Derivatives, Second Life, and Responsible Investing

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Derivatives1, Second Life, and Responsible Investing
by G. Benjamin Bingham

The current human situation is fraught with multiple levels of complexity. After looking at the broad phenomena, this article will focus on the stock market as an example of the gradual dominance of abstract worlds derived from reality. Finally it will show that through the balancing act implied in a threefold approach to life it is possible to master this abstract world with responsibility so that even the stock market may in turn reflect positively on humanity and the earth's future.When I was 6 or 7 the first television set took its place next to the ticking antique clock in the corner of our dining room. The security of my mother's warm voice reading a bedtime story was replaced by powerful music and drama through an aluminum contraption on the roof, wired to a plugged-in box. Going to bed became a point of argument. Something in me was unplugged.

The late Hans Mueller-Wiederman, an elder of the Camphill Community in Germany, once studied the effects of television on childhood development. He noted the gradual increase of visual images from the single set dramas of the late 50's and early 60's with one setting per minute to multiple images per minute bombarding the viewer in the 80's. He suggested that the changes in setting were impacting children's capacity to understand and remember the context of their lives. Each image coming into their world disrupted the natural flow of memory and would, in his view, impact their ability to know themselves.

Today, with multiple images per second on TV and the endless images and pop-up ads on the internet, with a constant background of musak, surround sound, i-Pods and cell phone voices on the street, it is a wonder we know where we are. Or do we?

Rudolf Steiner, the great Austrian philosopher of the early 1900s, often said that it would become increasingly difficult to differentiate between the natural world we were born into and a second world that would arise out of the abstract materialistic thinking that humanity had developed. The scientific objectivity we human beings need for our own evolving consciousness would increasingly put us in danger of living in a world of illusions. If life on earth is a school for transforming what is incomplete in each one of us, then a world of illusions may indeed be an interesting class to attend, or it can become a way to drop out of connection with the real world. 'Virtual reality' was not a term known in Steiner's time, but today it describes a phenomenon that has usurped much of our time on earth. Who would have guessed that corporations such as IBM would be holding meetings over the internet in a virtual environment, where executives would be viewed as 'avatars' of their own creation? Ironically, in Hinduism the word 'avatar' refers to the incarnation of a deity. Now it is a term that is being used to describe an invented persona that represents a person on an internet site. It is as though human beings are trying to excarnate (get out of our bodies) as online deities! The following excerpt from the website Second Life demonstrates how far virtual reality has come - it is no longer enough to 'get a life' as the colloquial expression goes, but now we are encouraged to get a virtual second life:
Second Life is a 3-D virtual world created by its Residents. Since opening to the public in 2003, it has grown explosively and today is inhabited by millions of Residents from around the globe.

• From the moment you enter the World you'll discover a vast digital continent, teeming with people, entertainment, experiences and opportunity. Once you've explored a bit, perhaps you'll find a perfect parcel of land to build your house or business.
• You'll also be surrounded by the Creations of your fellow Residents. Because Residents retain intellectual property rights in their digital creations, they can buy, sell and trade with other Residents.
• The Marketplace currently supports millions of US dollars in monthly transactions. This commerce is handled with the inworld unit of trade, the Linden^TM dollar, which can be converted to US dollars at several thriving online Linden dollar exchanges.

In addition to saving the expense and the carbon footprint of travel associated with face to face meetings and avoiding the pressure to accommodate one another's idiosyncrasies, IBM has found that communications flow more freely because the visible avatar on the screen, who seems to be talking, is one step removed from the executive behind it! In other words human beings are becoming 'more themselves' in a virtual world than they dare to be in their own skins. Remote collaboration is increasing dramatically and this may in some ways be a good thing, hopefully the confidence gained behind online avatars will lead to more confidence in real-life encounters!

Second Life seems to be an ultimate result of the abstract thinking that began with Descartes, the 17th century French philosopher and mathematician. In 1971 Owen Barfield gave a seminar on his novel, An Unancestral Voice in which he playfully walked us through the death of the Word with the invention of the Gutenberg Press. The living word was engraved in print, fixing it in time and space as opposed to the oral traditions that organically evolve the creative word. Barfield showed how this paralleled Descartes' plotting of concepts on a crucifix-like grid.2 But earlier still, the minting of money may have been the first abstraction derived from nature. Whether wampum made of shells and furs, or pressed gold, the value represented in trade was an abstraction based to a large extent on a cultural agreement derived from real defined needs and desires. Whilst shells, fur, gold and the like have intrinsic value - gold could be melted down; furs used for warmth and so on -in trading, these were not the primary values considered. Electronic Linden dollars on Second Life are just one more step removed from intrinsic values.

