Ep. 056 - Biblical Investing: A Faithful Approach to Stewarding Capital

Episode Transcript

Spencer
We've been on this journey of exploring what it is to invest with some kind of a biblical framework in mind, and today we get to wrap it up. So we'll talk about a big picture summary and then implementation.

Austin
So, Spencer, I'm sure that our listeners are overjoyed to know that we are coming to the end of this journey about biblical investing. But the reality is, we really think it's important to dive into this material because God has clothed us. He provided for us in so many ways, and we are to be faithful in all of our aspects of life.

Austin
And I think, honestly, as as we come back to this, it's really easy for me to segment out my investments into a different part of life because it's in this account that's kind of out there that future Austin gets a handle but present Austin doesn't really need to deal with. And so as we think about this, as we come back to this, we just anchor ourselves that God is our provider.

Austin
He was our provider yesterday, He is our provider today and He is our provider for eternity. But we still need to be good stewards of that money throughout the entirety of our lives. So will you walk us back through where we've been and what are the next steps that we're looking into today?

Spencer
Well, again, he gives us what we have. Everything, whether it's the resources, whether it's the talents, the gifts, the experiences, the relationships that we have and as he gives those to us, we have an opportunity to steward those. He gives us, He clothes us with everything that we have. He invests in us. That's the the root etymology that we've gotten into and such a of the word invest.

Spencer
And then we have the opportunity as his vice regents, as his designated decision makers in this world, to then clothe companies with capital, to make investments in them. Now, that's only one of the things of stewardship that we have. But it is a key one, especially with respect to our work here at the firm. And so we've been diving into that, how we clothe companies with capital.

Spencer
Because if there's one thing that every company needs, it's money. You know, an entrepreneur that I really respect, and I've talked to you many, many times, you said, you know, companies, they don't go under because the idea isn't good. They go under because they run out of capital, most of the time. So it's just a reality that it is a constraint.

Spencer
Capital is a constraint, but every company needs capital. They need ongoing capital, typically as well to expand. And so, we think about it in that light. Now, one of the quotes that we really like; C.S. Lewis, as he was watching Queen Elizabeth be crowned with this role as Queen of England, towards the end of his life, he said, the pressing of that huge, heavy crown on that small young head becomes a sort of symbol of the situation of humanity itself, humanity called by God to be his vice regent and high priest on earth, yet feeling so inadequate.

Spencer
And so there is this sense that we can feel quite inadequate, overwhelmed, there's all kinds of different decisions, we wonder, “Is all of this just gray? And we just need to say, well, you know, we'll go the path of the world, or is there a different path that we can try to navigate here?” And that's what we've been really trying to dive into is the rationale

Spencer
that maybe we can take a different path. Maybe it's really important actually, biblically, to take a different path, because the path of the world does diverge significantly from the path that we look at in the biblical wisdom.

Austin
Right. And as we looked at last episode, Milton Friedman argued that the sole objective of a company, the sole focus of a company, should be to generate profits. And he framed it in terms of as long as you play within the rules. That's obviously as we have proceeded 50 years from that quote in that article that he wrote, has, when dwindled down into the sole purpose of a business is to generate a profit.

Austin
And so then if I am an investor, we think about this ad from E-Trade that said: “If your money isn't making money, it's a waste of money.” And just that's that's the messaging that we are inundated with. Marketing has a huge power to really, as we ingest it, even if we're trying to actively press against it, the more we see it, the more it washes over us,

Austin
It just becomes normal. And so we live in and swim in a culture where “Make as much money at whatever expense, generate as much profit as you can.” is just the normal everyday thing. And so kind of like what you were talking about, it's really easy just to start swimming in that and saying “Well I will use money, I will use the profit to then serve the Lord.”

