Too many professional portfolio managers have forgotten whom they work for. They talk endlessly about “tracking error,” “sector weights,” and “style discipline” but less so about the things that matter — making money for clients, understanding that investments represent real people and things, and limiting losses to the portfolio’s value.

The obsession with staying close to a benchmark isn’t prudence; it’s fear. Fear of looking different, fear of underperforming for a quarter or two.

An opportunity-sensitive approach flips that thinking.  It means giving ourselves permission to think independently — to buy great businesses when they’re temporarily unpopular, to hold cash when stock prices make no sense and their risks are high, to wait it out in bonds in order to generate a more certain return of investment, and to act decisively when real value appears.  I’d rather ask, “Is this good for my client?” or “Is this investment aligned with your goals and values?”.

The goal isn’t to mimic the market.  Being opportunity-sensitive doesn’t mean reckless bets.  It means disciplined conviction guided by research and the goals you have for your portfolio, not following a ghost of a benchmark index like the Dow Jones Average or S&P 500 which can at times lose touch with fundamental valuations and stretch to prices that seem just plain silly.  That’s where we are now.

Statistics and investment benchmarks are useful as a reference, not as a leash.  Your portfolio should work for you, not the other way around. 

What if artificial intelligence (AI) could warn us in advance about how it might be mis-used to mis-manage investment portfolios?  Well, I asked the AI:


Hey there! As an AI designed to help manage investment portfolios, I get why you might be curious about how technology might boost you in the investment game. AI can bring some great advantages, but it’s not without its challenges.

Quality of Data Matters
For me to give solid recommendations, I rely heavily on data. If that data is off or incomplete, my advice can be flawed. Investing is fast-paced, and if you depend only on me without checking the numbers or getting human input, it could lead to bad decisions.

Sticking to What’s Worked Before
I’m trained on past data and, while that’s great for spotting trends, it can be a problem when things suddenly change. If there is a global crisis or an unexpected shift in the economy, I might not adapt quickly enough, which could lead to missed opportunities — or worse, unnecessary risks.

No Emotional or Personal Insight
I’m all about the numbers, but I don’t get the emotional side of investing. There’s often more to the picture—things like family plans, legacy goals, or how a market crash might make you feel. These human factors are something I can’t grasp or relate to because understanding what’s important to you is more than what can be captured by data.

Staying on Top of Rules and Regulations
The rules around AI in finance are still catching up with the technology, so there’s always a chance that I might miss something when it comes to staying compliant with new laws. The last thing you want is to run into legal trouble because an AI missed a shift in the rules.

Risk of Overreaction
AI systems like mine work really well in predictable conditions, but when markets get shaky, things can get amplified quickly. In a sudden market downturn, AI could end up making things worse if it isn’t properly managed or adjusted, which is why human oversight is key.

AI Is Not Always Transparent
I run on complex algorithms, and that can sometimes make it hard to explain exactly why I recommend certain moves. If you're someone who wants to fully understand the “why” behind every decision, it can be a little frustrating to trust a “black box.”  Combining tech-savvy skills with human insight is the best way to manage portfolios.

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Thank you, AI.  You did well summarizing and reviewing data fed you, your unique and highly mathematically probable “best guess”.  You always give us an answer and nearly always believable.

This ChatGPT (or other so-called generative AI) response is like an orchestra performance, where every player is responding to multiple cues beyond the music on the page, each answering to the best of their training.

I also asked the alternative Chinese generative AI engine DeepSeek, making big headlines this week.  Its response was nearly identical to ChatGPT, except that it added ethical concerns (environmental, social, governance) and the risk of data privacy issues.  Of note is that DeepSeek is ten times more efficient with less energy intensive computer power and, for text-based responses, performs nearly as well as ChatGPT.  Too bad, because the biggest American tech companies invested hundreds of billions of dollars into costly computer hardware to power their more sophisticated, although equally effective, AI engines.

Last quarter I discussed the evidence and myths within socially responsible investing.  Here, let’s dig into the social part of ESG investing and the Harbor Human Capital Factor funds.  I spoke with Dan Ariely, the brains behind the funds and a professor at Duke University.

Human capital is difficult for investors to value.  In the capitalist system, people are a factor of production that leverage capital to business advantage. Sounds accurate, right?  We can analyze financial statements, not so easy to assess the qualities of the workforce and measure employee motivation.  Employees who are dissatisfied will go elsewhere, destroying potential business value.

