Supporting Causes With Integrity

Introduction

I am a skeptic when it comes to charity– I believe most charity efforts are inefficient ways to make the desired impact, misunderstand the nature of the problem they seek to address and are doomed to treat symptoms rather than causes or, at worst, create more problems than they solve. I believe that this is partly due to the incentivizes and mechanisms of philanthropic activities versus monetary/commercial exchange activities, and partly (mostly) due to the fact that most people interested in charity do not spend much time thinking philosophically about what they’re doing, how they’re doing it and why they’re doing it.

As I do intend to contribute to (or even create) some philanthropic entities over the course of my life and I do not wish to be a hypocrite, I have attempted to identify and outline some important tradeoffs which must be considered before engaging in charitable activities.

Spectra of tradeoffs

Short-term vision vs. Long-term vision

This tradeoff involves the consideration of looking at problems which are immediate, present or developed in nature versus looking at problems which are distant, in the future and developing or potentially could develop based on a particular trend playing out. This tradeoff also has implications for questions of fund-raising and financing methodology and the construction of a strategy to meet the problem (ie, building a strategy which is active in the coming year versus a strategy which may only become active many years from now). This tradeoff has a generational component– looking at one’s own generation or the immediately following generation, the generation of one’s grandchildren or even more distant successors, or looking at the general inheritance of mankind for all time.

Physical issues vs. World of ideas

This tradeoff involves considering problems related to things that affect the material well-being versus predominant ideas, values, culture, etc. An example would be providing books to schools, versus influencing what is in the books in schools.

Treat symptoms vs. Prevent problems

This tradeoff is one of both urgency and quantity. It implies a certain metaphysical reality for the tradeoff to exist, that is, that a smaller good can be had now at the expense of a larger good later. The tradeoff demands that we consider which is more important: ending present suffering or ending the the cause of suffering. An example is providing malaria medication, versus providing mosquito nets.

Act locally vs. Act globally

This tradeoff involves the radius of impact and the desire to improve one’s own community versus the potential to affect a more desperate community further afield. An example would be trying to end homelessness in your own city, versus trying to provide clean drinking water to everyone on the planet.

General application vs. Specific application

This tradeoff is similar to the impact radius consideration but the question asked is more precise: “Given that resources are limited, do you seek to relieve the problem as it affects one specific group, or as it affects all groups?” A person may choose a specific group far away or a specific group they know familiarly, that is why this is not a question of acting locally or globally. An example might be seeking cures for childhood cancer, versus seeking cures for all cancers.

Verifiable impact vs. Difficult to measure

This tradeoff involves considerations of the empirical measurement of philanthropic influence. You may decide only to support a cause which has a clear and objective metric to indicate the influence your contribution is making, or you may decide to support a cause where the impact is subjective, mixed up with other independent variables or is simply on too vast of a scale to easily measure. An example is delivering computers to third world classrooms, versus improving the happiness of a community.

DIY vs. Pay to fund others

This tradeoff is a question of agency and considers whether one will serve as the agent of change himself, or whether he will hire others to do the work for him. It is not just a question of leveraging the efforts of others through the division of labor– it is about whether it is personally desirable to be involved as an agent oneself or whether it is preferable to provide things like ideas, organization and money while leaving others to actually execute on the plan. An example is going on a mission trip and building houses for the poor, versus making a donation to the Bill & Melinda Gates Foundation.

Change the system vs. Work within it

This tradeoff involves an analysis of the contribution the social system (rules, laws, cultural customs, traditions, economy, etc.) makes to the existence of the problem in question. You might see the problem as a necessary outcome of the system itself, necessitating a “revolution” to resolve it, or you might see the system as largely disinterested in or detached from the problem meaning it’s possible to use the system, or channel its energy differently, to resolve the problem. An example is abolishing the tax code, versus seeking a privileged status within it such as 501(c)3 designation.

For-profit vs. Non-profit (Self-sustaining vs. Dependency)

This tradeoff examines the proper method of financing a charitable activity. It signifies an awareness of the way that the existence of a charitable resource might influence the supply or stickiness of a social problem. It also provides consideration for the likelihood of strategically resolving a social problem with a potentially uncertain, inconsistent or mismatched method of finance. It understands that the design of economic systems and the consideration of incentives is often background for the existence of certain social problems. An example is a business that purposefully hires various “at risk” demographics to keep them out of trouble, versus a charity which spends significant time and energy ensuring its continued financing by others; a corrolary example is a charity with a substantial endowment which is intelligently invested over a long-period of time allowing it to grow, versus a charity which comes hat in hand every year asking for new donations to continue its operations.

Individuals vs. Families/communities

This tradeoff involves the philosophy of “If you can change the life of just one person, you’ve made a difference” as opposed to “It takes a village” or “Only together may we truly prosper.” It asks one to focus their consideration on whether the problem is truly being solved if only some are relieved or whether a wholesale solution must be put into affect to feel a sense of accomplishment. An example is a scholarship for a talented student, versus constructing a school for an “underserved” community.

