“The Shade of Trees They’ll Never Sit Under”: Investing for the Lodge and Your Future Brethren - Part 2

by Midnight Freemason Contributor

Phillip Welshans

Part 2: Defining the Parameters

This material has been prepared for general and educational purposes only. This material does not provide recommendations concerning investments, investment strategies, or account types. It is not individualized to the needs of any specific investor and is not intended to suggest that any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material. All investments involve risk, including possible loss of principal.

Before we get into the weeds of managing lodge investments, it's probably helpful to start at a 30,000-foot view and define the parameters of our discussion. Investing, like most fields, has a dictionary of technical jargon and terminology that is accessible to all but understood by the few who take the time to learn (sound familiar?). For example, many people know what a stock is, per se, but not what it's for or how its price and value are related.1 A stock is something you can buy and sell, but so what?

This is also because I don't want to simply assume every brother reading this is starting with the same level of knowledge. If you're new to investing, either in your personal life or in your involvement with your lodge (or both), it will do you no good whatsoever if I jump right in with jargon and wrongly assume everyone spends every working day around this stuff like I do. So, this post starts with some basics. If you're reading this and saying to yourself, "I know this already," that's cool; skip ahead to other posts and you'll be fine.

Defining Investing

Investing is buying a security or financial interest in a venture or business that is designed to generate a return on investment (ROI) for the investor. It is one of the fundamental means by which capital is allocated in a capitalist society. There are people who need capital to start a business, grow a business, build a prototype, etc. Existing companies need additional capital to expand their operations or fund new capital expenditures ("capex"). They can all access that capital through a variety of means, not least of which is attracting investors, both public and private.2

Generally, in our discussion, we will think of investing as buying and selling securities in companies, funds, and so on, rather than buying direct interests in businesses. The reason for this is ease of use and low cost. Without getting too far ahead of ourselves, it's not practical for most lodges to expend the time, energy, and money needed to make direct investments in businesses or ventures. Especially when the huge, highly liquid secondary markets are easier and cheaper to access than ever.3 Most brokerage firms like Fidelity or Vanguard or Schwab offer every customer commission-free trades on thousands of mutual funds and ETFs. For the vast majority of lodges out there, your investment management will occur almost solely in the secondary markets.

Individual & Institution: The Two Types of Investors

Just as there are dog people and cat people, Dodge people and Chevy people, fries people, and onion rings people, so too there are two types of investors: individuals and institutions. Individuals are you and me, sitting at our desk or computer, buying and selling stocks. You may have heard the term "retail" investor bandied about as well, and generally this and "individual" investor are interchangeable so we'll use them that way here too. Institutional investors are large organizations such as corporate or government pension funds, asset managers, university endowments, sovereign wealth funds, insurance companies, and banks. These investors are giant players in the markets with, in most cases, (tens of) billions of dollars to throw around. For example, the biggest pension fund, Japan's government pension scheme, has something like $1.5 TRILLION dollars under management.

Retail investors tend to have smaller accounts individually4, although by some measurements still makeup about half of all assets under management. They also tend to be less "sophisticated" investors, seeing as how most retail investors' day jobs are not in investing or finance broadly.5 For many retail investors, investing is a hobby or a task they have to perform in order to plan for retirement.

You may (or may not) be surprised to learn that Grand Lodges are considered institutional investors. Many Grand Lodges have accrued large holdings of real estate and other assets over their many decades of existence, and they've created foundations and endowments to manage those assets. If you attend your Grand Lodge's annual or semiannual communications, there is probably a portion of the proceedings and information packet dedicated to the performance of these accounts.6 Almost certainly your Grand Lodge, via an internally formed investment or finance committee, has hired a professional financial advisor to manage those assets full-time, and that advisor will usually provide regular updates to whatever committee or other body has been tasked with keeping tabs on these substantial sums of money.

But what about your lodge? Individual lodges share traits of both individuals and institutions. On the one hand, most lodges' assets will be closer to those of an average individual investor (let's say <$1 million as a round number) than an institution. Often a lodge's investments will not even be the biggest asset it owns, that being the lodge building and/or land itself. Moreover, a lodge may not have a brother or brethren who are active members and have any sort of investment knowledge. Therefore, as an "investor," the lodge may be fairly unsophisticated. That's OK! Not every lodge needs to have a Warren Buffett in-house in order to successfully manage their investments. We'll talk more about why that is and what steps those lodges might want to take later on.

