Principle- and Ethics-Driven Investing
Where do principles, ethics, and personal values fit into ‘value investing’? If I’m concerned about sustainability, corporate responsibility, or support for specific causes – or if I just want to make sure my investments are doing more good in the world than just making me money – how should that affect my investment decisions?
In general, I agree that it doesn't feel good to make money through an ethically questionable investment. To use an example that may be a little controversial, I've owned Facebook in the past, but I’ve come to have mixed feelings about them from an ethical standpoint. They’re so big and influential that they can meaningfully shape people’s views of the world. A lot of good can come from that! But I also see a lot of harm in terms of spreading misinformation and cultivating self-doubt and anxiety.
Thankfully, there are enough opportunities out there to make money in a way that you can still feel good about yourself.
To that end, one question I ask when I’m evaluating a company: are the company’s customers there for all the right reasons?
I’d prefer a company whose customers love their product because it’s a good product and the company is also doing good. Customers are often a good judge of the character of the companies with which they do business; and they recognize when they’re being manipulated, mistreated, or used. Customers won’t stick around if they have a choice, so many would-be unethical companies end up foundering because of their own behavior.
But it can be tricky, because sometimes customers don’t have a choice. Think of telecommunication and cable companies. I discussed these back in August’s Q&A, when we were discussing ‘moats.’
On the surface, you’d think these companies have a strong moat (i.e., a protected market position). But they don’t. So many of their customers hate them and use them only because of an absence of meaningful alternatives. As cord-cutting has become more viable, these companies have been bleeding customers. Pay TV companies lost 5.5 million customers in 2020 and another 1.5 million in the first quarter of 2021. That trend won’t stop.
The issue here isn’t one of value. These companies do provide value to their customers! They aggregate enormous amounts of entertainment and information for a single price each month. The issue is very much an ethical one. They took advantage of their market position and virtual monopoly to treat their customers badly.
At a certain point, companies that resist the urge to maximize today’s profit dollars are preferable to me if it means that they’re doing right by their customer.
It’s not just a matter of principles, either. There is financial value to doing right: it strengthens and extends the loyalty of your customer base. Abuse of power by companies over their customers or others will almost always lead to their demise, or at least a worsening of their market performance. Ultimately, I think ethical decisions and good financial decisions kind of flow through each other. Good companies usually have good policies across the board.
Think about climate change and sustainability. You can't be a company that says, “Well, I'm ignoring climate risk,” and expect good business outcomes in the future. If you're affected by it, and you're ignoring it, then that has very real economic consequences in addition to the ethical ones. Even if you're not directly affected by climate change (acknowledging that none of us are totally unaffected), that's part of the valuation equation that I would have to consider. Netflix isn’t going to be affected by climate change the way Exxon Mobil is, but I would expect both to be considering climate-related risks such as it relates to their businesses, to their customers, and to the world at large
Ultimately, I think having some social consciousness is probably inherent in the DNA of really great companies. These businesses are the ones that try to do the right thing and find ways to make a difference, and that’s definitely something I look at and encourage others to consider.