Hi I am Arjun Parthasarathy speaking and this podcast is on “Will you avoid a Product but buy the Company that manufactures the product?”
Marijuana stocks have found flavour with investors after many states in the US started legalising the drug. Marijuana while having medicinal properties is also a hallucinogen, which if used in excess can cause many health issues. However, there is still a debate on whether alcohol is equally bad. Cigarettes and junk food are also highly harmful with absolutely no beneficial effects unlike marijuana.
The question is, if you do not consume, would you invest in companies that manufacture and sell marijuana, alcohol, cigarettes and junk food?. Many of these companies have grown to become some of the largest companies and brands in the world like McDonalds, Coco Cola, Pepsi and BAT.
The list of products that cause environmental damage or that can be harmful to safety, health, finances etc is high. As long there is a growing market for such products, the companies that manufacture them grow and make profits and investors too reap the benefits. How long can this go on and will investors continue to invest in such companies?
Banks sold products that were harmful to investor’s financial health prior to the 2008 Lehman crisis and investors who had invested in bank stocks have suffered deep losses. Insurance companies that have pushed unit linked policies by paying agents high commissions have seen investors shunning such policies after seeing sub par returns on these products. Insurance companies have been underperformers by and large globally. Read our note on ICICI Prudential Life IPO.
Similarly, many fossil fuel producers have suffered erosion in market cap even as clean energy producers have seen increase in market cap.
While it may be seen as a clear cut choice on investing based on products, it is not as simple. Companies have to still be evaluated on management performance, competitiveness and other such qualitative and quantative parameters. Many companies that manufacture products that are potentially harmful, have strong management, big brand presence, large distribution networks and cash rich balance sheet, which are what investors look for to invest in a company.
The choice here for investors then becomes a personal choice, whether to ignore the product and invest in the company or whether to invest in the company based on the product.
At investors are idiots.com, we have made the choice to recommend investments in a company based on the product. Listen to our podcast on Ethical Investing. Obviously we give a high weight to qualitative and quantative parameters before recommending stocks to invest in.