I was worried that this whole post might omit missing hedging and impact investing:
(a) an investor may wish to invest in equities for mission hedging reasons (e.g. scenarios where markets go up may be correlated with scenarios where more AI safety work is needed, or you might invest heavily in certain types of biotech firms, since their success might be correlated with pandemic risk work being needed)
(b) an investor can have impact on the entities they have a stake in through stewardship/engagement (sometimes referred to as investor activism). Roughly speaking, this involves having conversations with the firm’s management to influence their behaviour for the better, and using your voting power is part of this.
Fortunately, I’m pleased to see that you have mentioned both of these points, albeit only briefly towards the end. Thank you for incorporating those points.
Mission hedging seems to suggest you should hold more equities than you claim, by your logic.
Your concerns about mission hedging were that you weren’t sure whether future (e.g.) AI scenarios would lead to markets going up, or whether there would be some sort of “mayhem” prior to there being an existential catastrophe.
However your conclusion from this seems to be that we should be holding either more equities or less, and you’re not sure which, so it’s unclear how to update.
However I don’t think this is the right conclusion.
For those in the community who believe that certain risks (e.g. the risks from AI or GCBRs) are neglected, it would make sense that they are not adequately priced into the market. Even if you don’t know whether you this means more downside volatility or more upside growth, this means you are, in the jargon, “long volatility”, and you should do the following:
hold more equities (so you do well in the scenario where equities go up)
hold put options (so you outperform in the scenario where equities plummet because of “mayhem”, because the put options provide you with protection)
I think your post does a disservice to shareholder engagement
I think your claim that shareholder engagement has a small effect is reasonable if it describes the median of the engagement which actually happens, but is likely harsh on the optimal shareholder engagement strategy.
However in terms of the conclusions for this post, I’m unsure of how your engagement scales with size, and I wouldn’t be surprised if it were markedly sublinear. If that’s the case, then it doesn’t significantly argue against your claim. In other words, if you’re arguing between holding 60% equities and 80% equities, and you believe that the 80% equities holding gives you significantly less than 80/60x as much influence as holding 60%, then even if shareholder engagement can be more valuable than you claim, that’s not a very strong argument for holding 80%.
I was worried that this whole post might omit missing hedging and impact investing:
(a) an investor may wish to invest in equities for mission hedging reasons (e.g. scenarios where markets go up may be correlated with scenarios where more AI safety work is needed, or you might invest heavily in certain types of biotech firms, since their success might be correlated with pandemic risk work being needed)
(b) an investor can have impact on the entities they have a stake in through stewardship/engagement (sometimes referred to as investor activism). Roughly speaking, this involves having conversations with the firm’s management to influence their behaviour for the better, and using your voting power is part of this.
Fortunately, I’m pleased to see that you have mentioned both of these points, albeit only briefly towards the end. Thank you for incorporating those points.
Mission hedging seems to suggest you should hold more equities than you claim, by your logic.
Your concerns about mission hedging were that you weren’t sure whether future (e.g.) AI scenarios would lead to markets going up, or whether there would be some sort of “mayhem” prior to there being an existential catastrophe.
However your conclusion from this seems to be that we should be holding either more equities or less, and you’re not sure which, so it’s unclear how to update.
However I don’t think this is the right conclusion.
For those in the community who believe that certain risks (e.g. the risks from AI or GCBRs) are neglected, it would make sense that they are not adequately priced into the market. Even if you don’t know whether you this means more downside volatility or more upside growth, this means you are, in the jargon, “long volatility”, and you should do the following:
hold more equities (so you do well in the scenario where equities go up)
hold put options (so you outperform in the scenario where equities plummet because of “mayhem”, because the put options provide you with protection)
I think your post does a disservice to shareholder engagement
I think your claim that shareholder engagement has a small effect is reasonable if it describes the median of the engagement which actually happens, but is likely harsh on the optimal shareholder engagement strategy.
However in terms of the conclusions for this post, I’m unsure of how your engagement scales with size, and I wouldn’t be surprised if it were markedly sublinear. If that’s the case, then it doesn’t significantly argue against your claim. In other words, if you’re arguing between holding 60% equities and 80% equities, and you believe that the 80% equities holding gives you significantly less than 80/60x as much influence as holding 60%, then even if shareholder engagement can be more valuable than you claim, that’s not a very strong argument for holding 80%.