Despite the early use of derivatives1as abstract replacements for barter, Descartes' statement: "I think, therefore I am" is the mother of all abstractions, for it implies that reality exists only when it can be perceived. Steiner boldly turned this around by stating: "I am, therefore I think." By starting with consciousness Steiner establishes the awareness of self as a condition for thought, rather than vice versa. Yet it is essential here to differentiate between living thinking or 'heart thinking,' and its opposite: 'dead thinking' or intellectual materialism. Otto Scharmer, in his book, Theory U, shows how essential it is to 'let go' of what he calls 'downloads' or abstract learned assumptions, and then in meditative silence to 'let come' living thoughts that lead to valuable and meaningful action. Without this conscious process it is possible to be swamped with introjections or dead thoughts that are assumed to be true. This can lead the human being, the 'I am', to become lost or to hide away in an addictive world of abstractions like one big video game.

Turning to the stock market, where can we focus in order to avoid the addictive gambling glitz and stay responsibly grounded in reality? The parable of the Talents comes to mind (Matthew 25:14-30) from the New Testament. Three men are given 'talents' to take care of while their master is away. The first two invest and double the value of their talents and are rewarded well, while the third is afraid to lose his so he puts it under a rock for safe keeping and proudly returns without having lost anything. This man is sent away to a world where there is "weeping and gnashing of teeth," which sounds miserable. This story infers the adage 'to whom much is given much is expected'; it seems to be a sin not to make the most of what one has. I'm certain that superstar evangelists are pushing this parable for all it is worth, since some churches seem to target the riches of worldly wealth as a sign of approval from God. But let's explore the truth in the parable, first generally then in relation to the stock market.

We are each born with certain predispositions because of inherited and environmental factors, not to mention the notion of karma from past lives. These are the 'talents' we have to work with, to overcome, to transform, or transcend. When John the Baptist calls out in the wilderness: "He must increase, I must decrease," he may be referring to this talent. In other words, in order to become most alive he must get out of the way of his own personality to allow something more perfect to grow in him. This something is a mystery, but it is called most simply and powerfully the 'I am' by the voice in the burning bush that spoke to Moses after he led his people out of Egypt.

Now, the good businessman is one that can relate to the idea 'I am, therefore I think.' Jay Coen Gilbert, the founder of B Lab (www.bcorporation.net), uses the phrase in meetings: "the best idea wins!" In his quest to establish a brand for beneficial companies, with this phrase he is decreasing his personal sense of importance and increasing the importance of the thoughts generated in the group. In fact, this approach increases his powerful presence (his 'I amness') and multiplies the group's potency at the same time. Investment in stocks is investment in ideas that have relevance, vitality, presence. Businesses that are profitable and win the 'keys to the kingdom' are often those that inspire investors through the generation of these vital ideas. However, in order to be a responsible investment one could propose that the intentionality to do Good must increase while the isolated desire to maximize wealth with mindless disregard for others must decrease. That is to say: the best idea may be the one that maximizes benefit to the most. The point is that investors are looking for the best ideas and the more mindful we are as investors, the more vital the conversation becomes.

Unfortunately, the 'love of money' is the 'root of all evil,' so it is said. Money as a derivative serves as a useful replacement for the clumsiness of barter (e.g. how many logs of firewood would I have to cut in exchange for a refrigerator!). What is dangerous and causes imbalance is to associate money too strongly with the things you might truly value. It seems that if we only had enough money we would be happy. This is an abstraction leading to addiction. The attraction of the stock market can be a result of this abstract love of money. Trading stocks is often not based on good intent, but on the alluring game of winning versus losing. This polarity is the foundation of the virtual world, right down to the 1's and 0's of dualistic computer science. The open/close gates of technology are morphed from the age-old polarities of good/bad, win/lose, rich/poor; and the acceptance of these downloaded constructs can lead to empty ideas that appeal to the lower, lazy aspects of ourselves that needs to decrease to allow a a responsible, moral goodness to increase. Numbers, especially with dollar signs next to them, appeal to the score-keeping mentality of this lower nature, lending an illusory sense of reality that remains on the two dimensional surface of things. In order to rise above this binary trap, a third element is required: the real, more complete world may only be discovered by balancing between extremes -like a tightrope walker, achieving balance in order to stay upright and walk forwards. This 'Middle Way' between extremes taught by the Buddha is not a relativistic compromise where one chooses the 'least bad' option, rather it is a vital dance that takes into consideration all sides of any story and then moves forward with awakeness. This third element of the tightrope walker is a conscious balancing act: 'I am, therefore I think!' This threefold view of life implies a middle, a sensing heart, an administrator to perceive what is and respond with the appropriate investment of talents. Certainly, picking stocks can be done in this way. By looking for balance we can avoid stocks of companies that seem to have good intentions but are not grounded in the real world. On the other extreme we would want to avoid stocks that may make money in the short term but deplete the very resources they require so in the end also fail.

