Is Investing Premised on a Myth of Infinite Growth?
When most of us buy a stock, we do so based on the idea that the company is going to get more valuable over time. As part-owners of that business, we believe we'll benefit in the form of a higher share price. That mindset, though, has led one Rule Breaker Investing listener to pose an interesting question: If companies are essentially forced into a never-ending pursuit of growth, and they're rewarded for doing whatever it takes to increase profits, have we set up a market system that will inevitably lead to businesses that push or ignore ethical boundaries?
In this mailbag segment of the podcast, Motley Fool co-founder David Gardner and analysts Emily Flippen and Dave Kretzmann offer their views on whether there really are limits to growth, and whether the market pays off for ethical behaviour.
A full transcript follows the video.
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This video was recorded on Nov. 28, 2018.
David Gardner: Rule Breaker mailbag item No. 8 -- oh, my golly, is that Emily Flippen here joining us in the studio? Hi, Emily!
Emily Flippen: Hi! How are you?
Gardner: You're here because I want to talk about Chinese ADRs with No. 9. But since you're here, I wanted to share this whimsical question with both of you. "Whimsical" might not even be the right word. In fact, Patrick in Canada, Patrick Hoffman, who's writing us, is using the word "ethical." We'll talk, maybe, a little bit about ethics. Who knows where we're headed with this one? Let's start it off.
He says, "Ethical question from an aspiring investor. As an aspiring investor," Patrick writes, "I'm wrestling with ethical questions I'm hoping you could shed light on. It appears to me that the whole concept of the stock market is based on one principle: that this part of a company that I'm buying today will be worth more later than it is now. But isn't this idea based on the fallacy of infinite growth? It's impossible for a company to continually grow forever. My concern is that in this unending pursuit of growth, are companies not encouraged and rewarded for doing whatever it takes to increase profits, including, maybe, pushing ethical boundaries? Might be a silly question -- one I'm seriously wrestling with, though. Patrick in Canada."
David and Emily, I'm really interested in both of your perspectives. All I'm going to add in is this from Hamlet, because how can I read the phrase "infinite growth" and not think of, "Alas! Poor Yorick. I knew him, Horatio! A fellow of infinite jest, of most excellent fancy, he has borne me on his back a thousand times. And now, how abhorred in my imagination it is." And it goes on from there. One of the most famous scenes of all of Shakespeare. Of course, we're The Motley Fool, so we're going to have this Shakespeare vibe going through this podcast, as we have in the past. A fellow of infinite jest, as Hamlet holds a skull of the court jester of his time when Hamlet was a little kid. And now, all he has is just Yorick's skull that he discovers with the gravedigger. A fellow of infinite jest. A market of infinite growth. Emily.
Flippen: I like to believe that some companies are capable of infinite growth just because I want them to be capable. I think Amazon is a great example of that. But when you look at a company like Amazon, it's hard not to ignore the ethical issues that Amazon has had. While I don't believe that any one company can grow infinitely forever, I do think that the market rewards companies that grow ethically. Companies that are more and more taking an ethical manner to the way that they do business, to the way that they grow, I think, especially as we get further and further into the 21st century, those are going to be the companies that are rewarded.
As an investor, I often think that I'll miss out on amazing growth opportunities because I don't invest in companies that I don't see operating sustainably and ethically. But I think as an investor, you have to make that choice yourself.
David Kretzmann: Yeah. It's interesting to hear Jeff Bezos talk about this. Amazon at one point crossed that $1 trillion market cap hurdle. It's still one of the biggest companies in the world, although the market cap has dropped a bit recently.
Gardner: I've noticed!
Kretzmann: [laughs] Yeah, it's a little bit painful. But, he said, the bigger institutions, whether it's governments or companies, they should invite more scrutiny, whether it's from the public, from regulatory agencies, from consumers, all these different stakeholders. As organizations or, in this case, companies get bigger, they will invite more scrutiny. And I think they will be held to a higher standard, whether it's by their customers, their employees, regulators, whatever it might be. I agree with Emily, especially in this day, where you have social media and so much more insight into these companies through the internet and through that connectivity. Companies will need to increasingly operate in an ethical way if they want to survive, let alone grow over the long term.
There's also a beauty built into capitalism. Theoretically, every company would love to be the one dominant company in the world that does everything, but there's that built-in mechanism of competition among companies. If you go back to 1980 and look at the top 10 biggest companies in the Dow, the biggest companies in the world, I don't think any of those companies are the top 10 today. You have companies like IBM, AT&T, ExxonMobil, which is still a bigger company, but then you have Schlumberger, Shell Oil, Mobil. You really had a bunch of energy companies that were the biggest companies in 1980. Really, the top 10 companies in the Dow or any index actually don't typically have a great track record over the long run --
Gardner: Once they've established that huge size, right. It's just harder to grow those things.
Kretzmann: Right. And we'll see, maybe that changes with the dynamics of the internet and with software, where you don't necessarily need to build more physical infrastructure, more drills or whatever it might be, physical assets to expand. Instead, you can just sell more software, sell more ads. It's a much more scalable and bigger business model. It's an appropriate conversation, probably best for a 2 a.m. discussion in the dorm room or something, maybe with the assistance of some other substances to really get the most out of this. But I think there is some built-in competition there that limits the ability for any one or two or three companies to reach that pinnacle of being one of the biggest companies.
Gardner: I agree, and history proves that. I'm delighted that you brought history into it, David. I will say, just for my own part, that last week's podcast with Paul Rice joining us, improving business through Fair Trade. Paul was talking about how capitalism is changing as we speak. In a way, I do think it's becoming more and more ethical thanks to people like Paul and many others that realize that the best way to grow, as Emily just said, is to grow ethically. When you do so, people want more of that. If a company is growing unethically, that's increasingly unsustainable in this world. I think we all want better from business. We're ask a lot of business. We're asking entrepreneurs like Jeff Bezos to do almost everything. Keep growing, keep innovating, and do everything well, and, by the way, don't make any mistakes or you'll get flamed on social media. It's really quite remarkable what we are asking of some of these great public companies of today.
Patrick, I hope that was helpful. I hope we helped you think through it a little bit. Infinite growth, I will say in closing on that, that a lot of times, people think that you shouldn't hold stocks for a long period of time because it can't keep growing forever. They'll point out how lots of companies aren't around anymore. But what they neglect to mention is, some of those companies that disappeared over the course of time were simply bought by another company. Some great companies. Marvel for me was a great stock. It no longer shows as a stock. It would look like Marvel disappeared if you were looking backward, but all that happened, as we all know, is that Disney bought Marvel. The infinite growth doesn't need to be infinite. We all have finite lives. But some of these companies can be held quite a long time. And sometimes, when they disappear, it's not because they went bankrupt; it's because they got snapped up at a premium.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Gardner owns shares of Amazon. David Kretzmann owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.