The Purpose of Investing

Our sole activity at KIP Capital is capital allocation. We define our purpose through the following words of Michael Porter.

Interviewer: Michael, just like businesses are encouraged to lay out a purpose, you have indicated the same applies to investors. Explain that.

Michael Porter: I believe the fundamental purpose of investing is to deploy capital to productive uses in the real economy. It’s the ability of businesses to use capital well to meet needs at a profit and grow that creates all the wealth in society. Government and NGOs do not create wealth; they utilize taxes and donations to meet societal needs. Directing capital to companies that can use it productively to create economic value, and thus wealth, is ultimately the most profound benefit investors can have on society.

Beyond allocating capital, investors also play a vital role in monitoring what companies are doing, pushing for transparency, and intervening to catalyze change if the capital employed isn’t generating the economic value it should. All of this raises the fundamental wealth that is being created, and this kind of wealth creation does not come at the expense of other investors.

The concern is that it seems like the vast majority of energy and effort in investing has become about other things. It’s about indexing. It’s about momentum. It’s about program trading to capitalize on tiny movements in share prices. It’s about locating your servers closer to the exchange so you can trade in and out a little faster. I am all for price discovery and liquidity, but improvements here have diminishing returns for fundamental wealth creation. One investor’s gain is often another investor’s loss.

As more investors walk away from fundamental investing, the need and the opportunity grows for value investors who focus on understanding companies, industries and competition. Such investors can do well for themselves, for their own investors, and for society. This is creating shared value. I would like to see more investors with that sense of purpose, and more rules, regulations and incentives put in place that lead investing in these directions rather than those that create limited societal returns.

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