Each of us has a reason for investment in stocks and in this instance mine is FOG No, this is not another newfangled over-the-counter derivative designed for obfuscation but simply "For our Grandchildren". You will gather for this purpose I would not envisage or indeed welcome a roller coaster ride from any of my choices and prefer slow but sustained growth over the medium to long term. This is not to suggest that my purchases are always as inherently safe as I expect these to turn out to be since in other dealings I am prepared to accept a higher risk for short term gains. With my FOG selections I try not to do so though it's often difficult when I find something I really like. So instead of using the charts, the fundamentals or the p / e ratios, I apply my own tests.
I am not for one moment suggesting that these stocks will never as Shakespeare put it "suffer the slings and arrows of outrageous fortune". If any financial adviser tells you otherwise, beat a hasty retreat; you are in the hands of either a megalomaniac or a crook. Nowadays in stock investing uncertainty is the only sure thing. Most of us grew up with parents who used expressions such as "safe as houses!" Egypt "as good as money in the bank!" It's some time now since I last heard them. Obviously for good reason; we've had the three F's (Fannie Mae, Freddie Mac and foreclosures) which put an end to the former and countless bank failures and bailouts to the latter. The notion of a capital growth in the value of your home and a realistic rate of interest on your bank savings are now nothing more than a sick joke.
These days it's very difficult to see further than the end of the street in investment terms and so I have laid down certain criteria which my stock should conform to. If it does not I reject it for the purposes of FOG though I may still dabble given the right fundamentals in my general portfolio business. So which tests does my would be FOG stock have to pass?
First and above and beyond all, I want to know my corporations have a social conscience. To have that attribute is good for business right now and I believe into the future it will be increasingly so. I spent many years in England in the 80's and 90's and remember very well the Co-operative Bank, a mutual with three hundred branches, more commonly in the north of that country since it was formed in Rochdale Lancashire, at the end of the nineteenth century. During the time I was there and ever since so far as I am aware, the bank has stressed that it conducts its business on a strictly "ethical" basis by which description it means in practice it will not carry out banking for, or give loans to, or invest in any company it feels is not ethical. These include tobacco companies for example because of course the businesses those companies run are perfectly legal. I recall then that the bank's principals were considered oddball in some respects, a bit divorced from practical reality, perhaps something freshers at university might demonstrate as being in favor of. Now I believe it's right on the nail.
The bank I refer to does not have branches in the USA and so should not be confused with the bank of a similar name which failed in recent years. As a matter of record it is one of the few UK banks which does not pay executive bonuses and did not need a bailout during the bleak days of 2008 and 2009, though I am not suggesting this was as a result of their ethical investment policy. Yet maybe in some small way it was, since sometimes this bank always took a more conservative approach due in part to its humble beginnings. There is something about that way of doing business which gives me a good feeling.
Discussing banks and their current woes, leads me on to the question of banker's bonuses. For the purpose of my FOG selections, I will not include any bank stock where bonuses are an issue either with the administration / government or with the stockholders. For me this is a no brainer, if the stock has risen exceptionally as a result of the management's skills, then possibly a bonus is in order but for my money it would have to be something really extraordinary. To consider paying any bonus at all to the board of a bank who have prescribed over a falling value in stock and profits can not in any way be justified. Neither should other payment be made which on the face of it is dressed up as compensation but in fact is remuneration. There is of course nothing contrary to law in such an arrangement but is it compensation or is it remuneration?
So for my FOG choices, no companies located offshore to avoid obligations that the ordinary John Doe (or Jane to be politically correct) is forced to pay, no questionable taxation tactics designed to prevent whichever administration obtaining its planned entitlement, no Enron pyramid, no Bernie Madoff's and no Allen Stanford's. Somehow these may now be seen to be lingering remnants of the late 20th century, anti social and truly a demonstration of the "unacceptable face of capitalism". My companies must be the very antithesis of those and embrace and embody Sarbanes-Oxley and Dodd-Frank. This is by no means unrelated to their future performance. The Lord & Benoit report of 2006 makes it clear that quite apart from corporate transparency, in SOX compliant companies, share value gain was higher and certainly outweighed the implementation costs of the legislation. This is there before no altruistic exercise from my point of view but one founded on the expectation of higher returns from my FOG acquisitions.
Of course Sarbanes-Oxley has its critics who appear to group around the notions that the additional transparency the act imposed has led to a fall in stock value for the investor, declined new smaller corporations and has proved too costly. In summary "the pendulum has swung too far" As John McEnroe said "You can not be serious?" If, "coming clean" about the finances of a corporation led investors to re-assess the share price in a downwards direction, then to me at least that sounds as if previous investors were to varying extents misinformed (see Eastman-Kodak 2004 accounting errors delay Kodak earnings). In Jan 2012 Eastman-Kodak filed for bankruptcy protection. Previously In September of 2011 the company had made the following statement "Kodak is committed to meeting all of its obligations and has no intention of filing for bankruptcy."
