November 17-18, 2005 - Minyanville.com
Wal-Mart's Double Standard
I talked to two friends of mine, both are money managers. Their firms will not buy Wal-Mart (WMT) because they’re afraid clients will be upset with them. One of the firms is located in Boulder – so that unwillingness to own WMT makes sense, as Boulder is a socialistic Californian city disguised by the Rocky Mountains (did I just call Californians socialists?). But the other manager’s firm manages north of four billion dollars and has several mutual funds. This leads me to believe that the headline noise about Wal-Mart’s immorality may force it into the “immoral investment class,” where money managers may be dropping the name from their portfolios due to client pressure, thus creating a buying opportunity in the shares.
I also had a client call me asking if I really believed in what I wrote about WMT, referring to the Wal-Mart – “Capitalist Pig
” article. He could not believe that I meant every word; he thought I was just being “provocative.”
I really do believe that Wal-Mart is an incredible company and I don’t feel that it is committing any immoral acts. It is a retailer that is very good at what it does. Its only fault is that it is extremely successful; becoming the largest retailer in the U.S. and in the world. Its sheer size attracts the criticism, which has nothing to do with Wal-Mart but has to do with realities of capitalism, i.e. poverty of the lower classes, high medical costs and inability to afford health insurance etc… We don’t hear anybody discuss smaller retailers, i.e. Dollar General (DG), Family Dollar (FDO) and other businesses that pay minimum wage to their employees (Wal-Mart actually pays almost double the minimum wage) and don’t provide health insurance. It seems that there is a double standard by which Wal-Mart is judged upon.
Investors that have a social investing gene in them would be more upset about owning WMT than about owning a liquor (or any other sin) company. My view on social investing is very simple: it is an oxymoron. Investing is done to make money. Any company scrutinized enough won’t pass the “social” test. It is hard enough finding good investments, adding another very subjective criteria to the mix only makes it more difficult.
This is what Larry the Liquidator
said about social investing: “Take the money. Invest it somewhere else. Maybe, maybe you'll get lucky and it'll be used productively. And if it is, you'll create new jobs and provide a service for the economy and, God forbid, even make a few bucks for yourselves. And if anybody asks, tell 'em ya gave at the plant.”
Mailbag: Sin Stocks
I live in Colorado Springs….and if you don’t like living in Boulder I’ll trade places with you anytime. I think you’d find that living with the ‘socialists’ in Boulder is more tolerable (and more fun) than living with the ‘Focus-on-the-Family’ fundamentalists here in the Springs. But seriously, I don’t think screening out the biggest social culprits is that big of a hurdle. I find that most of our investors prefer not to invest in alcohol, tobacco, gambling, or military contractors. Actually, we’ve done several points better than the S&P 500 over the years without investing in those industries. So, the hurdle really isn’t that great. True, some social screens are much tighter than that, but then again, so are other fund screens based on market cap, value, growth, etc. I don’t hear Jim Awad complaining that he can only invest in small caps.
I live in Denver but probably would not mind living in Boulder. Though I've been told by my friends who live in Boulder that the liberal brush I’ve painted of the city may not apply to it any longer.
Avoiding sin stocks (i.e. defense, tobacco, gambling and alcohol) doesn’t severely limit an investor’s stock universe and is not very taxing on time and effort, as sin stocks are easily identifiable. That is not something I would do, it is an issue of personal values. As you mentioned, and I agree, following that strategy should not have significant consequences on the return achieved in the portfolio. However, social investing could be taken to an extreme if one decides to do so:
- Political donations – A company is giving money to the wrong (another very subjective criteria, unless it is something black and white like Al Qaeda) cause or party.
- Treatment of employees (very subjective) - Does Wal-Mart (WMT) treat their employees fairly? Do you start looking at employee compensation of every company you invest in?
- Labor practices (use of child labor) - Do you avoid companies that use parts made in China or manufactured in China?
- Environmental citizenship – Do you avoid oil companies and refineries? What about auto companies who make gas guzzling SUVs?
I probably missed a dozen categories, but you get the idea. When social investing is taken to the extreme it turns into a very taxing exercise and substantially limits the ‘investable’ universe.
Best regards, Vitaliy
Vitaliy N. Katsenelson, CFA
This article is written for educational purposes only. It is not intended as a recommendation (or advice) to buy or sell securities. Author and/or his employer may have a position in the securities discussed in this article. Security positions may change at any time.