RI blog, Erika Karp: Lady Gaga and Sustainable Investing

Great investors often demonstrate an extraordinary sense of the rhythm of the markets. Great entertainers seem to have precisely the same skill in their business. In seeking strong financial returns for the long run though, following the short term strategies which seem so prevalent today, might prove to undermine the efforts of an investor. In this note, I argue that we can learn a lot about successful investing from Lady Gaga. Her extraordinary performance isn’t predicated upon following the concensus path. In her dancing she moves on the one- and the three- beat, rather than on the usual two- and four-. It’s different, non-traditional, and certainly strikes the right chord for her audience. It’s fair to say that the success of her performance can’t be matched by that of most portfolio managers. So maybe investors can take a lesson from her differentiated approach. The different approach I’m referring to for capital market participants is called “Sustainable Investing”. The greatest single impediment to this investment discipline is short-term, concensus thinking. This is unfortunately propogated by sub-optimal incentive structures across industries. Like Lady Gaga’s music, the approach is most suitable for those with the courage of their convictions and the patience to think about the needs of all the diverse stakeholders. These stakeholders are not justthose with the loudest voices in the crowd. But in times of economic stress in particular, these voices need to be heard. Ultimately their roar could become deafening. In other words, the well-being of all the customers, employees, suppliers, communities and minority shareholders from which and for whom companies generate their ultimate success, should be cared for in a manner that will lead to truly sustainable business performance. In fact, attention to all these constituencies should be considered a proxy for great quality business management, strategy, and execution. Sometimes taking a different approach can lead to amazing results. Companies and financial analysts who don’t get such fantastic results might consider altering the nature of their investment analyses and change their rhythm. They ought to try asking different questions and digging deeper to look for signals about the sustainable drivers of business growth for the long-run. An analysis into corporate performance around issues relating to Environmental, Social and Governanace (ESG) practices can yield a great deal of predictive insight into the ultimate outcomes for earnings, cashflows and share prices. We can only hope to find shares that show even a modest portion of the meteoric rise of the stock of Lady Gaga. Perhaps we could even find ourselves on The Edge of Glory.
Erika Karp is Managing Director, Head of Global Sector Research at UBS