Posts Tagged ‘financial crisis’
Should companies invest in sustainability?
Good times. Bad times.
Corporate Social Responsibility? Sustainability?
Are these ideas and a strategy better left for the good times? Post-financial crisis can a business really afford to “green” itself or think about scarce resources?
Saving on energy costs hits the bottom line. But some sustainability projects add costs. Are they worth it?
Yes. They are.
In the post-financial crisis environment, long-term thinking is as appropriate as ever. Just how are companies who have made an authentic commitment to sustainability doing?
Long-term thinking
In 16 of 18 industries studied, A.T. Kearney found:
Companies recognized as sustainability-focused outperformed their industry peers over both a three and six-month period, and were all protected from value erosion.
Let’s talk results:
- Over three months, the 99 companies studied outperformed by 10 per cent
- Over six months, by 15 per cent
Such outperformance in difficult times is remarkable.
Companies were part of the Dow Jones Sustainability Index or the Goldman Sachs Sustain List.
Risk management and sustainability: A partnership
The study suggests that:
Prudent risk management practices often evolve from the same approaches used to develop and execute long-term strategies to avoid disruptive events from occurring due to weak links in the supply chain …
So … Sustainability planning may have a bigger impact on long-term business performance than many think.
Sustain outperformance in bad times
In some sectors of the economy, companies practicing “true” sustainability showed remarkable outperformance:
- Financial services by 25 per cent
- Media by 33 per cent
- Automobiles and parts by 33 per cent
True strategic efforts toward sustainability have shown their worth even during trying times like the financial crisis. While some companies will take a “lip service” approach with purely tactical short-term endeavours geared toward winning awards, the strategic approach toward sustainability will produce concrete dividends even in challenging times.
More importantly, it was the worst of times
It’s not about short-term reputational gains. It’s about long-term gains and avoiding the disasters that short-term thinking so often lead to.
Strategic policies like the United Nations Global Impact, where companies follow:
… universally accepted principles in human rights, labor, environment and anti-corruption … embedded into daily business practices and … applied to supplier codes of conduct, company policies, and compliance procedures for confidential reporting and auditing, among other areas …
… have an effect on the bottom line.
In light of the growing fallout over Wal-Mart’s activities in Mexico, the evaluation of cost and commitment regarding sustainability over the long-term looks highly positive, especially since it outperforms against the average even during the worst of times.
It doesn’t take a rocket scientist to understand the damage to reputation and shareholder value the Wal-Mart allegations will lead to if they’re found to be true.
But reputational damage happens the moment allegations are made, the moment the media picks up the story. Shareholders sell fast. Headlines have immediate impact.
A brand branded with a headline related to bribery, or even supply chain issues, lasts long in the memory.
The best crisis management continues to be avoiding the crisis in the first place. A focus on short-term solutions leads to long-term crises.
Related articles
Part Two: Cash, corrections, the end and feeling fine
It`s the end of the world as we know it -- or is it?
Squabble, squabble, squabble: What happened to collaboration?
We’ve watched U.S. and European politicians do little. Squabbling doesn’t really count as a productive activity these days. Playing politics looks pretty selfish. Procrastinating looks plain stupid. The crisis in Europe is a serious issue that requires a serious response. Most probably, one that involves world-wide collaboration.
The markets are going to force politicians to get their acts together. This isn’t the time to think regionally. The global economy is here, like it or not. It’s time to act for the greater good rather than protecting one’s own backside.
We live in a global world. Interconnected, with dependencies that aren’t always transparent on the surface of things, a large event in any one country or region has far-reaching consequences. Yet too many politicians are shouting, “Mine!” Toddlers in daycare show more skill in sharing and thinking about their larger community.
iShare
Warren Buffett’s belief that increasing taxes on high income-earners is the way to go has become popular with many people. There seems to be a growing feeling of community amongst some individuals. A feeling that it’s time to share the wealth, and that tax cuts for the wealthy have gone too far.
Agree or disagree with Buffett’s belief on taxes, he`s a man that’s been, to understate the obvious, fairly successful at what he does. No wonder he has something like superhero status amongst Berkshire Hathaway’s shareholders and the followers of what’s become the “cult of Warren”. Not to mention that he’s one of the biggest philanthropists in history. He also advocates that the wealthy should follow his example. He counts Bill Gates amongst his admirers and a fellow in philanthropic efforts.