Austin
Doesn't matter where it's made. But as we come back and we look at the Scripture and we look at the narrative of where we've come from, God doesn't want us to profit from ill-gotten gain. He doesn't want us to bring blood money into the temple. We see this over and over and over again. And so as we think about how we deploy capital, what are the considerations that we need to think about moving forward?

Spencer
Well, again, we think we've framed it as we need to think about the products and goods that a company produces. Do they enhance and enable human flourishing? We think about the practices that a company employs. And this would be with respect to the customers, to the employees, to the suppliers, to the society as a whole, to the environment, and then to the local communities where this company is.

Spencer
So all of those practices, we, we want the company to be thoughtful about and to contribute again to human flourishing. We know that every company is going to make some decisions that are, not aligned with the scriptural witness. There's no company that's perfect. We are fallen people. Every company, every person that they hire is a fallen person.

Spencer
But there are some practices that are far, far more redemptive than others. And we detailed some of those, you know, whether it's, staying away from bribery or the way that we treat, our employees and the benefits that's provided to them, or just even when a company makes mistakes. How do we deal with that? Yeah, there are practices that are far better in some circumstances than others, and companies that have a core set of values that they're trying to adhere to that go beyond just, hey, we're going to try to create as much profit as possible, tend to be those companies actually, that do better long term because they're adhering to something that is

Spencer
external to, “Hey, just give me more right now as quick as possible.” So those are the kinds of things that we think about. And profit, of course, is one marker of all of that. But profit, just a healthy level of profit indicates that a company is, being able to manage its, cash flow in a way that may enable it to continue to enlarge and continue its mission over time.

Spencer
So we need a company that is stable, profitable, growing, ideally, and we want to close that company and capital if it is doing things in a way that is increasing human flourishing. And of course, as we talked about, there are ways that we can cultivate within the garden and innovate that are very much in line with God putting us in that role as vice regent.

Spencer
And then there are ways that that's not so much, the case where we need to think more about keeping the garden and not harming those things. So we think about this, this framework of, bringing forth more beauty and goodness from the world that God has already made good.

Austin
Yeah. So as investors, we can kind of think about supplying capital in a couple of ways. We can think about it in in getting companies off the ground. You can be an initial investor at a company. You hear about an idea that maybe your friend has. And so you say, hey, I want to deploy capital to your company, invest in it directly, think about maybe even initial public offerings seeing, hey, I see this company, they're going to do great work.

Austin
I'm going to go ahead and buy the the first stock from the company. But then there's the secondary market where most stocks are traded on a day to day basis. And that's affirming companies participating with those profits. So you want to walk us through kind of how we think about that primary and secondary market. and what is it,

Austin
how do we really think about the ways in which we clothe those companies in capital and how it affirms them?

Spencer
Right. So we will be including in the show notes, a graphic called The Valley of Death, that UC Davis Center for entrepreneurship put together. And that's one of those that's kind of the life cycle of a venture, you know, firm. So you have, angel investors, typically friends and family and others that get involved early stage, maybe some venture capital.

Spencer
And finally you get to that magical IPO and some of the founders get cashed out, or at least a portion of their holdings. Most of the folks that we work with, they're not really investing in that stage. That is a critical stage. But we recognize that that's not the primary stage that people are investing in. If they're investing in publicly traded stocks, for sure.

Spencer
The secondary market that you mentioned, is still really, really important. And sometimes you hear personalities say, well, I'm not investing in such a way that I'm really funding the company. I'm just buying shares from somebody else that's already funded the company. And there is a little bit of truth to that, but there's a whole lot of nuance that makes that actually not very helpful, as a way to think about things.

Spencer
Because if we didn't have a secondary market, there wouldn't really be a primary market there. So we need that secondary market, because if people are not forming businesses that then they can sell, eventually, and particularly in that secondary market where shares are traded in such, there wouldn't be near as much entrepreneurial activity. So in some ways we are affirming by buying shares and we're participating in the profits and the growth of that company in some substantial ways.

