The Independent Market Observer

Doing Well by Doing Good

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Aug 11, 2014 2:23:10 PM

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doing well by doing goodOne of the keys to business success is sustainable advantage, often referred to as a competitive “moat.” In short, if you have something your competitors can’t duplicate, you can charge for it and make money.

The idea typically centers on things that protect products. Think of patents, or the kind of ecosystem of software, hardware, and content that Apple, Amazon, and Google are building, at a cost of billions of dollars.

I would argue, though, that there’s a simpler and potentially more effective way to build a moat: just treat everyone fairly, kindly, and with respect. Although this approach may not maximize short-term results—it could well hurt them—it’s likely to generate long-term benefits.

The cost of bad decision-making

Two recent events have brought this topic to mind: first the Tufts University day care debacle, and now the escalating battle between Amazon and Hachette. Tufts alienated students and alumni, staff, and the community with its secretive decision to outsource management of its popular early education program. On a larger stage, Amazon is using questionable methods in its negotiations with Hachette, prompting 900 writers to sign a letter denouncing its tactics.

In both cases, what were quite possibly defensible decisions—driven, it seems to me, by short-term financial concerns—will end up doing long-term damage because of how they were implemented.

Two thoughts here:

  • Branding has become essential to businesses and organizations. A brand is a reputation, an identity customers should identify with and aspire to, and few people aspire to be weasels.
  • In the Internet age, information will come out. If decisions are made badly, people will know.

Goldman Sachs is another example of how damaging poor decision-making can be. When I graduated from college, some time ago, it was one of the most admired firms around, known for an almost public service ethos. No doubt that was never entirely true, but it had some merit. At any rate, it was far better than the “vampire squid” meme currently associated with the firm.

A different kind of business philosophy

An example on the other side of the ledger is the firm I work for, Commonwealth. We try to do the right thing, to treat people with respect—and to make a profit. These goals aren’t mutually exclusive; in my experience, they actually reinforce each other. When we make mistakes, we recognize them as such and move to correct them.

One of the partners here, Andrew Daniels, wrote in response to my Tufts posts: “One of my favorite elements of Commonwealth is that we are absolutely a for-profit concern, but operate under the belief that we can be profitable, our advisors can be profitable, and their clients can pay a fair price. A rising tide will lift all ships.” I couldn’t agree more.

Individual investors also stand to benefit from this philosophy, by looking beyond immediate financial results to the bigger picture. In this context, chasing short-term gains should be less important than maximizing long-term wealth.

I’ll write more about this in the fall, but for now, try viewing your investment decisions in this framework. You might just gain some perspective on what you’re really doing with your money.

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