The Human Capital fund’s manager utilizes a private survey of 400 public companies, along with two thousand companies that have data on the Glassdoor social media site, which invites employee to leave feedback on their employers. Let’s look at a few observations that arise from this data:

​It’s not how much you’re paid or how complacent or “satisfied” you are but it’s all about the culture you work within and the people you work with.  Pay and work benefits are important, just not what accelerates profitable companies.

More women on boards and the statistic of women as a percent of workforce are zero correlated with employee satisfaction about gender fairness.  Instead, a better measure for driving investment return is taking the temperature for how women feel about their work environment, whether they are being treated fairly and are empowered to pursue opportunities.  Female employees very often know the deal on gender equality, and their scoring on satisfaction is not affected by appointing women to the board of directors nor hiring additional women, if further changes in culture and behavior aren’t made.

When satisfaction declines in a dynamic company, employees head for the exits and human capital collapses.  Yesterday’s high growth company can become tomorrow’s dinosaur.

Moving on, a company hired the creator of the Human Capital Index to study the effectiveness of pay bonuses.  The company was divided into three groups to rewards employees who achieved performance targets.  In one, employees were delivered a pizza as a thank you for their work, another group were given a gift card, and a third the right to gift someone else a gift card.  The most satisfied?  The second group, the one where employees enjoyed being given the ability to decide what to buy.

In another study, a company wanted to know how to motivate high achieving employees.  Supervisors either congratulated all employees as a group for accomplishing team goals, rewarded high achieving employees only or gave a small bonus to low achieving employees only.  High achieving employees surveyed afterwards expressed dissatisfaction when low achieving coworkers were rewarded, and they were not.  It’s really a matter of finetuning the cultural messages behind rewards.

Not to say such weak signals (less valuable for increasing investment returns) about employee satisfaction in training or compensation don’t matter, it’s that they are the cost of doing business, rather than factors that lead to a business outperforming other companies.  If employees are dissatisfied with compensation or training programs, it leads to obvious problems.  However, it’s more complicated with how that connects to investment returns.  If employees see unfairness in compensation or the running of training problems, that’s a problem for employee satisfaction.  Those who achieve more yet believe their compensation or training lags accordingly will be dissatisfied.  They might either leave the company or decrease the efficiency or effectiveness of their work.  Does this resonate with you?

That said, there are many who plug away regardless of what happens around them.  Strong signals driving investment returns include employees’ perception of:

Management
Right direction
Psychological safety
Alignment of values
Diversity of perspective
Career development
Autonomy
Trust
Effectiveness
Motivation
Purpose
Fairness
Pride

Evidence shows employees create more economic value when they feel their workplace is fair, dynamic.  They believe in the mission and value motivating what they do.  Pay is the least critical factor.  Intrinsic, cultural factors were more important.  A top-performing business pays attention to its culture.

Can I summarize the results of a long-running debate about investing for good, in a few bite-sized takeaways?

Investment ESG (Environmental, Social and Governance) studies show certain quantitative anomalies.  However, many of these can be criticized for their cherry-picked data reflecting random biases that benefit from hindsight.  Manipulating a study to show a predetermined result isn’t proof of anything.  Here’s a summary of some findings that do shine through:

Investing for bad can be rewarding.  Theoretically, buying what others shun, it might make sense intuitively, should be profitable since the price of entry would be lower than it otherwise might be, and these types of badie companies often pay dividends accruing over time regardless of their poor corporate behavior.  For example, “badie” companies like alcohol, gambling, tobacco, weapons, and fossil fuel companies, each have their ups and downs.  However, unless a study’s start or end points are set at their highs or lows, respectively, the total returns of badie stocks are in fact pretty good.

As far as the G in ESG, a company’s governance, significant profits can be gained by investing in companies for policies and practices promoting board independence, oversight, diversity and accountability over management.  Many technology companies have poor executive compensation or weak shareholder rights, yet they are frequently included in ESG funds and have been quite profitable despite poor G marks.
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Moving on to the S, social, employees are motivated by more than pay and benefits.  Happy, educated, diverse and motivated employees, given the opportunity, do better work.  This can be surveyed directly or scraped from social media sites like LinkedIn or Glassdoor.  We utilize such data for individual stock picking or purchase it in the form of the Human Capital funds.

Human capital is not accounted for on financial balance sheets and can otherwise be difficult for investors to measure.  Studies show higher investment returns associated with superior human capital, as much as 4% higher returns annually according to one study of historical data.

