(Interviewed by Louis James, Editor, International Speculator)
L: Doug, you said at the end of our last talk that I wouldn’t like what you had to say about business ethics. Given your two principles:
1: Do all that you say you’re going to do.
2: Don’t aggress against other people or their property.
Why would that be? Sounds like good business to me.
Doug: Well, as far as completing your contractual obligations and not stealing from – or intentionally harming – people you do business with, that’s pretty obvious and we’ve already covered it. No need to discuss that further.
Unfortunately, though, when most people think of “ethical investing,” it has nothing at all to do with ethics. Most people have been deluded into thinking it has to do with not investing in tobacco companies, gun manufacturers, miners, timber companies, oil companies, many drug companies, many agricultural and food companies… in fact, whatever is on the ever-growing hit list of the politically correct. Pretty soon the silly bastards will be saying you shouldn’t invest at all but give your money to NGOs.
L: Hey, you might be on to something there; if everyone gives their money to everyone else, everyone will get lots of money for nothing – free cash for everyone, what a great idea!
But let’s come back to that in a moment. It’s true that murdering your competitors is a rather short-sighted business strategy. It’s also true that failing to deliver what your customers expect is an even shorter path to insolvency and dissolution of your business. And so forth. But a lot of businesses do things that are not ethical – or at least fall into legal gray areas that allow executives to claim they didn’t do anything wrong. If that’s such a bad idea, why do so many businesses do it?
Doug: I can’t speak for other businesspeople, but you know that after hydrogen, stupidity is the most common element in the universe.
I can say that in our own business, reputation is critical. We offer investment advice through our various publications – why would anyone take advice from someone they don’t trust? Of course we comply with all the laws and regulations imposed on our industry – even though I disapprove of any regulation – but we go beyond that. As you know, we not only do not sell the same shares we tell people to buy, we disclose when we already own shares of companies we recommend, and we let subscribers sell first when it’s time to head for the exits. This may sound self-serving, and perhaps it is, but it remains true that people know that Casey Research can’t be bought; companies cannot pay us to write them up.
We certainly have one of the best track records of investment results in the business. It’s sometimes hard to know what to make of our competitors’ claims. Some of our colleagues in the business are absolutely first class in every department, including ethics and competence. But others…
Reputation is a strange commodity from a philosophical viewpoint. On the one hand, a good reputation is of high value. On the other hand, it’s only an opinion held in the minds of others, and like all opinions, it can be based on incorrect information or interpretation. I think we have a superb reputation, but as far as I’m concerned, reputation is strictly secondary to our actually acting ethically.
I don’t, however, worry about it. I almost never do, or don’t do, something because of what other people would think. The mob is fickle, thoughtless, and easily swayed; the best proof of that is the type of people elected to public office. Going back to a religious figure mentioned earlier in this conversation, look how the mob turned on Jesus when nothing had changed but perception.
I prefer to rely on reality. Damon Runyon was correct when he said, gainsaying Ecclesiastes, that the bread may not go to the wise, nor the battle to the strong, nor the race to the swift – but that’s the way to bet.
L: So you adhere to ethical business practices because you adhere to ethical action in general, but for people without quite the same strength to their ethical backbones, reputation can be a powerful market force for the good. But still, there are companies that put out cheap, shoddy products, relying on the fact that few people will complain or take the trouble to return the items, and that the market is large enough that they can make money for years before they run out of customers who don’t know how poor their quality is. Why doesn’t reputation seem to work in such cases? Is this a case of so-called market failure?
Doug: Well, there’s a place for shoddy goods. People calculate costs and benefits subjectively. Maybe junk is all the buyer can afford. Maybe the buyer plans on just using it once and then discarding it. Maybe it’s just part of the buyer’s learning process. For instance, I hate cheap suits, but I’ve bought them when I didn’t know any better. Cops prefer them, however, since getting in a fight, which they often do, is a sure way to ruin a good suit; and if they owned a good one, their fellows would assume they were on the take.
My view is that I’d rather have one good suit than three crappy ones. One good lawyer than a dozen shysters – one good doctor, friend, whatever, than a dozen mediocre ones. Quality is what counts. But it’s a question of both having judgment in figuring out what “quality” is and having the means to procure it.
Of course, there are companies that take advantage of novices, the unwary, the fools, and the greedy, by misrepresenting their wares. But that’s to be expected. Pareto’s Law dictates that if 80% of businessmen are honest, then 20% might be iffy, and 20% of that 20% are scoundrels. Generally, the scamsters prey on the fools, the greedy, the novices, and the unwary. It’s a naturally balanced ecosystem. And if you try to protect idiots from themselves, even if you succeed, you just wind up filling the world with idiots.
