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Material Difference

Michael Flack, 1:10 am ET

A RECENT ARTICLE on HumbleDollar, which detailed the economic and moral shortcomings of commodity producers, reminded me of a conversation I had in 2004. I was in my study reading Security Analysis or watching The Sopranos—it was a little while ago—when I heard a knock at the front door. I opened it to find an earnest but scruffy sandal-wearing young man trying to raise funds for the Sierra Club.

He quickly segued into blaming oil companies for the devastation to Mother Earth. When he paused to take a breath, I mentioned that I just happened to work for Exxon Mobil.

“Sorry to hear that, as you’ll be out of a job soon, when Exxon Mobil goes out of business,” he said, and then quickly walked away.

While I appreciated his youthful enthusiasm and impetuousness, I didn’t appreciate his lack of manners or his salesmanship. Why couldn’t he focus on all the good that the Sierra Club was doing—saving the bald eagle, arranging hikes in Shenandoah National Park and all its other kumbaya activities—instead of dumping on the way I supported my family?

I also didn’t appreciate his forecasting ability. It’s now almost 20 years later, and Exxon Mobil is doing okay. There have been tough times, but the company is still a going concern.

That brings me to the recent HumbleDollar article written by John Goodell. John laid out economic reasons to avoid commodity producers. Now, avoiding a company based on economic analysis is a mainstay of investing, though I’ve never known anyone who could do it reliably. Making the right call on an entire sector seems even more difficult to pull off, especially one as diverse as the natural resources sector. How can you lump companies in such diverse industries as oil, gypsum, lead and diamonds into one homogeneous rock?

The article also mentioned morality as a reason for not investing in the mining sector. My response: The buying and selling of mining company shares on the secondary market has zero effect on the underlying business. If everyone who owned shares in Hindustan Zinc or China Molybdenum sold their shares today, the mining conducted in Rajasthan or Xinjiang would continue tomorrow just the same. I can understand not buying newly issued stock or bonds from Bougainville Copper. But once they start trading on the Australian Securities Exchange, that ore train has left the station.

Also, if you’re upset by the mining conditions in South Africa, West Virginia or Bougainville, then you must be outraged by companies that peddle cancer, cirrhosis, alcoholism, handguns and obesity to teens, the mentally ill and the rest of us. So out goes tobacco, liquor, beer, firearms, and food and beverage. And don’t even get me started on investment banking or cable business news. When it’s all over, what’s left? Beyond Meat?

All that said, the conclusions reached by John and me are the same: Invest in broadly diversified index funds. I recommend John invest in the Schwab Total Stock Market Index Fund (symbol: SWTSX), which has 6.8% of its assets invested in the energy and materials sectors—and then donate 6.8% of his gains to the Sierra Club.

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Philip Stein
Philip Stein
27 days ago

Mike, I understand your reservations about Mr. Goodell’s article on investing in commodity companies.

Its deplorable that some commodity miners engage in price-fixing or treat their workers badly, but we still need the commodity. We may avoid buying stock in such companies for ethical reasons, but these companies will still sell their product to meet demand regardless of our personal preferences.

Mr. Goodell laments that nearly every commodity-rich nation outside the U.S., Australia, and Canada is a human rights abuser. But we continue to import billions of dollar worth of goods every year from China. Currently, China is the world’s foremost supplier of industrial-grade lithium. Will we stop making car batteries until China cleans up its human rights act?

Finally, Mr. Goodell chooses to avoid commodity companies because their future business success is limited by dwindling supplies remaining in the ground. If supply declines in the future, but demand remains the same, wouldn’t that result in higher prices, boosting the earnings of mining companies, and lifting their stock price?

mjflack
mjflack
27 days ago
Reply to  Philip Stein

Philip Stein, I like the way you think!

Tooney
Tooney
27 days ago

Michael, thanks for another interesting and entertaining post.

I especially enjoyed the recommendation to donate 6.8% gains from total stock market fund to the Sierra Club.

Last edited 27 days ago by Tooney
mjflack
mjflack
27 days ago
Reply to  Tooney

Tooney, thanks for your comments.

Nate Allen
Nate Allen
28 days ago

Where is the “report spam” button when you need it?

Brent Wilson
Brent Wilson
28 days ago

I have no dog in this fight but I’m drawn to something you wrote. “The buying and selling of mining company shares on the secondary market has zero effect on the underlying business.” Ignoring the example of mining companies, I’ve always had a vague understanding of what you describe. That is, after all initial shares are purchased by the public, all subsequent purchases of stock are done on the secondary market which doesn’t directly affect the company.

Is it then, that if a company is “strong,” generating sufficient income to cover their operating activities, that they would not need to worry about their stock price? But, on the other hand, if a company is “weak” and needs to raise funds, perhaps by issuing new stock, a lower stock price would mean issuing new stock would generate less funds, thereby hurting the company?

I believe GameStop actually benefitted from being a weak company with a soaring stock price to issue new stock and stay alive. Perhaps that’s a unique example, but it does seem companies stand to benefit from strong stock prices.

In the end, I would agree that the best way to “fight” against companies you don’t agree with is to not purchase their products or services. Being an index investor means I’ll always own some companies whose purpose I disagree with, but the only alternative would be to slice up my portfolio to a likely unmanageable state.

mjflack
mjflack
28 days ago
Reply to  Brent Wilson

Brent Wilson, you make a valid point about how a low stock price could reduce the amount of funds raised when issuing new stock. Though if the business case was compelling I would think funding would still be possible.

Nate Allen
Nate Allen
28 days ago
Reply to  Brent Wilson

Also, stock options and company stock is often given to current employees of the company as a part of their compensation. Surely a stock price on the secondary market has some effect on the functioning of the company itself.

(Note: I largely agree with the other points the author made.)

Last edited 28 days ago by Nate Allen
mjflack
mjflack
28 days ago
Reply to  Nate Allen

Nate Allen, reduced stock prices would affect the stock options and stock given to employees as compensation. Though I’m sure that a workaround could be found: options can be repriced, compensation can be given in cash. I have no doubt management would do just fine (though the non-managment employees might suffer).

Nate Allen
Nate Allen
28 days ago
Reply to  mjflack

Michael, thanks for the reply.

I also found this brief response to basically the same question from USA Today in 2012 on how a falling stock price affects a company: https://www.usatoday.com/story/money/columnist/krantz/2012/10/14/falling-stock-price-hurt-investors-company/1624761/

Edit: And this from investopedia, of course:
https://www.investopedia.com/investing/why-do-companies-care-about-their-stock-prices/

Last edited 28 days ago by Nate Allen
mjflack
mjflack
27 days ago
Reply to  Nate Allen

Nate Allen, thanks for the link. As the linked article mentions, mining companies can always turn to banks for its capital needs.

R Quinn
R Quinn
28 days ago

It seems that whenever humans criticize something they fail to make the connection between what they criticize and what they need to live – or want to live they way they do.

If you want something to go away, don’t use it and if enough people do so it will go away.

Then there is the individual factor. Except for a couple of Pacific Island nations, the US is the most obese country in the world. Should we ban soda, potato chips and pizza as the solution?

mjflack
mjflack
27 days ago
Reply to  R Quinn

R Quinn, boycotting the product or service is a very effective way of getting companies to change their evil ways.

Philip Stein
Philip Stein
27 days ago
Reply to  R Quinn

I suppose we could consider banning soda, potato chips, and pizza if we regarded obese people as victims of soda, potato chips, and pizza.

mjflack
mjflack
27 days ago
Reply to  Philip Stein

Philip Stein, maybe we should, but not pizza.

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