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 theyâ€™re afraid clients will be upset with them. One of the firms is located in Boulder â€“ 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 managerâ€™s firm manages north of four billion dollars and has several mutual funds. This leads me to believe that the headline noise about Wal-Martâ€™s immorality may force it into the â€œimmoral investment class,â€ 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 â€“ â€œCapitalist Pig
â€ article. He could not believe that I meant every word; he thought I was just being â€œprovocative.â€
I really do believe that Wal-Mart is an incredible company and I donâ€™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 etcâ€¦ We donâ€™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 donâ€™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 wonâ€™t pass the â€œsocialâ€ 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: â€œTake 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.â€
Mailbag: Sin Stocks
I live in Colorado Springsâ€¦.and if you donâ€™t like living in Boulder Iâ€™ll trade places with you anytime. I think youâ€™d find that living with the â€˜socialistsâ€™ in Boulder is more tolerable (and more fun) than living with the â€˜Focus-on-the-Familyâ€™ fundamentalists here in the Springs. But seriously, I donâ€™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, weâ€™ve done several points better than the S&P 500 over the years without investing in those industries. So, the hurdle really isnâ€™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 donâ€™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 Iâ€™ve painted of the city may not apply to it any longer.
Avoiding sin stocks (i.e. defense, tobacco, gambling and alcohol) doesnâ€™t severely limit an investorâ€™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 â€“ 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 â€“ 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 â€˜investableâ€™ universe. Best regards, Vitaliy Vitaliy N. Katsenelson, CFA