A Trinitarian approach to life is as old as the mysteries. It was the basis of the Celtic or Hibernian mysteries which placed the seeker of truth between the realities of the spirit (the idea) and the secrets of the earth's depths; a path that wove between science and art. Today, it is becoming more common again to view the Arts and Sciences as different sides of one reality. Interestingly enough George Soros, the billionaire investor, and the recently deceased Sir John Templeton (founder of the Franklin Templeton Funds) both have described investing as something between a science and an art. In reality all great lives have in common a marrying of given attributes: the scientific factors in their circumstances, and a great idea, a calling, something greater, akin to Art. Anyone who is too caught up in the material world as Scientist or Artist and too much in a hurry to derive abstract and tangible wealth from it, is inevitably dissatisfied, because meaning has been squeezed out of the middle, balancing realm. It is also noteworthy that many great investors who did not subscribe to responsible investing, later seem to want to reconcile the harm done through charitable giving. Soros, Gates and Buffett have recently followed in the footsteps of Carnegie, Ford and Rockefeller before them.

To avoid this compromise of acting badly so that later one can act well ('the ends justify the means') it may be helpful to realize that truth is neither abstract nor relative, and the material world is not an illusion to be eschewed. Rather it is each person's task to marry real life's circumstance with a real spiritual world that calls to make meaning out of what is given to him or her. Material wealth will end in dissatisfaction if a spiritual calling is ignored. On the other hand, the egoistic pursuit of spiritual bliss generally leads to isolation, with concomitant infidelity and/or illusions of grandeur. Thus the investor who invests in ungrounded ideas may throw away his or her 'talents' and become embittered and cynical in the process of losing wealth.

There is always a dreadful attraction to extremes and one-sidedness, it is part of the challenge we humans face. As investors seeking to become responsible, we have to navigate between the enticement of beautiful marketing, full of half truths that only refer to the best attributes and leave out anything controversial that would expose them (like the fact that they are not making money!); and, on the other hand the enticement of money making companies with short term goals based on raping and pillaging the environment or cheap labor and commodities or both. Our goal is to find companies that are good citizens, and have ideas that will result in the best financial returns. This is not relativism or a question of finding the 'least bad.' Rather it is a challenge to find the winning balance that will be fruitful and multiply into the future.

These two very different gestures of evil are the polarity of extremes we live with and need to balance as investors in life. Both extremes take us away from our path or cause us to 'fall off the tightrope'. One extreme allures us away from the reality that we must succeed in the material realm; the other entices us with abstract success based on numbers and measures without meaning. We need to stay grounded and secure in a safe place based on understanding and respect for the realities of the material world, while at the same time measuring success by the degree to which we can lift up and transform these realities with practical idealism. How can investors do this?

First, it is important to understand that stocks, as is the case with all derivatives, have value only through a common acceptance of this value in our culture. These values change in a volatile manner. The agreed upon values of all the currencies in the world are traded in the trillions everyday, affecting costs for the globe's unconscious consumers who have no choice but to accept the prices of things. A relatively small number of currency traders can turn an economy on its head through sheer speculation. On the other hand the stock market is becoming the common man's way to win back control of their relative capacity to survive in this world: their so called 'net worth.' Largely because of the fact that pensions have become based on the relative value of investments, faithful workers for corporations in the western world may retire as 'millionaires' after 40 years of hard labor, or if invested badly, may be forced to retire early with a meager pittance to live on. It is no wonder that a win/lose mentality dominates investors. The image of once wealthy stock-brokers throwing themselves out of buildings in 1929 when the stock market crashed is still potent today. The rise and fall of 'net worth' is understandably linked to one's feeling of self worth. It can help to remember that the 'I am' is eternal while 'net worth' is merely a temporary abstraction, but this is hard to see when facing hunger and the loss of livelihood.

Second, it may help to own what you can understand and especially beware of owning derivatives of derivatives! In the Spring Issue of New View I touched on the fact that mortgages had been packaged together and sold in different ways by different entities. These packages are derived originally from many loans for the acquisition of real houses somewhere. The unconscious investor may buy a mutual fund ( a portfolio of many investments bought and sold by the fund's manager using many investor's money pooled together) with some of these mortgages in it without even knowing it. By this time multiple packages of loans (some subprime some not) may have been mixed in and it becomes impossible to be conscious of the original loans. The package the investor buys containing other packages of investments impossible to understand is what I mean by a derivative of a derivative. Since stocks themselves are values derived to some extent from the actual earnings or projected earnings of a measurable entity, it is possible to analyze whether or not the trading prices are based on reality. Warren Buffet, the famous American investor and founder of Berkshire Hathaway, built his fortunes on companies he understood so well as an investor that he eventually owned a majority position and managed them. However, within mutual funds or even worse within the black box of hedge funds, which by law do not need to reveal what investments are inside them, it is possible that the entities the investor has purchased are so far removed from reality that they cannot be understood. Sighing and leaving this to the experts has not proven wise of late, as the brokerage houses have sheepishly had to admit that even they could not put a value on some of the stuff they were happily trading months before; so these values have crashed.

