The Key to Investing Heaven

Importance of investing and why we should take risks while investing in stock markets.

The late Carl Sagan, besides being a renowned cosmologist, was also an ‘activist’. Ann Druyan wrote incisively about scientific activism while writing on Sagan: “What should we expect from the scientist who grasps a danger brought about by science? Should he/ she hides silently behind the protective wall? Most of rests of us are scientifically illiterate. We are conned. All governments lie, and few of them ever demonstrated a concern for the future beyond the next election. If the scientists must refrain from activism or even public education, how can we hope to successfully avert these dangers?”

The parallels between scientific activism and shareholder activism are many. Corporations, like governments, often lie. Many long-term minority investors- scientists, for instance- do not have a sense of their own responsibility, and choose not to have the time or the energy to play an active role in corporate governance. Investors must become ‘citizens of the corporation’, and not refrain from activism when needed.

One specious argument made is that investors in publicly quoted companies can always vote with their feet, and sell when their concerns do not find a receptive corporate ear. But what is individually rational is collectively irrational. This behavior is appropriate for investors who view themselves as short –term riders, not as owners.

Richard Feynman, one of the twentieth century’s most brilliant physicists, recounted an anecdote in his book The Meaning of it all: “Once in Hawaii, I was taken to see a Buddhist temple. In the temple, a man said: ‘I’ m going to tell you something that you will never forget.’ And then he said, ‘to every man is given the key to the gates of heaven. The same keys open the gates of hell.’” The power of ownership given to every shareholder, if used judiciously, can lead to investing heaven. And when not used at all, it can lead to investing heaven. And when not used at all, it can lead to investing hell.

What are the primary reasons behind poor corporate governance and apathetic shareholder response? Charlie Munger, Warren Buffet’s partner in Berkshire Hthaway, illustrated the importance of psychological principles when it came to stealing, and felt that the same principle could be used to answer the above question: “A very significant fraction of the people in the world will steal if (a) it’s very easy to do, and (b) there’s practically no chance of being caught. And once they start stealing, the consistency principle will soon combine with operant conditioning to make stealing habitual.

“It’s very, very important to create human systems that are hard to cheat. Otherwise you ruining your civilization, because these big incentives will create incentive-caused bias, and people will rationalize that bad behaviour is OK…Then, if somebody else does it, now you have got at least two psychological principles: incentive-caused bias plus social proof. Not only that, but you get Serpico effects: if enough people are profiting in a general social climate of doing wrong, then they will turn on you and become dangerous enemies if you try and blow the whistle.”

Corporations determine far more than any other institution the air we breathe, the quality of water we drink, even where we live. Yet they are not accountable to anyone.