Project Band-Aid: (It’s [not] just a flesh wound)
Solutions in Europe have been largely plastic. But Band-Aid’s are short-term. Germany is coming under increasing pressure to be a leader in Europe rather than dwelling on its own self-interests. Take a look at the share prices of German banks or the MCSI Germany Index down 28 per cent year-to-date.
The market’s telling us you can’t have your cake and eat it, too. You can’t create markets, sell to them and leave them, according to investors. Not without paying for the engagement ring, at least. And the price tag is more than three months’ salary.
What investors would really like to see is a unified Euro bond. Perhaps leadership in Germany (and Europe broadly) needs to think more about the greater good (including Germany) rather than more national self-interests.
After all, why create a broader community in Europe if when crises appear leadership is going to become nationalistic? Marriages are for better or worse. If any one nation in Europe thinks it’s going to skate away from the Europen crisis, it’s sadly mistaken. The fact is the interconnectedness of financial instituitons, financial transactions and myriad moving parts is not going to ignore Germany. It’s punishing its stock market along with those of other European countries. And inaction and lack of adequate response will make this situation worse.
President Obama’s under pressure as well. American politicians have looked just as ridiculous as their European counterparts. The inability to collaborate, to forge solutions and move forward is getting a lot of press. Markets gave the Operation Twist strategy a big thumbs-down within moments, and today’s activity in the markets reinforces that.
So, wait a minute … Where’s opportunity?
Here:
- Corporate profits are near record levels
- Corporations are in better shape than some governments
- Corporate bonds look better than some nations’ bonds
- Global housing bubbles have burst already (largely)
In Canada, we are fortunate to have a strong bond market, but in the U.S. and Europe, there are more than a few questions regarding bonds. However, during the last few days’ extreme market volatility, investors still threw their money into the U.S. dollar and Treasuries – liquidity foremost in their minds.
Bonds and dividend yields
Bonds have done exactly what they were supposed to do in this correction. They have provided income and have risen dramatically as investors ran for cover. With bonds yielding very low rates of return (despite functioning as insurance in portfolios) in both the U.S. and Canada, the situation seems better and better for strong dividend-paying stocks long-term. Recently, we saw the S&P dividend yield rise above the 10-year Treasury. In Canada, dividend yields have also risen dramatically. Your dividend yield is paying you to wait. Not bad.
The economic situation may be deteriorating; still, it’s hard to imagine that GICs are going to be worthwhile as an investment for anything other than short-term concerns in the current environment of low interest rates.
Hopefully, many investors have been following a strategic protocol of rebalancing their portfolios. If they have, they don’t need to worry as much about the volatility in today’s markets. They may have to wait for better returns, but at the same time, they’ll get paid to wait knowing they own solid companies with a history of dividend payments.
Holding dividend-paying equities is really important because it’s the end of the world as we know it. But it’s been the end of the world as we knew it so many times before. Past is prologue. Perspective is very persuasive.
In the end, dividends provide what more speculative investments can’t:
- A solid income stream
While the pain created by the Financial Crisis, and the current crisis in Europe is serious, investors who’ve followed prudent rebalancing strategies will be able to:
- Count bond and dividend payments as they sleep
And that’s probably the best measure of whether your portfolio accurately measures your ability to tolerate risk … being able to sleep at night.
It’s the end of the world as we know it (like so many times before), but from an investor`s perspective, a solid income stream might help us feel fine.
Related:
As if on cue, Warren Buffett announced today that Berkshire Hathaway would buy back its own shares.
Warren Buffett bought $4 billion worth of stock in the third quarter as markets slid, investors worried and pessimism gathered steam.
Don’t panic
In the face of the typhoon (market correction), bend like bamboo
What is it about market corrections? Wise, rational people can become wide-eyed pessimists and conduits of fear in the face of steep market drops. Can you remember a time when you sold investments during a market correction and it turned out to be a wise move?
Investors ruled by a forest fire of emotions, fanned by the media looking to report the latest, most sensational story, rarely make wise decisions. Often, when the market is hitting new record after new record, they’re buying. But when the market turns the other way, and suddenly high quality companies are on sale and can be bought at excellent discounts, emotion-ridden investors are running for the hills or putting their heads in the sand.
Here are some facts that you’d do well to pay attention to. The study tells the sad tale of how investors, suffering from a bad dose of “Oh, no! The world’s going to end!”, make some classic mistakes while investing. In fact, what may be the most important aspect of your investment plan, after asset allocation, is dealing with the forces of rampant negativity that rear their ugly heads every time there’s a market correction.
