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It seems like an obvious thing to say "be ethical, be honest" and yet there are so many people and so many companies out there that are not. Some make money, some don't. But in the long run, there is no other way to run a sustainable business without these qualities.
While a simple comparison between the returns of the FTSE KLD social index ETF with those of the S&P 1500 over 1, 3 and 5 years shows a small advantage to the socially responsible group, the jury is still out on who ultimately wins. There are academic studies that both support this theory and some that show no difference in returns.
Regardless of who wins, there's no doubt in my mind that there is one major pre-requisite to being in business and that is being honest, transparent and ethical (socially responsible is just a part of these qualities).
Instead of engaging in over analyzing why people and companies behave unethically, a much better question is "why would anyone invest in companies or people who behave unethically?".
A few stories to illustrate
I know this small business owner who operates in the service industry. He hires service providers to deliver services to a third party, the third party pays him, he pays the service providers the bulk of the earnings and takes out a small percentage, for coordinating the team and assuming all liabilities for the services rendered. His percentage goes down as his team grows.
It just happened that over a short few months last year his team started to flock to a competitor who offered slightly higher rates. His business suffered. But he remained honest and insisted on paying his team fairly and timely as always while his competitor had to make up for the higher wages by delaying payment and "accidentally" misplacing people's paychecks.
So what happened? The honest small business owner soon saw his business flourish again as his competitor started to lose people due to dishonest and unethical behavior.
Moral of the story: honesty pays, dishonesty is not sustainable.
A personal story
I recently hired a team of contractors for a small project of mine. The candidates who seemed the best had done work in advance of being awarded the project. They had updates and demos for me even before I agreed to hire them. Their turnaround time was impressive, sometimes answering my concerns within a few hours. So I hired them, expecting nothing short of great results. I was promised a new update the next Monday.
So a few days went by and on Tuesday I decided to check on the status of the job. The contractor said the team was on holidays for a few days but that the next day, there would be updates. Another day went by and this time I was told that the team was actually busy working on another project, but that within a day or two they'd be taking on my job. They had lied to me. Of course, the next two days went by and the team was "getting started very soon now".
Had they told me upfront that they were busy, I might have taken my project to someone else or I might have chosen to go with them anyway. But now, not only I'll never hire them again, I won't let anyone I know hire them either. That's worse than losing one single job -- they lost a customer, possibly a repeat customer, and who knows how many more customers they've now lost.
Conclusion
These are just simple illustrations of why I believe that being ethical in the long run is the only way of operating. As such, I don't hire or invest in businesses that can't or won't operate in the most ethical way possible.
No investor should. Do your homework before investing (or hiring).
Disclosures: No interest in the above mentioned securities.
2010-03-07
2010-02-27
Beat Warren Buffett
Warren Buffett likes to remind us that he likes easy one-foot hurdles he can step over rather than having to jump over the higher ones. He's referring to companies that are easy to understand and provide a lot of downside protection. It's easy to make money if we can find these easy-to-step-over hurdles!
However, for us non-Buffetts, finding these safe money-making investments is not that easy -- and Buffett admits it's getting tougher for him as well. Investment is about taking risks and, of course, managing them.
So how can you and I beat Warren Buffett at his own game? Not by doing better research than him on public companies. Nor by buying big, private ones either.
Be where Buffett cannot be
Both you and I have an advantage over Buffett: we live in different places, buy different products, surf different websites, have different tastes and most importantly, we come in contact with new, small, local businesses that Buffett cannot cover!
What does this mean? Should I be buying small start-ups?
Why not?
Be an angel to small businesses and start-ups
I'm not advocating you go door to door trying to buy your local landscaper or butcher shop. But you can be a small angel investor in small businesses if you simply ask them. Many business owners will be happy to take your money. All you have to do is find one that you believe in. And you have the tools for that, and Warren Buffett doesn't: you already buy their services or goods or know about their future products or services first-hand, by word-of-mouth and local publicity.
Angels don't have to be those who can offer multi-million dollar deals or even hundreds of thousands. I once read a short biography of a successful entrepreneur named David Portes, who started out by selling candy on the streets, with borrowed money -- ten dollars. By the time I read about him, he was already making more than a hundred thousand a month from teaching marketing seminars and his candy-selling business. Those ten bucks came from an angel -- who, given the circumstances, didn't think of himself as an angel. But he effectively was.
You too can be an angel investor to perhaps someone in your family or a friend. Yes, investing in start-ups and small businesses can be a huge risk. But if you do your due diligence as you would do on a big business(*), you have an edge over Buffett and over Wall Street that not very many people have.
Think about it, how many people knew about Bill Gates when he was just a kid with a computer? It's true that for each Bill Gates there are thousands of Broke Bobs and Bankrupt Sams out there. Your job is to find the ones that are competent, that have a great product or service, a lot of energy and integrity and most importantly, whom you trust.
Being an epic investor is about looking where others aren't.