Spencer
Another way that we think about as we supply capital, as we close a company with capital, you know, it's foolish to think that CEOs, management teams are not interested in their share price. Yeah, they are hyper focused on their share price typically for a lot of different reasons, some of them important and redemptive, some of them not so much.

Spencer
But one of them is that most, executive teams are compensated in some way by the performance of the company's share price. So it links directly to these, managers, these leaders, their compensation. But they also, even if they're not thinking about their own compensation, they have to be thinking about, the potential of a takeover.

Spencer
So if their share price drops too much, and the company is not valued as much, they may have a strategic takeover. Some, you know, investor or some company may come in and say, okay, well, we're ready to buy your firm. So they're very focused on that share price. And as you buy a stock in the secondary market, you're pushing up that share price.

Spencer
Typically that's just the way that the market works in there. So if you own that company again it's important to see that you are affirming management there. And you are saying, yes, I think that you have good prospects and I want to participate in the, the profitability of the firm, the dividends that you pay off, the growth of the firm.

Spencer
And it also can even supply more capital down the road because you see, in a situation like, you know, GameStop, for instance, you know, the shares were bid up in value. There was this, fight, in essence, between a lot of the retail investors, against, some of the hedge funds and, and some, but pretty interesting, situation there.

Spencer
But what happened that was interesting to our conversation was that GameStop was able to use the share price that had been inflated, and they were able to sell more shares into the marketplace to raise more capital. So they got a new lease on life, because you had all of these folks that had been buying and kind of squeezing these hedge funds out, but because they did that, it actually gave them a new lease on life because they were able to sell into the secondary market again.

Spencer
So, when we have more investors that are interested in a company and that share price goes up, a handful of different things happen. But one of them, it can be easier to access equity capital also can be easier to access debt capital or fixed income. They can, move bonds, you know, more easily at times.

Spencer
So lots of different reasons that that secondary market that we talk about buying shares there are important to consider. It's not just one of these throwaway things where, you know, some people would say, well, you know, “Since I'm not really investing in the early stage of the company, I'm not really facilitating the company's growth.” That that's not actually true.

Spencer
It's not true. Maybe to the same extent, that you're important as you would be, say, in an angel investor or one of these folks that's a friend and family that's, you know, putting some money right in at the ground level. But it's still critical, for the success of the company long term. I mean, in essence, if you buy a Mercedes and it costs $50,000 and, you know, the next day that it's going to be worth $10,000, you're not going to be as likely to buy a Mercedes, right?

Spencer
Yeah. So if you know that the resale value is going to stay high, you're going to be much more amenable to buying that vehicle upfront. But that is the long term trajectory, you know, over many different types of vehicles and kind of a, you know, multi-decade history as you kind of have to know, okay, if I buy this new vehicle, there's going to be value, you know, there.

Austin
Yeah. So so I've heard this argument made where the secondary market for stocks is similar to the secondary market for used cars. A car manufacturer may make a sale directly to, the dealership and viewership then passes it on to the consumer. And the consumer buys the new car. The company makes the initial profit, but they don't care what happens on the used market.

Austin
And that's kind of been alluded to. It's similar to the stock market in that regard. The stock market, those companies shouldn't really care where the stocks are traded on the secondary. But that's really a false argument because you think about it, Mercedes cares about what their resale values are because it shows the reliability of their cars. It shows the value of their cars.

Austin
So of course they care about what happens in the secondary market. Of course they care about resale. It's very similar to the stock market. Yeah, they they don't have as much control over the secondary market. But they do care what happens there.

Spencer
For sure.

Austin
So Spencer, at this point we got to start asking the question about implementation. And we'll say on the front end we're not going to recommend any stocks. So you don't you can't take what we've said here and actually try to go pick whether it's a Vanguard fund or a Fidelity fund. We're not going to do that. But we're just going to say when you start thinking about how do I move towards a faithful investing approach, what are some things to consider?