Glued to the media, wide-eyed and beset with your worst fears for the economic future? It’s time to go for a walk. Fund managers wait for corrections to go out bargain hunting. Wouldn’t you be happy if the suit or new pair of shoes you wanted to buy were now on sale? Because that’s exactly what’s going on now: high quality, dividend-paying companies are on sale.
Investors need to do themselves a favour:
- Develop a thicker skin
- Stop dwelling on the investment media during corrections
- Stop chasing investment returns
- Ask yourself: since everybody’s talking about gold bullion (or whatever the flavour of the month is) right now, do I really want to buy it?
- Get a sound investment plan
- Stick to your plan
- Buy or sell investments when your asset allocation veers away from your planned allocation, and do it regularly
- Remind yourself that great, stable companies are not going to disappear
Further considerations that you should bear in mind:
- Remind yourself that Warren Buffett (and other smart money managers) are looking for bargains rather than making rash, panic-fuelled decisions
- Aren’t all the companies you wanted to buy when they were more expensive, cheaper now?
- The economy’s gone through corrections dozens of times before – this won’t be the last time (e.g., Latin American bonds, the Asian Crisis, the Tech bubble, 9/11, [Remember when people were talking about the Canadian peso?], the financial crisis, etc.)
- If you’re buying in the midst of this correction, or any, remember, you don’t need to throw all your money in at one time – you can also buy gradually, giving you a cushion and better prices should the market go down further
- There’s a place in your portfolio for bonds – do you have any?
- Revisit your plan yearly
If you’re still spooked after a hard, meditative look at your investments, maybe your asset allocation is too aggressive. Should you reduce your equity holdings somewhat? Reducing stock holdings amidst any correction is tricky. You’re probably going to be selling at the worst of possible times – maybe you should revisit your asset allocation model when things calm down a bit? (Have I mentioned stick with your plan and re-evaluate your plan regularly?)
The time for strategic thinking is before a correction and during one. When it seems that investment losses are falling out of the sky, too many investors forget their planning. Many have heard Warren Buffett’s “Be greedy when others are fearful” philosophy – slowing down and taking a breath during the bad news feeding frenzy will help give you some perspective on where you’ve been, where you’re at now and where you want to be.
Goliath gets a dose of realism: Does the average investor understand how Nasdaq’s re-evaluation of Apple’s weighting could affect markets?
Nasdaq had to reshuffle. It hadn’t touched weightings since 1998. Nasdaq decided it’s not in investors’ interests to have one holding representing over 20 per cent of the index. And it’s right, such an over-weighting doesn’t represent an investors’ best interests.
It’s been said before, and it’ll be said again, one company’s over-weighting in an index counters the principles of proper asset diversification. Think Nortel and what happened when it was hugely dominant in the Canadian stock market. When Nortel got crushed in the tech bubble so did Canadian investors — many watched their portfolios bomb.
Investors have definitely benefited from Apple’s meteoric rise over the last few years, however, at some point, rational thinking has to prevail. Do you really want the extra risk associated with an enormous weighting?
How many investors buying the Nasdaq know how overweight Apple is? In slashing Apple’s weighting about 8 per cent down from 20 per cent, Nasdaq’s doing the responsible thing.
Apple has been getting an enormously disproportionate share of the market due to its dominance of the Nasdaq. Apple’s been profitable but so have other companies. In comparison, Microsoft, posting profitable quarter after profitable quarter, hasn’t been getting its due. And it pays a dividend!
Perception often rules over reality in the markets. But reality often comes back with a smack.
In the short-term, there will definitely be re-weightings of Nasdaq stocks in portfolios the world over. These re-weightings should benefit Microsoft, Cisco, Oracle and Intel. Apple stock should experience some interim pressure as managers adjust their portfolios over the next month.
What the future holds is as yet unwritten, yet Nasdaq’s re-weighting of the benchmark will be a wise long-term move for the index.
While the Nasdaq is nowhere near the valuations of the tech bubble, Apple has done almost nothing but go up since the financial crisis. However, during the volatility of the crisis, it got hammered.
Portfolio managers are measured against the indices that are their benchmarks. A benchmark should never be overweight one stock. It forces managers who want to compete with the index to buy more of the very stock they should be cautious about.
Here’s a graph and story of what happened to the Nasdaq after the tech bubble, when mania overcame rational, strategic thinking.
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