The transposition of creative accounting to any company balance sheet in my view belongs to the fiction department of the public library. Incidentally speaking of public libraries, consulting the reference section you may find a volume of Sarbanes-Oxley for D ummies which I have been told by some who should know, is much more broadly read in corporate circles than one might have thought and is no doubt suitably disguised on suburban train journeys in brown paper wrapping a la "Lady Chatterley's Lover" or "the Karma Sutra".
As to the additional costs of compliance, this can certainly be an assumption but one which a corporation must factor in when it forms its plans. Therefore, and I realize this is a simplification, for a chief executive or adviser to argument that less transparency is somehow better because it is cheaper, is clearly absurd. The name of this site is stockinvestingtips and if I had to give only one piece of advice to those who would invest in stocks for the future, it would be to follow strictly the information I have just given and avoid any stock which fails to refer to transparency and social correctness. They are the current buzzwords of investing.
The second test I apply to my FOG possibles and I suppose to some extent connected to the first is that my FOG corporations should be devoid of the potential (so far as can be reasonably foreseen) of causing injury to either their employees, the general public or the environment. The corporations also must not be dependent on supplies of manufactured goods from areas of the globe where workers are frequently exploited as in some of the garment "sweat shops" of the third world or if they are so dependent are taking their responsibilities in this regard seriously (see below)
I make no apologies for spending some time on this single point. What I am conveying to you now is what behind doors, boards of directors are adopting as company policy all over the Western world. The fact is that no corporation which respects its image can any longer turn a blind eye to the origins of its products.
In an article in the UK based Guardian Newspaper of the 10th April 2012 there is a most interesting article on the "ethical" conversion of the world's largest fast fashion retailer H & M. To give an indication of the size of this corporation's activities, it is believed to be selling in excess of 500 million garments a year and recently announced a quarterly profit of over $ 400 million dollars. As the article describes it has now determined to embrace "sustainability" by using organic cotton so far as possible and recycled polyester equivalent to 9.2 million plastic bottles. On the human "ethical" side it has a team of one hundred people assessing conditions in third world factories "and has produced a series of groundbreaking short films, including one on fire safety that it claims more than 400,000 garment workers have seen". There is some way yet to go but at least this is a beginning and an important one and in placing themselves firmly on this side of the fence they will be joining other huge corporations such as Nike, Gap and Tommy Hilfiger who for some time have seen this as the direction they must take. The full text of the Guardian Article is here ( http://uk.lifestyle.yahoo.com/hm-new-home-ethical-fashion-153506565.html
In looking at potential injuries to employees and members of the general public, obviously I can not expect that no accident will ever occur, after all, employees frequently suffer accidents at work. What I am talking about is the type of business where such events are part and parcel of the day to day risks which go along with its operations. For example, I will not include any oil corporation in my FOG stocks because of the pollution risk. Simply mining is not a business I could ever include in its present form. However there are some interesting developments from Australia on this subject, where "minerless" mining is being developed. To me this looks like the future about to begin and stocks of this type I would certainly give serious consideration to including in my portfolio when the technology has been fully developed.
Once again this is not an altruistic innovation on my part, but a way of protecting the FOG choices as far as they can be protected, against sudden swings in the share price as a result of some calamitous incident. Unfortunately, my caution must also extend to shipping where through circumstances all too common the risk of pollution may occur or even that ship may be designated by pirates and a huge ransom have to be paid which may serve to depress share values. In 2011 there were worldwide 439 separate identifiable piracy accidents.
To give an indication of how toxic external events can be to the well being of any stock, it should be noted that the recent incident of pollution in the USA, caused the stock price of BP to fall by fifty per cent in six months. At this time serious consideration was given by the board to a proposal to suspend the dispute indefinitely, a move endorsed by some in US government circles although not official policy. Had this happened, because of the worldwide ownership of BP and especially the holding by USA pension funds, it would have meant a loss of over four billion dollars to USA stock holders alone. Such is the nature of international business.
On a purely human scale, the tragedy at Bhopal India in 1984, at that time under the control of Union Carbide (India) Ltd must serve as a lesson to all of us that owning stock is not something impersonal at all but in some sense we are a part of the corporation we invest in.
