Sometimes the most innocuous conversations can lead to puzzlement over much bigger topics. In this case, a very brief online banter with a local stock expert about breakfast illustrates a moral dilemma in equity market investments.
John Mangun, a friend of mine who writes for the BusinessMirror and has been an investor and adviser in the Philippine stock market since about the week after Magellan landed, mentioned that his younger son (who’s 12) suggested that Pancake House might be a good choice for breakfast because “they look busy,” the implication being, of course, that a crowded restaurant is a fair indicator of good food.
That’s a pretty good insight from a youngster, and its analog in stock investing would be that a stock that is selling rapidly and rising is probably a good buy. My response, however, was that the potential return rather than apparent popularity should guide an investment decision. I do not particularly like the food at Pancake House, therefore, from my point of view the return on the investment of my meager allowance for breakfast there would be unsatisfactory, and I would look for a better option.
John pointed out, however, that shares of Max’s Group (MAXS), of which Pancake House is a part, are up about 25 percent for the year, which is ultimately the result of the high demand for the product – the food that I do not particularly like.
That raises an interesting moral dilemma: In equity investing, to what degree should the character of the business activity underlying share performance dictate investment choices? The question is significant, because stock markets quite often operate as closed systems. Large factors, such as earnings results, mergers and acquisitions, new product announcements, or significant problems, do move the stock prices of individual companies, but those things do not happen every day; effects on the system cause prices of individual stocks to move on a day-to-day basis more often than effects on the issuing companies.
The problem is this: A mildly amusing factor such as “I do not find their food particularly enjoyable” can be overlooked (I mean no offense to the Max’s Group by using them as an example, especially since the Group includes brands that I enthusiastically patronize, such as Yellow Cab Pizza and Krispy Kreme), but what if the underlying business activity is something one finds truly distasteful?
For instance, the shares of San Miguel Corporation (SMC), which derives a significant part of its revenue from the sale of alcoholic beverages, are generally considered to be a good investment; SMC has gained just slightly less than 18 percent this year. According to the World Health Organization, however, as many as 85 deaths per 100,000 in the Philippines may be attributable to alcohol-related causes. A case could be made—depending on one’s point of view—that investing in SMC is contributing to otherwise preventable deaths.
I am certainly not suggesting that is the perspective towards SMC in particular or the alcoholic beverage sector in general everyone should or should not have, but it does illustrate the point that the underlying value of an investment is sometimes created by things that one might consider ethically or morally unacceptable, and that the nature of the market makes it easy to overlook that. Not that there is much of anything that the market structure itself can do to correct that; because of the vast variety of individual viewpoints among investors it would be impossible for the market to impose some sort of moral code (apart from compliance with established laws and regulations) on listed companies, and wrong for it to try to do so.
Investors themselves must exercise their own moral responsibility, and they should, because knowing that their investment in companies whose core activities may be questionable makes them targets for advocacies that wish to change those activities. Market investment can be a powerful tool for the greater good; as we reach the end of a year in which the world has wrestled more than it ever has before with questions of deepening social inequality in an environment of general economic growth, perhaps it’s time that markets and the financial interests who inhabit them are forced out of their comfortable, disaffected cocoons and join the rest of humanity.