Rule #1 Finance Blog

With Investor Phil Town

HOW DEEP SHOULD RULE #1 INVESTORS DIG?

I love this comment from Patty H.  She is serious about being a proud owner of whatever she is putting her money into.  Believe me, if more of us feel that way, we will change the way business works.  Read on and see more from me at the end.


From: Patty H.
Date: Aug 15, 2005
Subject: Biotech Investing
To: Phil

Dear Phil,

I have been studying your web page and have become very aware of all the moral issues associated with investing. In Sunday’s local paper I read a very interesting article stating that DuPont is now getting into the Biotech world with a green product called Sorona. The logo for the new plastic is "Clothing from a cornfield."  They will use biotechnology to convert corn instead of oil into plastic.

As a nature lover I know I want to invest in a green company so this really peaked my interest. DuPont is not nearly green enough for me so in doing some investigating I found that Sorona resulted from a long term collaboration between DuPont and a company called Genencor International. I started to research Genencor and liked everything I read. They were ranked the number one medium size company to work for the year from HR Magazine, so I knew they were good to their employees. Things started to look up because they were a very green co. too, again something I really wanted. I then found out they were recently purchased by a company called Danisco and their stock would no longer be publicly traded. I was not crazy about Danisco…

a Copenhagen Food Co. that made food products that I wouldn’t feed my kids, so I would never invest in them.

I thought I found a company  with the moral issues intact, and a good product. Now I am a little crazy worring about how you really know every aspect of a company is O.K. Do you ever know for sure?  I know you really like Panera, and so do I, but are you sure the farmer harvesting the wheat for the bread is getting compensated properly? In other words, is there such a thing as looking into a company too far? I want to know without any doubts I will own a company I can be proud of.

Patty H.

Here’s my response to Patty’s question:

I was talking about this with Douglas, a good friend and an investor I throw ideas around with a lot.  He kind of misunderstood what I meant when I said I think investors should not be hypocrites and invest in businesses that do things to the world that they don’t agree with.

Like if you think smoking is a bad thing, what are you doing investing in big tobacco?  Or even simpler, if you think Coke is bad for you and you wouldn’t want your kids drinking it, why own the business?

Douglas thought that I was taking a particular point of view.  He was kind of assuming a specific moral view.  In fact, although I certainly have my own moral viewpoint regarding what I invest in, I’m not pushing my view on others at all.  Zero.  Nada.  What I’m pushing is this:  You ought to have one and then not be a hypocrite about it with your investing.

It’s funny how the word "moral" gets loaded with a particular connotation when it’s really a neutral word.  It just means principles of right and wrong.  I studied philosophy with an emphasis on the philosophy of ethics and, believe me, my professors could show you how one set of principles of right and wrong can contradict another set in many important ways.

For example, Coke may not be a good business for some people who think drinking Coke is a bad health idea.  Others, many others, actually, think Coke is not so bad to drink and that it tastes so good on a hot day that, hey — live a little and lighten up, okay?  Same with a Budweiser, a shot of vodka, or a Big Mac and some fries.  Point is, I’m not advocating a particular set of rights and wrongs for Rule #1 investors.  I am advocating that you think about what is good, bad, right or wrong to you and see that you don’t contradict your own views when you buy a business.

Having said all that, we still have a problem that Patty raised: how the heck do you know how far to dig to see if the business is, in fact, measuring up to your standards as an owner?

The answer is this: you and I are not going to know everything there is to know about how a company does business — even if we dig all year.  On the other hand, if we are going to buy a business as if this is the only way to support our families for the next 100 years, don’t you think we should understand what we are buying?

If, in the process of getting to that level of understanding, we come across business practices or products that we abhor, we have two choices:  change the way this company operates or buy something else.  I wish I could tell you to dig in and change the business, but the truth is, you and I can’t change a thing.  We can, however, refuse to get in bed with these guys.  Maybe if enough of us start thinking like that, they’ll change.  That’s the idea.  So dig deep to satisfy the first M, if you don’t think they are a moral business, write them a letter that tells them why you refuse to buy their stock.

And don’t be afraid of the truth about your business.  If you buy something and find out later that they are not a business you feel good about owning, sell it.  No big deal.

So – final answer – dig deep enough for the 4Ms and then if something comes up later that you don’t like, sell it and move on to something you like better.