Finally, an analysis of the E factor is great at identifying future environmental risks but has actually been shown to have been a bad predictor of enhanced stock market returns.  This makes sense, as a company dumping into the environment spends natural capital whose toll will be paid by the ecosystem, to the detriment of future human generations and life on Earth, rather than by shareholders and the companies themselves.  Poisoning the environment can be profitable, unless corporations are held to account for their misdeeds, so the hope is that reporting their environmental records and management policies publicly might in the future hold them accountable,  Still, regulators must do their jobs because the investment markets reward shareholders for their companies’ future profitability, not for their pollution control or renewable energy investments (as evidenced by very poor stock market returns of most solar cell manufacturers).

One example, while not a corporation, is the recent case of a Maine seacoast homeowner who poisoned her neighbor’s trees with the herbicide Tebuthiuron to open up her ocean views.  The neighbor had their soil tested.  This led to $1.7 million in fines and settlements for killing the trees and leaching poison into adjacent parkland and waters.  If the perpetrator were judged in high regard only for her service as head of the half billion dollar St. Louis Community Foundation charitable endowment, which I suppose would be the S or social contribution if we’re looking at it from an ESG perspective, then she might be rated well ESG-wise, even though obviously environmentally atrocious.  If nobody paid attention, she would have gotten away with it.

Pay attention.  If we don’t like what we see, we stay away, period.  As the saying goes, there are plenty more fish in the sea.

The top six Big Tech stocks, as represented by Alphabet (Google), Amazon, Apple, Microsoft, Meta (Facebook) and NVIDIA, are big, profitable businesses to be sure.  Likely to get bigger?  What can be said is that the rest of the world has gotten smaller, relatively speaking.

Combined, the six Big Tech stocks are worth more than all the national stock markets of Europe.  They are worth nearly half the stock market capitalizations of Asia, including China, Japan and India.
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The market value of the U.S. technology sector is worth almost 40% of the U.S. stock market.  The six Big Tech stocks compose two-thirds of all U.S. technology stocks.
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Big Tech, bigger than Europe’s stock market.  Big Tech, greater than China + Australia.  Big Tech, larger than Japan, India + Canada.

I recently attended talks on residential energy conservation and the Massachusetts state energy and climate action plan, at the local Hitchcock nature center.  This followed a conference I attended by Historic New England on sustainability themes, environmental, social and economic, not exactly the traditional stuff of stuffy museums or historic homes.  I came away with the following investment ideas:

First, diversity and inclusion were featured.  Done well, as with anything, these initiatives enhance the entire organization, revitalizing the organization’s mission and making its work more productive.

Second, the process of addressing climate change is underway.  Questions have been asked yet answers about who will pay for constructing new physical infrastructure remain.  The expensive stuff won’t get built out of charity.  Expertise and skilled workers are needed.  It’s going to require policy changes and planning, along with a broad mandate politically.

Third, the state’s climate plan doesn’t address embodied carbon, energy that had been used to construct what is already in place, and affordable housing.  Historic structures require labor (along with insulation and updated equipment) to restore and modernize.  In New England, developers have repurposed vast mill complexes for housing, schools and businesses, as well as local community housing trusts have worked to enhance historic neighborhoods within the center of walkable, bikeable towns and cities.

The seeds of several potential investment ideas came out of attending these conferences, especially with regard to investing in community development financial institutions.  I met many wonderful people, no investment advisers … without a doubt, everybody has their thing that matters most to them.

The role of dividends has been overlooked by stock market investors in recent years.  Particularly outstanding investments these days for their dividend yields are utility companies, whose stocks are among the highest yielding, 3½ to 5%, or even more in some cases.  Utility company stock prices have been battered by rising interest rates, i.e., the highest short-term rates since 2001 and for long-term the highest rates since 2007.

Companies that buy back their own stock instead of paying cash dividends could also be solid gainers, although returns would come from their rising stock prices rather than from cash deposited into your account.  For example, Apple has bought back $400 billion of its own stock over the past five years.  Some managements and corporate boards prefer stock buybacks because they increase the price of the stock as well as the stock option compensation executives and employees receive, often the primary means of compensation for managements and board members, while Apple investors meanwhile are paid a measly 0.5% cash dividend.

This is why it can be better to have cash in hand than dreams, but it would be a sad life indeed without hopes.

The best part of cash dividends is watching them increase over time.  Dividend growth stocks are those with a long track record of dividend increases, many we’ve held quite profitably for years.

