I’ve talked about this a little bit before but wanted to elaborate/ramble with some more thoughts – how does morality fit into investing?
For example, would you invest in Altria, the world’s biggest producer of cigarettes? Lots of people have made gobs of money investing in the company over the years, but would you?
There’s no doubt that smoking leads to lung cancer. So, is it an ethical problem to invest in the company? What about if you invested 70 years ago when people didn’t understand the health effects of smoking? Does ignorance play a part in the ethical nature of your decision?
These are tough questions and maybe there aren’t truly “right” answers because there is a lot of gray area.
Another example is the portfolio’s largest position, Upstart. When we first bought the stock, we got some valuable pushback from a few members about the morality of investing in the company. Was it right to charge upwards of 20% APRs in some cases? Should we invest if we would never personally use the product?
On the other hand, Upstart has great intentions. Their goal is to lower APRs for people who never would have had access to credit in the first place. So, although I may not use a short-term personal loan, is it my place to say that no one should? Is that a “mightier-than-you” attitude? The fact is that some people simply need a loan right now and they would be on the streets if they couldn’t get one; they may be in a tight situation and need a little money until they can get a job.
Or what about a company like Affirm, where you can convert a specific purchase into a short-term loan? You can pay for a vacation with monthly installments instead of upfront. Is that morally wrong since it’s likely not a financially responsible decision? Vacations are consumable products -- you can’t reuse them (just the memories!), so should people wait until they can afford to pay for them fully or should they go on them now and pay later? (hence the name, buy-now-pay-later!)
The examples are plentiful – what about investing in coal companies? Burning coal is bad for the environment, but should it be outlawed? What about the developing nations that don’t have clean energy? Is coal inherently a bad thing if it helps current people groups but may harm future groups? The questions go on and on.
The bottom line is that morality regarding investing is a bit tricky, maybe even trickier than business in general. Why? Well, this may be semantics but when you invest in a stock, you’re not explicitly giving the company your money. You’re buying those shares from other people across the world. You are putting your belief in the company though. On the other hand, I guess you can make the argument that your investment does help the company. If no one bought shares, the valuation would be super low which would make it more difficult to recruit top talent and do stock-based acquisitions. In that sense, you are “giving” the company your dollars. Moreover, some people like day-traders, don’t really even care about the business so does morality not matter for them? On top of this, as a public-market investor, you have so many options. In comparison, if you were start a business, it’s not very easy to back out of it and start a new one in a totally different field. But as an investor, you can easily pick and choose to invest in all sorts of businesses. So the scope of businesses you have to think about may be much wider which leads to more possibilities of gray moral areas.
And yet another complication is that people have different moral compasses. It’s easy to assume that helping people, not harming the environment, and “doing the right thing” is obvious but many people don’t operate from that worldview. So as much as I personally believe there is right and wrong, I can’t control anyone else and force them to see the world the way I do.
With that said, here is where I stand currently on these issues (you’re obviously free to disagree with me). I learned this framework from a wise man.
There are six stakeholder groups in any company:
1. Customers
2. Suppliers
3. Employees
4. Owners
5. Regulators
6. Communities
And each party wants a few things:
1. Customers want an amazing value prop
2. Suppliers want stability
3. Employees want autonomy and purpose
4. Owners want superior returns, low risk and long duration
5. Regulators want to look good
6. Communities want good neighbors
To get superior returns with low risk for a long time, each of these six parties must be satisfied. Sure, you can get high returns for a long time but if you screw your suppliers and your community, the risk increases. And the thing about the owner equation is that its multiplicative. If your risk increases too much, you won’t have any returns to speak of. If you multiply any number by 0, you get 0.
Therefore, treating people well is good business in the long run. In the short run, you may be making trade-offs like paying employees more and giving better deals to suppliers. However, your long-term risk is much lower. So even besides the fact that I want my portfolio to reflect my values, treating people the way you’d like to be treated is good business.
There is this whole ESG (environmental, social and governance) movement that has been going on over the past decade where companies are explicitly trying to do the right thing so that they can score high on ESG standards. It’s a bit of virtue signaling but I think it’s a step in the right direction. On the other hand, lots of people are skeptical of the ESG movement because it may not be grounded in reality. Like the coal thing – is it really fair of me to say that a developing nation shouldn’t be able to burn coal when they don’t have any clean alternatives yet? Does the fact that I can worry about things higher on Maslow’s Hierarchy of Needs (like self-actualization through having my portfolio reflect my values) outweigh the fact that a developing nation needs energy? That sounds awfully sanctimonious if you ask me!
So what’s the solution? How do we deal with all of this nuance?
Unfortunately, I don’t have a fancy framework. I think each situation requires a thoughtful approach. One thing I think about is “intent”. Coca-Cola’s drinks have an insane amount of sugar and sugar isn’t good for people. But does management have intent to create better alternatives than 40 grams of sugar in an 8 oz can? But obviously intent can be “gamed” and management can say one thing and do another. I like the Coke example because it takes things to the extreme. Sugar isn’t inherently bad but in large quantities, it is harmful. So should we never invest in anything that has the potential to do harm? Malfunctioning airplanes kill people, software glitches can be responsible for putting people in danger, cars are the single biggest murderers after disease. At some point, you must draw the line. You could find something wrong in ANY company you think of. Roku promotes laziness. Upstart’s APRs are too high. Cloudflare hosts dangerous websites. You name it! At some point, the virtue signaling goes too far and you need to decide where that line is for yourself.
I think intent does matter. If the company is trying to make the world a better place and is constantly working towards creating better products, that goes a long way. Sure, maybe Altria buying into Juul for vaping is slightly better. Or a pharma company lowering the drug price from $250k to $200k is great but that’s why I think it’s important to think through each situation individually. In these two examples, maybe the intent just isn’t good enough. So I’m speaking out of both sides of my mouth. Intent matters but some things just can’t quite be redeemed. I think a great question to ask is: if I was the target client, would I use this product? If the answer to that is a resounding “no”, it might require some more introspection. Going back to the Upstart example, if I desperately needed a loan and I was black-balled from all the local banks, I would likely use the product. But if I was addicted to nicotine, I would be trying as hard as possible to stop smoking. So in that case, I can’t personally make an argument for buying Altria.
One other thing I want to point out is that investing in companies that do no harm means you have fewer headwinds to deal with. Whether you like it or not, there is a stigma around a company like Coca-Cola or GM or Altria. And with that stigma comes a lower valuation multiple. Beyond this, there is a customer headwind where people will vote with their dollars and choose healthier options. The best employees will also want to work for the companies on the right side of change. It’s just much easier to invest in companies with fewer headwinds.
To wrap up all these rambling thoughts, I can’t tell you how to think and what to believe. But I think caring about people’s well-being is simply good business that reduces the risk of losing money in the long-term. And companies that make the world a better place have fewer headwinds which also decreases long-term risk. As long-term investors, while sort of implicitly, our dollars do impact the businesses we get behind. Therefore, it’s important to think about the types of businesses we want to be associated with. Morality can be a tricky subject because sometimes the high road really may not be all that high. And the low road might be higher than you think once you dig into the complexities. But if we’re thinking deeply about each situation and we’re updating our views as we get more data, I think that’s all we can ask for. We won’t be perfect, but I want my portfolio to reflect my values. And I have nothing against people who don’t see it the same way.
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