Thirdly, and most importantly, invest in stocks that you not only understand but want to support; invest in companies that share your values, making the investment meaningful and constructive in relation to your idea of a healthy world. By investing in companies that are benefiting the world when they are undervalued by the market (i.e. their share price does not yet reflect their true value), as an investor you can support the growth of a good company and increase both your net worth and your sense of self by making a positive difference. As the company's value is recognized by the market its capital base grows, increasing its ability to borrow money and grow further.

The problem is that most investors don't really have the capacity or time to understand what they own, much less the capacity to take over companies and straighten them out. Certainly, a trusted advisor is needed; only make sure they understand what they advise you to own. Even then, investing only in what we know well may be too limiting and result in an imbalanced portfolio with higher risk. Most investors tend to invest close to home and realize too late that the best performing stocks are spread all over the world. Appropriate to this age of specialization, investors who can't do it all themselves increasingly rely on experts who have the best reputation for managing each part of their portfolio. Consultants and financial advisors have cashed in as middlemen or 'managers of managers', basing their choice of 'experts' for each asset class on past performance. Unfortunately, the best performers in any five-year period are usually fair to poor in the next five so it is a losing game with high costs. The consultants typically are statisticians looking backward with little understanding or insight about economic dynamics. Like the most successful Ivy League investment management groups at Harvard and Yale in the United States, the new best practice is to take a forward looking approach to investing, relying more on low cost indices to cover a broad sweep of global markets while filling out the portfolio with alternative investments that are increased or decreased according to insightful management.

By owning a company's stock at a given price one is backing the management and agreeing that the value is justified and that one expects the value to increase, or for dividends to be paid out in the future. The effect, beyond increasing borrowing capacity, is increased confidence within the company. Positivity, optimism and good will is engendered.

Capitalism and the idea of 'good neighborliness' (as Judy Wicks calls it; the co-founder of Businesses for a Local Living Economy) are surely compatible if not synergistic. As socially responsible investors gain momentum and begin to more clearly target companies that benefit all stakeholders including the environment, such companies will continue to thrive. May the intention to do Good increase among businessmen and investors, and the desire to maximize wealth without regard for others decrease in potency. That is to say: may it be widely recognized by investors that the most valuable idea is the one that maximizes their own wealth while maximizing benefit to the world at large. In this way, investments in the stock market can be an important tool for the benefit of all. Like other tools for trading derived from reality, the net impact of the trading itself can go well beyond the abstract numbers and help us wake up to and begin creating a real and better world.

Fall 2008 New View Magazine

G. Benjamin Bingham is the Managing Director of Benchmark Asset Managers (www.benchmarkam.com) in Phildelphia, U.S.A.

Endnotes

1. A derivative is a financial instrument that derives or gets it value from some real good or stock. It is in its most basic form simply a contract between two parties to exchange value based on the action of a real good or service. Typically, the seller receives money in exchange for an agreement to purchase or sell some good or service at some specified future date.The largest appeal of derivatives is that they can include some degree of leverage. Leverage is a financial term that refers to the multiplication that happens when a small amount of money is used to control an item of much larger value. A mortgage is the most common form of leverage. For a small amount of money and taking on the obligation of a mortgage, a person gains control of a property of much larger value than the small amount of money that has exchanged hands.

Derivatives may offer the same sort of leverage or multiplication as a mortgage. For a small amount of money, the investor can control a much larger value of company stock then would be possible without the use of leverage. This can work both ways, though. If the investor purchasing the investment using leverage (ie with borrowed money) is correct, then more money can be made than if the investment had been made without the
additional borrowed funds. However, if the investor is wrong, the losses are multiplied instead.

Derivatives made the news in 1995 when rogue trader Nick Leeson single-handedly caused the failure of the Barings bank of England. Nick Leeson was a derivatives trader whose trades did not work out, and due to the enormous leverage of the trades used, the losses became so large that the bank was bankrupt when the results of his trades become due. Warren Buffet, a much revered and very successful investor, has stated in one of his annual reports that he is very much against the use of derivatives and he expects that they will lead to eventual failure for anyone who uses them. In spite of all this negative press, derivatives and leveraging have long been a normal part of business and investing and are likely to be so for many more years.