math on it too.

Of course, if you want to invest in undeveloped countries because you think the returns will be better, that's more reasonable, but you're still playing an old game. That's regular frontier investing with a SRI constraint (maybe food and telecom is OK, tobacco isn't)

 

I like your analogy, though I'd prefer the car-boat to a Porsche in the water and to a yacht on the freeway. The Gates Foundation is a really fantastic organization, but that doesn't mean other initiatives don't have potential. Though multiple goals add extra layers of complexity, the potential for positive change is enormous if people can get it right

 

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