Dan Sweet

Could Amazon “go good”?

Thanks to Tweetdeck and  a Twitter search for “P&G” (my future employer) I came across an interesting post by Ryan Jones over at       m-cause.

The post is titled, “Could Amazon.com be doing more of this?”  In the post Ryan relates the tale of his recent online book purchase and enumerates the reasons that he decided to give Better World Books his business instead of Amazon.

  • BWB gives 10% of their profits from used book sales to literacy partners.
  • Free shipping.
  • All new BWB book purchases are shipped carbon-neutral.
  • BWB is a certified B corporation.  (great explanation by Ryan linked)
  • They are a triple bottom-line company. (people, planet, profit)

Ryan ends his posts asking if Amazon might start applying some of BWB’s ideas in their business.

My short answer is “no”.  I think Better World Books is awesome and I’d love to see Amazon as committed to doing good as BWB is, but I don’t think we should hold our breath waiting for it to happen.

As a finance guy, my first thought is the shareholder.  Amazon has them, while BWB is private.  While Amazon shareholders might care about the environment or global literacy as individuals, collectively, they only care about earning a return on their investment.  Therefore, Amazon shouldn’t increase its costs by shipping carbon neutral unless they think that carbon neutral shipping is valued by enough of their consumers that they can offset the costs by increasing prices. Unfortunately, we aren’t at a point yet where the general consumer cares enough about things like carbon-neutral shipping for companies to make a compelling business case for it.

Even though I am a finance guy, I still hate it when people use “the shareholder” as a copout.  The first few weeks of business school it seemed like I ran into this mythical “shareholder” everwhere I went and it drove me nuts.  Accounting had shareholders, Finance had shareholders, Marketing had shareholders, and even Ethics class had shareholders.  I had always been under the impression that the CEO and the board ran the show and what they said goes.  But no, apparently even the CEO and the board must answer to the shareholder.  At least some of them do.  Carl Icahn has a whole blog about how tons of them apparently don’t answer to shareholders.  Check it out here. I subscribed to the blog for a couple of months and it makes for some good reading but after a while you get the idea and all of Icahn’s rants start to sound the same.  The point is that company leadership is more than willing to disregard the shareholder when it benefits them personally.  So why can’t we just disregard the shareholder whenever we want to “do good”?  The problem is that “doing good” is very subjective and one person’s “good” may be another person’s waste of money.

Costco and Starbucks are two companies I can think of off of the top of my head where the company leadership has decided to pay their employees above-market wages and/or benefits.  They get routinely questioned by Wall St analysts as to why they aren’t being better stewards of shareholders’ money by running a leaner business.  Their defense is that this is how they have always run their business and if you had looked you would have known that before you invested.  As long as these companies have delivered financial results, the market has accepted these divergences from the norm.  As Starbucks has stumbled more recently, the pressure is back on to cut costs in these areas.

One could argue that Amazon is dominant enough in their market that they could get away with tacking some sort of social mission on to their existing business model and get away with it if they wanted to.  However, most companies prefer to keep the peace with their shareholders so I don’t expect this will happen.  For now, the best action you can take to support the kind of business practices that Better World Books embodies is to vote with your dollars and buy from BWB whenever possible.  If the word spreads and enough others do the same, pretty soon Amazon will be forced to have some MBA create a model to prove out the economics of things like carbon neutral shipping in terms of impact on customer loyalty and market share.  The market works, it just works slowly.  If you want it to work faster then start the next visionary company and help it along.

Warren Buffett on the best investments for young investors now? (12 of 12)

This is the final post in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

What do you see as the best investments for young investors now?

Do the internet equivalent of what I did with Moody’s books.  I found 15-20 companies in an afternoon looking through a 2004 guide to Korean companies published by Citi.

Example: Dehan Flour Company.  Earnings of 12k historically and 18k most recently.  200k book  value with 100k in marketable securities.  Selling for 38k won.  (2x earnings!)

Look for good fundamental businesses.  Selling for 2-3x earnings.  As long as you choose companies with great balance sheets you can’t lose.  In the U.S. I’d just choose 2-3 companies.  In emerging markets I’d probably diversify a little more.  A 5x return in 3 years would be doable.

Read Graham’s Chapter 8 of The Intelligent Investor on Mr. Market.  The market is the best place to make a lot of money without being very smart—and that’s what I was looking for.  If you bought a farm for $600 an acre you wouldn’t get upset if another farm sells for $550 an acre.  The farm doesn’t know what I paid for it.  Mr. Market is the best partner to have.  He’s psychotic, he’s drunk.  Sometimes its ridiculous.

The idea that the market is there to serve you and not to instruct you is the most important idea to keep in mind.

Liquidity should not suck you in.  Ask yourself, “would I be happy with this purchase if they closed the market tomorrow for two years?”

What you need is the right business, run by the right people, at the right price.

Subscribe to the RSS feed.

Warren Buffett on derivatives (11 of 12)

This is the eleventh in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

How do you feel about derivatives?

Derivatives create big positions people don’t understand.

Classic case is detailed in the Brady Report from October 19, 1987.  130/30 is the new hot thing.  Portfolio insurance was the thing then.  “Dynamic Hedging”  Basically the lower it goes the more you should sell.  Institutions had to sell at certain levels and everyone knew it.  Less than 2% of the market was on this kind of auto-pilot program-yet crashed the whole market.  Derivatives have created huge amounts of capital that are forced to move automatically.

They offer opportunity to me but a lot of people can get hurt.

A greater portion of the market is poised on a hair trigger to respond to given messages.

Federal Reserve margin requirements are 50% for you and me.  So many ways around that. “total return swap” for example.  Long Term Capital Management had a $6 billion position with no capital put up.  Whatever happens in the market is exacerbated by derivatives.

Banker’s Trust screwing P&G—like 8 variables those companies didn’t understand.

We will make a lot on derivatives but I will know every position.

Subscribe to the RSS feed to make sure you don’t miss any of Warren Buffett’s insights from this 12 post series.

Warren Buffett compares railroads to the Cubs (10 of 12)

This is the tenth in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

Which railroads do you like and why?

Rails had a bad century—just like the Cubs.  Rails used to have 1.5 million employees.  They are getting more done now with only 200k employees.  Competition ruined the business.  Excess capacity is a terrible thing.  Rising oil prices hurts truckers 3-4x more than rails.

RR business just eats up capital (not good).  Coke vs the bottlers.  I’m in the right one.  RRs use too much capital to ever be great.

There is a slight advantage for the West Coast in terms of future growth prospects.  I like them because they are bigger and easier to put more money in.

Subscribe to the RSS feed to make sure you don’t miss any of Warren Buffett’s insights from this 12 post series.

Warren Buffett’s thoughts on the Fed in October 2007 (9 of 12)

This is the ninth in a series of twelve posts. The introduction to the series is here. By way of review, these are my notes of Warren Buffett’s responses to questions from Notre Dame and Stanford MBAs on October 9. 2007.

Is the Fed doing a good job?

They can’t solve everything.

Dropping the rates a lot is less of an option with the dollar situation—$2B/day flowing out.  Bernanke’s hands are somewhat tied.  Brazilians have been supporting the dollar recently as their currency has become worthless.

Perceptions lag reality.

Gold and oil are up a lot but much of that is just our perspective and the result of the weak dollar.

Current account deficit is unsustainable.  Bernanke just said it. Greenspan said it in 2003.

Subscribe to the RSS feed to make sure you don’t miss any of Warren Buffett’s insights from this 12 post series.