Yet in other ways, it's very much an institution. For one, it's a group of people pooling resources into a single entity. Many lodges are also set up as non-profits and are therefore tax-exempt, which has implications for how finances are managed and differ from retail investors, who must pay annoying things like capital gains taxes, income taxes on dividends, and property taxes. And the time horizon for a lodge is typically much longer than an individual. This is arguably the most important difference and is one I consider to be important enough that it's worth spending more time on in a future post.

My personal view is that it makes the most logical and prudent sense to approach most aspects of your lodge's investment management from the standpoint of an institutional investor. In this case, I think it's prudent to ignore the number of assets your lodge owns and focus instead on the implications for risk management and asset allocation that come with thinking like an institution. So from here on, I will be assuming we're thinking about your lodge as an institution and not as an individual investor.

Conclusion

So, after all that, where are we? In sum, these posts are going to be focusing on constituent lodge investment management, but through the prism of an institutional investor. We'll be confining our discussions to primarily public secondary markets, as this is where the vast majority of constituent lodges will be investing, but we will address other markets and assets as appropriate. And this will be done in layman's terms as much as possible, with plenty of footnotes and definitions of technical terms as needed.

1. Broadly, a stock is a claim on the cash flows of a business, extending out into the future. The value of a stock is those future cash flows (profits and any dividends paid), discounted back in time to today at some rate called, unsurprisingly, the "discount rate." They are discounted because a.) they're uncertain and not guaranteed and, b.) a dollar that might be received sometime in the future should implicitly be worth less than a dollar received today.
2. We will spend some time in a future post talking about the difference between public and private financial markets, how they fit into investment management, and how you may want to think about each as you monitor your lodge's assets over time. We'll get there, I promise!
3. There are "primary markets," which is where investors with large amounts of money and expertise invest directly in businesses. An example would be a venture capital fund making a large direct investment in a Silicon Valley startup. Another common example is an initial public offering (IPO), where a private company offers shares of stock to the public. The secondary markets are where investors trade already existing securities. If you buy/sell a stock or bond or share of a mutual fund, you're participating in the secondary market. The New York Stock Exchange is a secondary market.
4. Very wealthy individuals can be an exception to this rule. Lots of high-net-worth individuals (HNW) will have access to investment vehicles with large minimum requirements. I'm thinking mainly of hedge funds, closed end funds, and investment in private equity shops as limited partners. Those with enough wealth will create so-called "family offices" where a small team of analysts and portfolio managers will manage a family fortune full time. These family offices are kind of in a no-man's land; they're not really retail but they're also not considered institutions, strictly speaking. But practically speaking they're often treated as institutional investors. The wealthier you are, the more you behave and are treated like an institution within markets.
5. The use of the word "sophisticated" here was coined by the investment management industry, and is more than a little pejorative in my view. It's a way for the pros to put more distance between themselves and the masses of individual investors by making themselves seem smarter than some of us really are. Just my two cents. Plenty of "sophisticated" investors go bust every year while prudent, yet unsophisticated investors bank solid returns.
6. Many, but not all, Grand Lodges keep this information close to the vest and are loathe to disclose anything but the highest level of information. Lack of disclosure just breeds speculation in my opinion, even more so when you're talking about an organization made up of people who are already promising to keep the secrets communicated to us.

~PW

Phillip Welshans is Senior Warden of Palestine Lodge #189 in Catonsville, MD under the Grand Lodge of Maryland A.F. & A.M. He is also a member of the Maryland Masonic Lodge of Research #239, and the Hiram Guild of the Maryland Masonic Academy. As a member of the Ancient and Accepted Scottish Rite, S.J. in the Valley of Baltimore, he has completed the Master Craftsman programs and is a member of the Scottish Rite Research Society. His interests are primarily in Masonic education, particularly the history of the Craft, esotericism, and the philosophy of Masonry.