One causes vs. Many causes

This tradeoff considers whether one can do the most good by having many plates spinning and doing a little good in a lot of places, or if it’s better to dig deeply and do a lot of good on just one issue. An example is putting all your effort and resources into diabetes research, versus supporting the local children’s hospital, a charity sports league, providing scholarships to handicapped students and funding a legal defense fund.

One project vs. Many projects

This tradeoff is similar to the one immediately preceding it. The difference is simply that one could have one project at each of many causes, or many projects at one and only one cause, or some other combination of the two. It is partly a question of finishing what you started before going on to something else. An example is just feeding the poor, versus feeding the poor, providing job training for the poor and organizing community awareness seminars about the challenges of the poor.

Mankind vs. Other Organisms

This tradeoff is self-explanatory– do you seek to resolve human issues, or ecological issues (including issues related to the state of the environment, the welfare of non-human animals, the prevalence of plant species, etc.) An example is building a church, versus saving a species of river smelt from extinction.

Conclusion

When it comes to philanthropy, I believe the most important epistemic principle is that you should have a rational, deeply contemplated answer to the question, “How do you know you aren’t making it worse?”

Video – Michael Mauboussian On Forbes

Intelligent Investing with Steve Forbes presents Michael Mauboussin, chief investment strategist, Legg Mason Capital Management, author of Think Twice

Major take-aways from the interview:

  • 9%, 7.5% and 5.5-6%; the rates of return, respectively, for the S&P500, mutual funds and mutual fund investors, on average– why the discrepancy?
  • Mutual funds underperform the S&P500 on a total return basis due to fees; mutual fund investors underperform the funds mostly due to timing– most individuals buy when funds have done well, sell when they’ve done poorly, exposing themselves to underperformance and missing out on subsequent over-performance
  • Curiously, institutional investors underperform as well; the culprit is overactivity– people believe “if you work hard, you’ll be rewarded”, so institutional investors try to “earn” their returns by moving money around constantly
  • Increasingly, investment returns have to do with luck and not skill; all activities in life fall along a continuum between pure skill and no luck (running competition) to pure luck and no skill (the lottery); the “Paradox of Skill” states that the more skillful competitors are, the more uniform their results become and the more important luck is to explaining differences in results
  • How to accurately judge a manager’s returns? Sample size is important: the more decisions the manager has to make over time, the shorter time horizon can be used to judge them; the fewer decisions they make over time, the longer the time horizon used to judge them
  • Focus on process, not outcome; in investing– analytical process of ideas, behavioral/psychological process, and organizational process (constraints w/in the organization that impede performance)
  • Investing boils down to two activities: handicapping (looking at market assumptions via price and then backing into the scenario that would have to occur for that price to be reasonable, and judging the probability of it occurring) and bet-sizing (waiting until you have a strong advantage and then betting big)
  • Expectations-based investing process: back into the cash flow assumptions that justify current market price; financial/strategic analysis of the company and its industry to see if the company is likely to do better or worse than the market implies; then decide to buy, sell or do nothing– what’s built in? what’s likely to happen? then “over-under” rather than “I know precisely what those cash flows will be”
  • Systems that are entirely skill-based don’t revert to the mean at all; aside from fatigue, running a race 5x will result in the same, highly-skilled winner each time
  • The extent to which a system is not all-skill is the extent to which it can mean-revert, but the question is, what mean? A highly skilled person might come down off a peak but they will not revert to the mean of more normally skilled individuals, for instance (tall parents tend to have tall children, but they might not be as tall as the parents — mean reversion — but you also don’t expect them to go down to the height of the average population)
  • Investing is not all-luck, but it is luck-leaning on the continuum; the best way to judge managers is by process, not performance
  • “Buy cheap and hold”: consider the story of Bob Kirby and the “Coffee Can Approach” [PDF]
  • What can older investors do in today’s interest rate environment? Follow Jim Grant’s advice, “Roll back the calendar 30 years”, ie, nothing, they’re screwed
  • “Patience is the key” to great investment returns

A Helpful ROIC Measurement Explained

A little back and forth between Nate Tobik and I about a company I have been analyzing resulted in Nate directing me to a post he had written on an ROIC metric he likes to use. After reading the post, I liked it enough myself that I want to copy the metric, composition and reasoning to my blog with this post so I have it for future reference.

This ROIC metric was developed by Ken Hackel and is presented in his book Security Valuation and Risk Analysis: Assessing Value in Investment Decision-Making. It seeks to measure cash returns on invested capital. The formula is as follows:

Cash flow-based ROIC = (FCF – Net Interest Income) / (Equity + Interest Bearing Debt + Present Value Of Leases – Cash & Marketable Securities)

The “footnotes” to this equation are:

  1. Intangibles are included because they represent real cash outlays used to purchase cash-producing assets
  2. IBD is included because it serves to help acquire cash-producing assets as well
  3. PV of operating leases because these leases are essentially debt that helps produce a cash return for the business; excluding them would unfairly boost ROIC and distort return comparisons between companies that lease property versus buy it outright
  4. FCF includes the payment of cash taxes and the elimination of other non-cash accruals

There’s more information on this metric and a fuller discussion of its benefits and drawbacks at Nate’s original post.

Thanks Nate!