Spencer
Well, we want to think about it again. Those two, polls, the world story of investing, God's story of investing. And there's some journey along the way. We need to recognize that we're never going to be perfect in implementing. You know, what God, His vision of investing, you know, would be; we are fallen human beings. But if we start off and we have no real parameter other than whatever the world says is fine, moving along that spectrum is going to be helpful.

Spencer
It's going to be, a move in faithfulness, wherever we land there. And there needs to be a level of discernment. There there's a lot of different considerations some of you have in tax considerations. So we need to we need to be thoughtful along this path. One of the places that we can go, that's one step over to say the world story of investing is to screen out some of the worst companies or the companies that their products and services, they are antithetical to human flourishing.

Spencer
So this is what we talked about. You know, earlier in saying maybe we look at, let's say, gambling, we look at pornography, we look at tobacco, we look at, products that contribute to death. We look at abortion, we look at weapons, we look at a variety of different arenas here that we say we just don't want to be part of companies, that that is kind of, that's what they do.

Spencer
So we want to stay away from, those companies that are contributing to the diminishment of our fellow human beings and the diminishment of even the environment. You know, what we see around us as God's garden, uh, there. So there are ways to be able to, to put those screens in place where we're trying to avoid the worst of the companies.

Spencer
And this might, you know, vary from 10% to 15 or 20% of an overall, opportunity set in a marketplace. So we're not really identifying companies and looking as much at their practices. We're really looking at those products and services that are offered. And we we're kind of creating this red line and saying, we're not going to go over on this side of things, which, I think that's a that's a reasonable way at least to start thinking about things is, okay, I don't want to profit from a lot of these other activities that are either creating bondage or death.

Austin
Yeah.

Spencer
So a second place that we can go to there is thinking about, okay, well, how do I how do I not just screen out some of those, worst players maybe. But how do I try to more actively work to invest to close companies and capital in a way that is going to, have practices as well that are maybe more aligned with the biblical view of, of investment and how, companies should be run.

Spencer
When we think about, again, those six different areas of customers, employees, suppliers, the environment, society and, and those local communities as a whole, there are ways to, again, hone in a little bit more and say, well, I'm not going to invest in the remaining 80 or 85% of companies. I'm not going to have everything. You know, just there that I that's not screened out, but I'm going to try to actually, be more targeted and more specific about the way that I invest.

Spencer
And, for some, mutual funds or ETFs, that might mean that they're only investing in 50 or 100 or 200 firms out of a possible 10,000, you know, firms, in a global landscape. So it can be much, much more targeted. Now, the trade off there is, as we kind of think about how these investments can play out when we remove a subset of companies that we're not going to invest in;

Spencer
if we had been investing in the entire market, then whether we choose, you know, that first option where we're just excluding some or we get a lot more targeted, we're not going to have the same rate of return as the overall market. Now our rate of return could be less, it could be more. But we need to to prepare ourselves that

Spencer
it's probably not going to be the same. It could be close. We just don't know over certain periods of time. But we need to prepare ourselves that it's going to be different. You know, so as we think about that, we've kind of got these, these ways that we can kind of think through investing all along the path towards maybe having our, our investments engaged in a way that is more aligned with the biblical wisdom there.

Spencer
The other thing that I think we have to think about, too, is the investments that we make on the equity side of the house. We are owners of those companies. We are directly participating in the profits of those companies. And so I think it's it's it's a lot easier to say, “Okay, I want to stay away from equity investments in all of these different areas that are objectionable,”

Spencer
You know, for instance, on the fixed income side of things, we've become lenders there. And so that's a little bit that's a little bit different dynamic. Because as we look at it, if we're lending, you know, if we have an, an investment in a, in a bank, for instance, their lending practices may be opaque to us.