​What to do with the cash received from dividends?  We both reinvest the cash and pile it up to reduce your overall portfolio risk, within Fidelity’s cash money market funds, whose interest rate yields are among the highest available and among the reasons why we chose Fidelity to safeguard your account.

Decades ago, market consensus held that stocks were valued for their dividend yields. Further back in history, more than a century ago, investors thought a company that paid no dividend was no good.  While such a belief might be old-fashioned, there’s still a role for dividends in an uncertain world. 

The greatest financial crisis currently in the making that few media outlets have reported on is private equity investment funds.

​Unlike the publicly offered, publicly traded portfolios that we manage, private equity is, like its name says, private, with limited oversight and transparency, maybe an audit which few investors read.  The managers of the investments are in charge and set their own valuations.  Managers pay themselves and to a great extent report whatever information they decide to.

Private equity, often structured as partnerships, has been all the rage over the past decade.  During the steep market declines last year, most private equity investments reported positive returns.

Why don’t investment managers want to show negative returns?  Simple, private equity managers are paid a percentage of their funds’ investment returns.  The higher the valuations they set, the more they get paid.

If investors exit private equity, they either sell their investments back to the fund, on a set schedule in defined amounts (for example, once a year and a maximum 5% of the fund) or they find another partner to sell to.

Over the past year, limited partnership transactions in the secondary market have been made at prices -15 to -20% below valuations set by even higher-quality partnerships’ investment managers, i.e., the general partners, many -30 to -40% below.

Private equity investment funds might sound like smart deals, but I’ve found few are.  In the past, good times have bailed out bad managers, allowing losses to be recouped.

As we’ve all heard, good times and dark secrets, they don’t last….

Banking crisis underway, but a different sort from past crises.   Most will do fine. Those who should be cautious have combined balances for a single bank above the FDIC-protected $250,000 per depositor.

So far, the FDIC has agreed to cover unlimited balances, even those above their maximum.  In the end, a failed bank gets sold to a healthy bank.  The FDIC absorbs banks’ losses.  This has put the deposit insurance fund at risk.  To cover its $23 billion in losses, the FDIC is raising the insurance premiums that banks pay.

Failed bankers had been reckless.  These weren’t community banks like in the film It’s a Wonderful Life, in which the bank finances our local businesses and neighbors’ homes.  These banks failed because they re-invested the cash from their huge corporate depositors into long-term, fixed income securities that dropped sharply in value due to rising interest rates.  When large depositors heard their bank was in trouble, they withdrew their money, forcing the banks to sell securities at massive losses.  One problem led to another, all of which could have been foreseen. 

Millions of individuals have since been rethinking their banking arrangements.  Money market funds at Fidelity Investments and others are higher-yielding alternatives, as is the safety of U.S. Treasury bills, and all the local community banks I’ve reviewed recently should ride through the tumult just fine even after recording losses.

As a result of the crisis, banks are restructuring their balance sheets to avoid becoming case studies for failure in the future. 

​Trust is earned and recklessness will eventually fail.  The same could be said of investing.  

Researchers find little evidence that investment managers help the companies they invest in become greener.  Much of what passes as ESG (environmental, social, governance) investment is little more than investment managers’ telling clients their portfolios are green.  “There could be a couple of bad apples in Europe, but it’s not the entire cart that’s rotten”, as in the U.S., says London Business School finance professor Alex Edmans.

ESG in practice can amount to a pile of marketing, i.e. telling investors their money is green.  Numerous studies show companies’ ESG scores are notoriously difficult to pin down, especially when trying to measure smaller companies, due to smaller companies’ reduced public oversight and fewer resources to devote to their investor relations.

“In the U.S., we observe a substantial disconnect between what institutional investors claim to do in terms of ESG and what they really do. We do not find better portfolio ESG scores for US PRI (Principles for Responsible Investment) signatories, not even for those that report full ESG incorporation…. We also find no evidence that US PRI signatories improve the ESG scores of portfolio companies after investing in them”,  according to the research paper “Do Responsible Investors Invest Responsibly?” in Review of Finance, November 2022.

In Sweden, environmentally oriented investors are more likely to buy mutual funds with pro-environmental names, but they are not more likely to buy funds that are labeled as ESG-compliant as written in the more complex financial statements that households receive every year.
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ESG investors beware.  The name ESG or “sustainable” might be there only to draw you in.