After last week’s episode, I keep talking to the author Thomas Meyer who decided to invest in stocks on his own. How do you find stocks and which stocks do you even want, are some of the first questions.
Thomas Meyer has doubts about how humankind is handling the earth’s natural resources. How should this affect his stock selection? First of all, I can put him at ease: If he wants to buy stocks from companies that behave ecologically prudent, then this won’t put him at a disadvantage.
This is an important point: If you decide to live in a more ecologically-conscious way, you might have to pay more than others who are more wasteful with nature.
However, things are different with stocks. Stocks of ecologically-conscious companies don’t have lower returns than those of companies who exploit nature, because the higher costs that come with ecological responsibility are also taken into account in the stock price. If the company has lower profits because it acts ecologically-conscious, then its price on the market is cheaper as well. It, therefore, has the same potential for returns as all other companies.
If this wasn’t the case, then a crafty investor would take advantage of the situation, which in turn would bring the stock price back to a level that conforms with the typically expected return of the market. This is called arbitrage. There are whole hosts of investors that don’t do anything except look for arbitrage opportunities. If such arbitrage returns existed in eco stocks, then they would long be depleted by now, which means that the returns of the eco stocks would already conform with the average again.
Buying eco stocks, therefore, doesn’t mean lower returns. On the contrary. Should the concerns prove true, then such stocks would benefit disproportionately. For this reason, large investors are already stepping away from ecologically-problematic companies and sectors. Thomas is pleased because he can follow his convictions when investing in stocks. You will find out next week what he is interested in right now.