To paraphrase Matt Taibi, speculators are like a giant vampire squid attached to the face of the financial markets. Speculators ignore the basic purpose of markets, facilitating wealth creation by enhancing the efficiency of capital allocation, and instead try to make short-term profits while being indifferent to underlying value creation. This hijacking of markets creates the bubbles and collapses that periodically make headlines, destroy people’s savings and impair society’s productivity in addressing human needs and wants. The problem with the Capital Asset Pricing Model is that it is at best a tool useful only for such speculation, though ironically it is not even very good at that. Social investment should reject CAPM and pursue tools that help finance realise its highest purpose: the creation of value.
CAPM relies on comparisons of the changes in a company’s share price to the changes of its peers in a given market over time. These comparisons produce a figure called “beta” that is intended to describe the risk of a given firm and assist in the diversification of a portfolio of investments. If we wish to use markets to create value, be they traditional or social investments, such a strategy is fatally flawed.