And that’s what government does. The problem, as is so often the case, is when the state sticks its nose into the situation, as when government regulators assure people that minimal standards are met. This gives companies an excuse for doing as little as they can get away with – and legal protection from claims in court – because they can show that they met the government’s minimum requirements. That’s why the FDA should be renamed the Federal Death Authority, because they kill more people every year (through vastly raising costs, distorting tests and usages, and slowing approvals, among other things) than the Defense Department does in a typical decade. The SEC should be called the Swindlers Encouragement Confabulation, since they don’t just increase costs immensely, but make John Q. Public think someone is actually protecting them.
Regulation creates an environment in which reputation is less important because consumers think the government is protecting them. They think they don’t have to worry about it, so they don’t. If this weren’t the case – if people knew they had to rely on their own judgment, experience, and expertise, as well as that of sources they trust – reputation would become much more important in all markets around the world. Having a reputation for striving for the highest standards of business ethics, as well as in quality of products or services, would become a powerful competitive advantage and regulating force. So government regulation doesn’t protect the consumer, it really just makes things easier for the swindler.
L: Pretty grim. But I’m an optimist. As we progress into the 21st century, people and capital alike are becoming more mobile. That means that more and more people can essentially shop for governments, based on their reputations, tax rates, corruption, etc. You’re doing it by moving to Argentina. Others are headed for Thailand, Panama, Switzerland, Costa Rica, etc. Eventually, it may dawn on even the densest politicians that they are going to have to compete for customers. Tax slaves evolve into voluntary fee payers…
Doug: In my dreams. At the moment it seems things are going the other way: all over the world people seem to be clamoring for the magic cornucopia of government to kiss things and make them better. They’ll get what they deserve… good and hard.
L: One way or the other, we’ll see as this century unfolds. But okay, back to ethical investing – like the fad for not buying shares in companies that did business in South Africa during the apartheid years. Or not investing today in companies that would ever, ever hurt cute furry creatures in the Amazon rain forest. That’s what you mean?
Doug: Exactly, and I have to say that this type of ethical investing is bunk. To me, it’s nothing but another form of political correctness, which we’ve already discussed. It’s complete nonsense. It’s the type of thinking that’s resulted in Warren Buffett and Bill Gates encouraging other billionaires to give away half their money to charity while they are still alive. These people are idiot savants – excellent at their businesses, but fools outside of their narrow spheres.
L: And we all know what you think about charities.
Doug: That’s the polite version. Conventional charitable giving is an entirely stupid, counterproductive, and perverse idea. If the goal is to improve the lot of their fellow human beings, conventional philanthropists are achieving just exactly the opposite by giving their money to charities, which only serve to dissipate that wealth so it can no longer be put to productive use.
Green investing is just as stupid – mired in the same moral morass. Investing with any criteria in mind other than maximizing return is, by definition, rewarding inferiority – or mediocrity, at best. Putting wealth to any use other than maximizing its growth is to squander it, to the detriment of the person who accumulated the wealth and all those he or she might employ. And charity often damages its recipients even more, by making them feel entitled, just because they’re poor, unlucky, incompetent, or whatever.
The best thing to do with your money – from an ethical, economic, and social point of view – is to deploy it in such a way as to make more money, that is to say, that it makes more wealth. When you increase the amount of wealth in the world, everybody benefits.
People who invest in these so-called ethical funds do so because it makes them feel good, perhaps assuaging their guilt if they’ve bought into the whole “money is the root of all evil” nonsense. Or, more accurately, hatred of the “love of money,” which is actually even more pernicious. Maybe they actually believe it will save the planet…
L: I guess they didn’t agree with George Carlin when he said the Earth doesn’t need their help.
[Ed. Note: The video linked to above contains strong language.]
Doug: George Carlin was a genius; I love all his stuff on YouTube. But “green” investing is a stupidity, in the specific sense of that word I favor: an unwitting tendency towards self-destruction. It’s absolute idiocy. It shows that these people know nothing about ethics or economics, or investing. Or the environment, for that matter. I’ll go further. These people don’t love the environment, so much as they just have a covert – and sometimes even overt – hatred for other people.
L: Okay, but it’s their money. If so-called ethical investing is as stupid as you say it is – you could think of it as a self-imposed stupidity tax – doesn’t that make it self-correcting? Anyone foolish enough to do this will deprive himself or herself (and his or her heirs) of the means for funding other really stupid ideas?
Doug: Maybe so; Darwinian principles should result in their being culled from the gene pool. They’re certainly at its shallow end. But they’ve probably already passed on their genes by the time they’re thinking of dissipating capital. The memes they promote, on the other hand, are even more virulent, propelled by squandered wealth. I’m not sure what you can do about that, other than have conversations like this and try to spread positive ideas around to nullify the destructive ones. It seems as if the good guys are losing the battle at the moment…
L: Well, the night before King Arthur’s final battle with his son Mordred, when Arthur was in despair about the failure of his round table to improve society and prevent war, Merlyn told him that no one can really be saved from anything. The only thing one can really do to improve the world is to add to the pool of ideas. That way ideas conflict – with each other and reality – and over time the better ideas survive, raising the whole aggregate of the human condition.