Spencer
So I think it's much easier to say, okay, we're going to focus on the equity side of the house. Now, from a personal standpoint, I'm going to look at equity in fixed income. I think it's important you know, enough both ways there. But I think we start and say, okay, well, let's at least eliminate bad. Yeah. If we're going this path and let's at least make sure that we're doing so on the equity side of the house.

Spencer
Yeah. And then depending on the level that we want to engage further, we kind of look at a more active selection of those companies based on their practices and make sure that, we think about both the equity and the fixed income side there.

Austin
So I think the other thing to realize with this is when you go with a broad market approach, you put your market in every stock possible. You invest in a mutual fund or an ETF. That's typically the cheapest way to go. As you add in some screening, that expense ratio grows a little bit because there's a little bit more cost to implement that as you go towards that active management, it's going to increase the cost as well.

Austin
So you just have to know going into this, how much cost are you willing to take on again, we come back to this as we're stewards of the resources that God has given us and we trust him to provide. And so how do we deploy resources in an God-honoring way? But just know that as you look at this, there's going to be a difference in cost there as well.

Austin
And the reality is, the less companies that you have in your portfolio, the more likely there is going to be some active movement and some volatility. And so again, as you look at this, as you wrestle with these thoughts, don't let perfect become the enemy of the good. There is never going to be a mutual fund, there's never going to be ETF,

Austin
there's never going to be a basket of stocks and bonds that perfectly satisfies every one of your values. So don't get into this and think, “I've got to get every minutia, every detail correct,” without actually taking steps forward. Let the Lord guide you. Let wisdom come back to James 1:5 “If any of you ask wisdom, let him ask God...” and and move forward.

Austin
Don't stop at: “This is too hard and I'm going to avoid it.”

Spencer
Well, and I think a good example here is, to your point that we're never going to have that perfect portfolio that perfectly aligns probably with our core values, one of the types of screens that is out there for a lot of these funds that's available, is a screen away from, nuclear energy. Well, I tend to be one that actually says, I think nuclear energy is probably a really good idea.

Spencer
The whether you're looking at just, where those, small modular reactors can be set up, their overall impact in terms of, you know, carbon footprint, footprint, lots of different things. I think nuclear power is actually a good thing, but there's a lot of these companies that screen it out for one reason or another. Yeah.

Spencer
So it doesn't perfectly it doesn't perfectly match, you know, some of my core values. But I'm I'm not participating in the ill gotten gain of all of these other areas. And so, okay, do I get to participate in the game from that very, very small area? No. But at the same time, like you said, let's not let perfect be the enemy of good directionally, you know, 95% of the way there that I could be.

Spencer
Yeah. And so, let's let's not get too uptight about, you know, one value or another that maybe is expressed or can't be expressed as, as accurately as we would like.

Austin
Yeah.

Spencer
Nine episodes. We've covered a lot of ground here in terms of laying out a foundation, a thought process for biblical investing. If you have questions, if you want to talk with us further, we'd be delighted to do so. There's a lot to cover here. And, I think the Lord is patient as we grapple with these different things and as we try to process them and taking, again, steps in the direction of faithfulness, he doesn't expect to get us to get it right overnight.

Spencer
It's been a journey for Austin and I. We're still on that journey. But as you have questions as you want to have conversations, we'd be delighted to have those. And until next time, take care. We want to thank our friends at the Eventide Center for Faith and investing. Jason Meyer and his team did a fantastic job helping us to grapple with the biblical wisdom on investing.

Spencer
Many of the quotes and thought leaders that we cite come from their original research.

Austin
If you found this episode valuable, share it with a friend and subscribe on your favorite podcast platform so that you don't miss the next episode.

Disclosure
This content was provided by Second Half Stewardship. We're in Knoxville, Tennessee, and you can visit our website at www.secondhalfstewardship.com. The information in this recording is intended for general, educational and informational purposes only, and should not be construed as investment advisory, financial planning, legal, tax, or other professional advice based on your specific situation. Please consult your professional advisor before taking any action based on its contents.