July 5, 2017
What We’re Reading This Week
Wall Street Short Termism
On June 16th, Amazon announced that it would try to acquire Whole Foods. The supermarket chain has been in a quandary for some time, mostly due to an activist investor and lagging sales spurring a push to sell from investor groups looking to make a quick buck. John Mackey, Whole Foods Market’s CEO gave a seething retort to these groups in June’s Texas Monthly:
“These people, they just want to sell Whole Foods Market and make hundreds of millions of dollars.”
Actually, when you put it that way you can sort of see their point.
While the marriage of Whole Foods and Amazon may seem odd (mostly because Amazon is single-handedly dismantling traditional retail markets) it makes sense. After the sale, Mackey gets to stay on as CEO and activist investors sort of just go away. Amazon is anything but focused on the short term. Remember, this is a company that couldn’t (wouldn’t?) produce a profit for four straight quarters until 2016. That was last year!
Proponents of the sale are also excited that Amazon will now have access to approximately 450 brick and mortar Whole Foods locations. I understand the interest in having national distribution centers, but it also reminds me a little of those weird shops that opened in the early 2000s. Remember those ‘Sell It On eBay’ places that allowed you to drop items off to be sold on the internet by another person? It’s sort of cute but it also feels like they are missing the point.
Devout readers will know that I loathe talking about Bitcoin, mostly because I think it’s stupid and I feel dumber for having talked about it.
Don’t get me wrong, there are a lot of people buying and trading Bitcoin, but apart from making people feel inferior for not owning Bitcoin, does it have any value outside of trading? Put differently, are people using Bitcoin to buy anything? In 2014, a digital marketing company Cooperatize.com began to accept the currency (I hate calling Bitcoin a currency) as payment. As of today, no one has ever paid them in Bitcoin.
A Morgan Stanley analyst report sums it up nicely:
“We see few reasons for consumers to use bitcoin over a credit/debit card given that paying online with bitcoin represents a marginally more inconvenient way to pay.”
After Facebook’s additional share class addition and Snapchat’s recent IPO, I have been seeing articles addressing public companies that don’t allow shareholders to vote. Most of these articles talk about how bad it is; this is a judgement I have never quite understood. One of the things I have always loved about this industry is that it is an incredibly fair industry. Certainly, the financial services industry isn’t fair. There are huge gaps in the amount of information between producers and consumers, but the market itself is abundantly fair. If someone doesn’t like a stock, then they don’t buy it. If a lot of people don’t like a stock, then they don’t buy it and the company must either change its business or close.
When I read articles that talk about how to penalize dual voting structures, I have to wonder who they are written for. If you want to own Facebook stock but you don’t want to own stock in a company that has disparate voting rights, then I guess you just don’t buy Facebook stock. If enough people agree with you, then Facebook will have to change to encourage people to buy the stock. Alternatively, if a large amount of people don’t care about voting rights at Facebook, then they will buy the stock instead of you. The argument that states, “I know other people are ok with their voting classes but I’m not and I still want to buy Facebook” feels childish.
Well, people still want to complain and penalize. Index firm FTSE Russell is proposing that companies like Facebook, Alphabet, and Ford be removed from broad stock market indexes unless they change their share class structure.
There are two reasons why this seems insane to me. The first reason is the one I just mentioned. If you don’t like Facebook corporate governance, then don’t buy an index that includes Facebook. It really is that simple. The second reason is that when you start making decisions about buying or not buying a stock based on corporate governance, you are doing the exact opposite of passive investing, which is what index funds are for. Picking and choosing stocks based on how the company is managed is a very big part of active investing.
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