I’ve never seen myself as an investor or working in a financial institution for many years. The reason was that I didn’t understand how they add value to society at large. For example, Elon Musk famously encourages people to study engineering and manufacturing while criticising the profitability of financial roles.
However, active public investors serve critical roles:
1. Creating and Capturing value for shareholders
Directly, public investors create value for people who invest in funds managed by them or with them. For example, a thousand dollars invested with Warren Buffet in 1965 would be worth 18 million dollars today. The wealth created for these shareholders creates life-changing value specifically for them. With the wealth generated, they can retire sooner or more gracefully, recontribute to society or live a life unimaginable to them previously.
Active investors also service passive funds like ETFs and index funds. Active investors serve a vital function in price discovery that passive investors depend on for their returns. In 2022, passive funds will own 16% of U.S equity markets yet do not do any analysis. By bidding up or down the price, active investors help signal to the market which companies are worthy investments. For example, the S&P 500 represents the top 500 companies in the U.S. However, who actually decided they are the top 500 companies? The active investors do. Shareholders in these index funds represent people from all walks of life wishing for a better life.
2. Promotes efficiency in the economy
Perhaps most importantly, investors serve as important capital allocators for an economy. By supporting the share price of good companies, they help the ability of good companies to raise capital or borrow at a lower cost.
Secondly, the public markets are the ultimate buyer for entrepreneurs and venture capitalists (VCs). By returning capital to these individuals, indirectly, the public markets provide funds to help fund new and innovative startups that solve the most critical problems facing society.
3. Company advisory and advocacy of issues
You can vote on important corporate events proportionally to your shares. Moreover, you can reign in excessive executive privileges as you become more influential as an active public investor. The biggest of which perform the function of an activist shareholder.
In Conclusion, public investors serve essential functions in the proper functioning of the modern free-market economy. If you’re a public investor, be encouraged your essential contribution and perform your functions well.