It must be clear by this point to the reader that my strategy in this second test in identifying opportunities for our Grandchildren is to cut out all stocks which carry an identifiable or foreseeable risk and which, were those risks to materialize, might both affect the stock price and / or or (which is far worse) cause a human tragedy
The third test I apply to my would be FOG Stock is that the corporations I consider should offer real jobs with real prospects for our kids. By this I mean the kind of jobs likely to last for a number of years. It does not overly concern me that some of my choices may employ almost exclusively people under forty since these are the very people who need help the most. Neither does my criteria exclude corporations outside the USA. In Europe the layout of the young unemployed is truly at crisis point and levels continue to increase. I also consider banks as being good prospects for the purposes of this task, as, in the past, banks have been prolific employers and I am certain will be so again.
The reason I consider this test to be important is because I believe the loss of jobs throughout Europe and the USA in recent years has haemorrhaged the life blood from these economies. Of course in many cases we are unable to do much about it as it has at least partly occurred through the rise to prominence and more nicely dominance of the Chinese economy which has appeared unstoppable. However, I believe things are beginning to change (as may be seen below) and the consumer is wise to the fact that mass production of this kind is not always accommodated by high standards of quality. A quiet revaluation has begun as to what is worth buying and what is not.
However there has been another direct loss of jobs, self imposed and I believe hugely mistaken and that is from outsourcing of work which within recent years has been very damaging to the prospects for employment in the USA and Europe and thus to economic stability. Before we begin on this let me say instantly that I am up against some very worthy and distinguished opponents of my view and it is worth spending a little time exploring the basis of their objections.
Back in 2007, the Investors Business Daily published an article which advised to prove that outsourcing to countries such as India and China had in fact been good for the economy and during the period that outsourcing had been criticized, not only had 9.9 million jobs been created in the USA but employment at 4.4% was below the average of the previous four decades.
At first sight and way back then when there were almost no signs of the "boom" ending, these arguments seem sufficient enough. Indeed an examination of the graph below Part Six (reprinted by kind permission of the IBD) shows unemployment falling as outsourcing is increasing and from this it can be fairly concluded that outsourcing in itself was not causing unemployment to increase. I recall at the time examining these figures and wondering what in essence they really mean. Sometimes I came to the conclusion that the graph in itself presents only half the picture.
Let us take an extreme hypothetical situation by supposedly a town with ten thousand employees working for the same corporation were one day told that their jobs would now be outsourced to China and they were redundant. From this it can be seen that the whole of the working population of that town would be unemployed, at least at that point of their being given the grim news. What happens next depends upon the financial situation, not in that town, but in the whole region in which it is situated. If the economy is booming there is little doubt that these ten thousand inconveniences would quickly be snapped up by other companies scattered across the area and the status quo would resume. However if the economic situation is grim, a large percentage of those people would remain jobless as a result of outsourcing. So while the graph shows what happened at the time during an expanding economy, it does not show what consequences might flow from an economy practically on its knees, as it has recently been. Nor could it of course as at the time it was compiled that situation had not yet come about. Summarized, what it means is that the author of the article has not foreseen any distinction between what happens after outsourcing when an economy is buoyant and what would happen if the economy is flat. I dispute that ratione. Perhaps it might be compared to testing a ship in calm waters but neglecting to test it in a storm.
Furthermore, I dispute that any corporation really knows the full impact of outsourcing in terms of cost and reputation. I may have been very unelected and my experience is purely anecdotal but I have had a number of telephone calls with call centers outsourced to India and Manila in the Philippines and have yet to be satisfied with any of them. If others have had similar experiences, how can the cost in terms of damage to the corporation's image and reputation be quantified? Of course the loss of manufacturing jobs to outsourcing is even more tragic.
Fortunately things seem to be swinging back in the opposite direction as they inevitably tend to in my experience. In March 2012, manufacturing expanded for the 32nd straight month, and contributed 37,000 of the 120,000 US jobs added, the government reported. That's partly because of the ongoing recovery from the Recession. But the economy is also changing. Consider this extract from the Wall St Journal 7th April 2012
"Manufacturing's share of gross domestic product plunged to 11% in 2009 from 26% in 1947, according to the Commerce Department. In 2010, it rose to 11.7% -the largest yearly gain in more than 50 years. on April 26, and the anecdotal evidence is promising; companies like Caterpillar, Ford Motor and NCR say they are moving some operations back to the US
These trends suggest America's "manufacturing renaissance" is just getting started, says Neil Dutta, US economist at Bank of America Merrill Lynch. First, the cost advantages of outsourcing factory work are narrowing. Emerging market wages, while still much lower than US wages, are rising, and high oil prices have made shipping more expensive. That is expanding the range of goods US factories can produce at competitive prices (think sophisticated machines, not toys) ".
Therefore the third test described above I also consider equally crucial to my FOG selections. I make it not simply because I want to see the kids here and in Europe get back to work, because that is important enough but because I believe in European and American workers and that they were the solid skill base that our corporations were built on. It is the model that sustained us over many years and we can do no better than to re-visit those earlier times to see if they still have anything to teach us. I believe they have.