* Remember, in this blog, we never recommend you invest blindly in anything, big or small, new or established -- you still need to do the scuttlebutt to find a suitable business that qualifies for your investment.
Disclosures: None.
However, for us non-Buffetts, finding these safe money-making investments is not that easy -- and Buffett admits it's getting tougher for him as well. Investment is about taking risks and, of course, managing them.
So how can you and I beat Warren Buffett at his own game? Not by doing better research than him on public companies. Nor by buying big, private ones either.
Be where Buffett cannot be
Both you and I have an advantage over Buffett: we live in different places, buy different products, surf different websites, have different tastes and most importantly, we come in contact with new, small, local businesses that Buffett cannot cover!
What does this mean? Should I be buying small start-ups?
Why not?
Be an angel to small businesses and start-ups
I'm not advocating you go door to door trying to buy your local landscaper or butcher shop. But you can be a small angel investor in small businesses if you simply ask them. Many business owners will be happy to take your money. All you have to do is find one that you believe in. And you have the tools for that, and Warren Buffett doesn't: you already buy their services or goods or know about their future products or services first-hand, by word-of-mouth and local publicity.
Angels don't have to be those who can offer multi-million dollar deals or even hundreds of thousands. I once read a short biography of a successful entrepreneur named David Portes, who started out by selling candy on the streets, with borrowed money -- ten dollars. By the time I read about him, he was already making more than a hundred thousand a month from teaching marketing seminars and his candy-selling business. Those ten bucks came from an angel -- who, given the circumstances, didn't think of himself as an angel. But he effectively was.
You too can be an angel investor to perhaps someone in your family or a friend. Yes, investing in start-ups and small businesses can be a huge risk. But if you do your due diligence as you would do on a big business(*), you have an edge over Buffett and over Wall Street that not very many people have.
Think about it, how many people knew about Bill Gates when he was just a kid with a computer? It's true that for each Bill Gates there are thousands of Broke Bobs and Bankrupt Sams out there. Your job is to find the ones that are competent, that have a great product or service, a lot of energy and integrity and most importantly, whom you trust.
Being an epic investor is about looking where others aren't.
* Remember, in this blog, we never recommend you invest blindly in anything, big or small, new or established -- you still need to do the scuttlebutt to find a suitable business that qualifies for your investment.
Disclosures: None.
2010-02-20
Current Short Interest
I thought it would be time to revisit the NYSE list of short interest. We've last talked about it in April 2009.
The NYSE table is interesting, but as it is it doesn't say much, because it's sorted by absolute number of shares sold short. But companies have different number of shares, so the sheer amounts correspond to vastly different percentages of their total shares.
To put things in perspective I like to look at the percentage of shares sold short, out of the total number of shares issued (column H in the spreadsheet). Too high and it means short sellers are aggressively shorting the stock and are probably very confident about it. Ignore numbers higher than 100%, these are ETFs for which the number of shares issued is simply a matter of market demand for the shares, which are created upon request.
Another interesting metric to look at is the number of days to cover (column G). This takes the number of shares sold short and divides by average daily volume. This tells us how long it would take for short sellers to unwind their positions. The larger the number the riskier it is for a short seller should a stock move against him/her. But it's also interesting from the perspective of a speculator trying to catch a short squeeze.
Finally, I like to combine both days-to-cover and percentage-short in one metric, where the product of the two gives us a number that "combines" both metrics equally. That is, the higher the number the highest the combination of both metrics together where both are equally important. Again, some numbers are skewed due to ETFs going above 100% shares sold short. Disregard those.
Here's the final table. Use it with care.
Disclosures: Long PG, BAC, GE, HD, EEM, KFT, SPY.
The NYSE table is interesting, but as it is it doesn't say much, because it's sorted by absolute number of shares sold short. But companies have different number of shares, so the sheer amounts correspond to vastly different percentages of their total shares.
To put things in perspective I like to look at the percentage of shares sold short, out of the total number of shares issued (column H in the spreadsheet). Too high and it means short sellers are aggressively shorting the stock and are probably very confident about it. Ignore numbers higher than 100%, these are ETFs for which the number of shares issued is simply a matter of market demand for the shares, which are created upon request.
Another interesting metric to look at is the number of days to cover (column G). This takes the number of shares sold short and divides by average daily volume. This tells us how long it would take for short sellers to unwind their positions. The larger the number the riskier it is for a short seller should a stock move against him/her. But it's also interesting from the perspective of a speculator trying to catch a short squeeze.
Finally, I like to combine both days-to-cover and percentage-short in one metric, where the product of the two gives us a number that "combines" both metrics equally. That is, the higher the number the highest the combination of both metrics together where both are equally important. Again, some numbers are skewed due to ETFs going above 100% shares sold short. Disregard those.
Here's the final table. Use it with care.
Disclosures: Long PG, BAC, GE, HD, EEM, KFT, SPY.
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