Thursday, February 19, 1998
TOWACO, NJ (Feb. 19, 1998) -- Intel rose more than $3, T Rowe Price was up more than a buck... all is right in Cash-Kingville (oh yeah, we established a new village this past week, CKVille, America). Enough about our stocks, though. Todays column will be a little more personal than most as I express my opinion about how a Cash-King investor should approach an investment that she feels is "ethically challenged." My aim is to illustrate that when we invest, we should first take a look at ethical considerations in order to:
1. Remain comfortable in our investments,
Let's start with #1.
Comfort when investing...
Each of our four Cash-King buys to date are well-known, well-respected companies that have ample reserves to deal with the inevitable problems that arise in any business. Those problems, they're inevitable -- whether we're talking about Microsoft being sued by the Justice Department, Coca-Cola being managed by a man stricken with Alzheimer's in the 1970s, Dell getting slammed by the derivatives market nearly a decade ago, or Disney banking on Michael Ovitz to work productively within the company's structure.
Everyone makes mistakes; every company errs... occasionally very badly. But we're aiming to find businesses with the resources, the brandname, the resiliency, and the rich tradition to bounce back and make all woes temporary. By loosely holding to a ten-year time horizon, we think we're giving our companies time to rally from any misfortunes.
But comfort is more than mere financial safety. Schindler's List reminded us of that. A Fool needs to feel good about how her companies earn the profits in which she shares. Tobacco and/or alcohol companies are often cited as the prime examples of ethically-challenged investments. In fact, there are many more examples than that. For example, a lot of investors shy away from investing in Microsoft because of their supposed "dastardly" business practices (fellow Cash-King manager Rob Landley, who you will meet next week, leads this pack).
Regardless of the reason, the bottom-line is that we invest to make the future more comfortable for our family and ourselves. I can not be comfortable if I'm uneasy about how I acquired the money that contributes to my enduring comfort. On the other hand, what makes one Fool uncomfortable doesnt bother another one at all. Owning Mr. Softy doesnt bother me at all; Tom could buy a microbrewing company without hesitation; and some of you out there actually love to smoke cigarettes. Its not our place to determine which investments are unethical for you or anyone else.
Now, fortunately as we make our investment decisions, we can be pretty selective. We're really only looking for 10-15 great companies in which to invest -- which we plan to hold for many years. We'll let Freddy the Fund Manager buy and sell and sell sell sell, and buy, no sell, hold, hold, wait, hold for a second, okay, okay, wait, okay... SELL! Now buy, and buy more, yes, buy! Then sell. Yes, sell, sell! Ok, buy again. Buy! Buy! Buy!
Freddy the Fund Manager can have the peculiar satisfaction of owning eighty-seven different stocks in a single day. Long ago, we set off in the other direction, jangling our bells and whistling old Neil Diamond tunes as we looked for a dozen great businesses to possibly own for a lifetime. From an ethical standpoint, this gives us time to periodically assess the value of the business as well as the values of the business. Traders don't get to make that connection (and often don't beat the S&P 500 Index Fund, once all commissions, cap-gains taxes, and opportunity costs of life are removed -- but that's another story!).
For investors, thankfully, there are at least a few dozen truly great companies in America, working extremely hard to profitably improve the world. In fact, as we've been building this portfolio, we've come to recognize that our biggest problem is choosing among the many great monopoly makers. There is a list of them that runs longer than our list of 10-15 potential investments. And given that, if one companys products or practices give us the willies, we're perfectly comfortable moving down to the next on our list.
We recommend that you do the same, Fool. If you find it distasteful that Microsoft smiles at the executives at competing firms getting rich on short-term valuations, then xeroxes their business model... bypass MSFT. If you think it's wrong that Sara Lee fattens Americans every day, avoid that one. You don't like the way automakers have historically treated their employees -- that's entirely your call, skip that one. You say that you don't want to participate in the sale of cigarettes to 12-year-olds in Budapest? Skip past our nation's tobacco industry. There are enough great companies that fit neatly into our daily lives as we consume their products and services every week -- why invest in a business that violates our ethical code and from whom we purchase nothing?
Another key component to Cash-King investing is taking advantage of all the time it leaves us for other things. This means a lot to me personally as I noted in my first column on Monday. I was initially drawn to this investment style on May 1, 1997, when I read the reprint of Toms article on the Simpleton Portfolio. I was delighted to learn of a method whose basis was to buy-and-hold for at least ten years, with so little time wasted on trading and a controlled amount of time given over to methodically reviewing the performance of our businesses.
Of course, as is noted in Step 6, 10-year purchases shouldn't be made casually. To a certain extent, the extra time we gain by not trading is paid for by the Foolish research required on the front end. In the beginning, it can take a long time and a lot of spreadsheet work to be comfortable that a company is really worthy of investment. Fortunately, as we gain familiarity with the process, we know what to look for and we can complete sufficient research literally in a few hours, and then stay up-to-date each quarter in 15-30 minutes.
What does this have to do with ethical investing?
Well, the time I spend on the research is precious. So the last thing I want to do is waste time researching the financials of a company whose business offends me. Accordingly, I always make the ethical decision first. It takes me a lot less time to decide whether a company makes me uncomfortable on ethical grounds than it does to decide whether its a good candidate for investment.
And finally, in my mind and heart, I leave ethical decisions up to each individual investor. Mine is not to reason why for them, mine is but to do and buy!
Well, enough on ethics for one day (OK, perhaps that was enough for a month!). Tomorrow, I conclude our shortened week together with a look at why we are not primarily concerned with valuation as we manage the Cash-King Portfolio. Until then...
Fool on and... go Intel!
Al Levit (firstname.lastname@example.org)