Doug: I’ll second that emotion. Looked at over the long term, there’s cause for optimism, I suppose. Mankind has risen from the primeval ooze, and a world of 100% theft, to a reasonable level of technology and perhaps just 50% theft – if you look at the government’s percentage of the GDP as a proxy for theft. The real problem seems to be the psychological aberrations seemingly ingrained in the human psyche. A pity, really. But the majority of human characteristics are good.
L: So… this might be a bit of a tangent from business ethics, but what the heck – it’s interesting. What do you do when you’re at the end of your rope? You’ve not going to give the money to charity, and you won’t be around much longer to keep us producing more wealth… What do you do with it?
Doug: Well, you’re certainly at liberty to disperse it to the four winds, with high living. But if you don’t consume it all, you’re going to have to put it under the management of someone. So, you’d better choose that someone as wisely as you can.
Obviously, that’s almost never a foundation of any kind – especially not one of the big, popular foundations. They are bastions of politically correct stupidity, and the type of people who serve on their boards should never be given a lot of money to play with. They shouldn’t even be given a little money to play with. Those types are generally just political hacks, highly conventional, mostly concerned with their position in the social pecking order. Wealth shouldn’t be played with; it should be kept whole and focused on creating more wealth. At least if you care about other people and the future.
L: What about foundations with missions written out explicitly to honor the donor’s intent, and created with sunset clauses that require the foundation to go out of existence after working on and spending (investing) the money into whatever the donors believes in?
Doug: It doesn’t matter. First of all, who’s to say the donor won’t be as hare-brained as Buffett and Gates? Anyway, entropy conquers everything. All systems have their flaws, and they all wind down. Once you’re gone, the board will find legal loopholes to take advantage of; they will wrench the wealth away from fulfilling your intent. I suspect Ford, Rockefeller, and Carnegie – not that I consider them models – would roll over in their graves if they saw what was done with their wealth. Foundations are just not a good idea – most often, they are disastrous ideas. Their only redeeming feature is that they deny revenue to the state because of their tax-free status.
L: Okay. No surprise there. What about children? You don’t have any, but most people do, and that’s a natural thought for them.
Doug: Well, even if I did have kids, there’s no guarantee I’d end up with one I trusted to run with the family business – or even with any I liked. I know several brilliant, successful people with children I wouldn’t trust to run a lemonade stand. It’s a total genetic and environmental crap-shoot what you end up with.
And if giving money to a foundation that might drift from your instructions for the wealth is a bad idea, leaving your wealth to children who did nothing to create it, know nothing about how to increase it, and don’t deserve to squander it, is just as bad an idea. Of course leaving it to your kids is ideal if they’re worthy of it. My suggestion is that you at least make a proper education available to them to increase the odds they turn out right. But you never know. Look at Marcus Aurelius – his son was Commodus.
Speaking of which, I like the Roman approach much better; choose your heir from among those you know. Pick whoever you judge to be the most sound, ethical, and competent. You may not even like him. But if he’s the one who’ll do the best job of keeping the ball rolling and growing, he’s the one you want.
L: Or her.
Doug: Or her. Or maybe, for lack of a better alternative, instead of giving it to anyone, invest it in a profitable company. You could buy the shares in a company that you really believe is creating wealth and has the best chances for continuing to do so, and bequeath the shares to the company in your will – a sort of free buyback.
The essence of the question is whether you’re interested in improving the general state of the human race – really eliminating poverty, improving nutrition, education, medical care, and what have you – or just indulging your idiosyncrasies and playing big-shot on the charity circuit. If it’s the former, then you must invest money and make it grow; there’s no other alternative that’s even close.
L: You don’t generally invest in big companies, so I guess you’d pick some entrepreneurial small company with management you really believe in. That’s a bit like the Roman idea, again.
Doug: That’s true. If you choose wisely, the small company will grow faster. As companies grow, they all eventually become victims of entropy and bureaucracy, and end up like General Motors: run into the ground by brain-dead suits. But that process can take decades and in the meantime can create a lot of wealth. But if you put it in a foundation, it’s a guaranteed automatic write-off. And, worse, maybe it will show a negative return, since most foundations are actually destructive, giving money to promote destructive memes and support human weasels and cockroaches.
L: So, it’s all building sand castles in the surf.
Doug: [Chuckles] Yes, it is. The good news is that in 1,000 years, what you do with your money won’t amount to a hill of beans anyway. But that’s the danger with taking a long-term view, I suppose.
L: But you know, if you build your sand castle well enough, even if it’s doomed, it can give you time to build the next one, even bigger and better, and that one can give you time to build the next one, and so on. So, progress is possible in the face of the ever-corrosive effects of entropy.
Doug: You may be right. In which case the second law of thermodynamics can be beaten, if only for a while. And we’ve got to fill those idle hours somehow.
L: [Laughs] Okay then. Food for thought. Until next time.
Doug: Until next time.