Business.... and Morality

Investment Analysis Clubs Saul’s Investing Discussions
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I find these morality-oriented posts about the financial services industry… mostly AFRM and UPST…. incredibly interesting. And just plain odd. Maybe that’s because most of us on this board have the luxury of having “enough”. Or maybe some have lost sight of how the business world works!

Let’s step back a bit & look at Retailing under the microscope, just as a little refresher.

  1. Retailing consists of ~67% of the US economy. You read that correctly. Retailing drives the economy…. through derived demand. Think Tesla & the thousands of parts it requires. What happens at retail affects all sorts of nooks & crannies of the economy. By definition, retailing consists of what the ultimate consumer buys…. groceries, gas, new cars, pre-owned cars, Pelotons, drugs, refrigerators, haircuts, spa services, smartphones, and everything else at the local store/website. You get the idea. The supply chain debacle right now shows the necessity of a well-oiled distribution system to move goods to where customers can buy them.

  2. The objective of a retailer is to sell stuff. The more the better. The shinier the bauble, the better chance the retailer has to make a sale.

  3. The objective of a retailer is NOT to discourage a customer from buying.

  4. So how do they do this? Lots of ways. Convenience. Branding. Merchandising. Snob appeal. Social media and “influencers”.

  5. But nothing is more important than making it easier to buy. And that means financing. Very, very few people pay with cash these days, but there are a number of options now. Anecdote: I remember a friend talking about how his grandmother bought her furniture “on time”, paying $5.00 a week until it was paid off. That’s how she got paid, and how she managed her cash flow. That’s how she was able to acquire what she needed. How is this significantly different from today’s BNPL? Or layaway. Have you ever seen the toys people start “laying away” for Christmas throughout the year? If you don’t understand this fact, I’m compelled to suggest you might be completely out of touch with reality.

  6. Of course a retailer wants to offload as much of this financial risk as possible, but he has to give up something… a small margin.

  7. Now the transaction is between the BNPL provider, or the credit card company, and the customer. The retailer got his money and is on to the next sale.

  8. Please tell me how Affirm or Afterpay or Klarna are hurting society? Or credit card companies? If a customer doesn’t want to pay the terms, then he/she is free not to use the financing. If these companies do a poor job, they will be replaced.

  9. It is impossible to protect people from themselves.

As for an investment, I see these BNPL companies as providing a service, for which they can be compensated. If they do a good job, the compensation will be attractive, and investors can share in the rewards. UPST is doing exactly the same thing. These businesses exist to serve their customers AND to make money doing so. Morality has nothing to do with it.

breezyday
large position UPST; tiny position AFRM

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Thanks for making this post. I find these issues interesting as well, but I’m not quite so quick to dismiss them as it seems you are. I think it’s important to make a few distinctions:

  1. Distinguishing between questions of morality on the users’ side and the providers’ side. For a user to take on more debt than they can pay may not be immoral – it may simply be foolish, or careless, or desperate. The important question users of debt need to consider is, “Is my need for this thing sufficiently great that I should accept the risk of debt to pay for it?” So the user has to evaluate both “need for thing” and the “risk of debt”. Both of those are highly individualized. The more money you have, the less risk debt implies. So whenever a user takes on debt, they should make a risk/reward calculation. But not doing so can be a function of a lack of ability, a lack of time, a lack of awareness, or a lack of information.

  2. So the question of morality on the business’ part is to what degree does the business intentionally enable, enhance, or capitalize on these deficiencies by the user.

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Hi Breezy Day,

I’ll make a single reply and then let’s take this OT discussion off-board.

There’s a reason why Affirm is the first and only stock that we’ve had discussions about its business being immoral. Although you mention Upstart, to my memory at least, no one has ever implied that what they were doing was immoral. It’s all about Affirm. There are posts saying that specifically encouraging people to take on more and more debt to buy things they can’t afford is immoral, and posts saying immoral doesn’t matter, the only thing that matters is how the business is doing. That’s the kind of thinking that really bothers me.

What you are saying is different. You are saying it’s impossible to protect people from themselves, which is a different issue. You can’t stop someone from smoking cigarettes, for example, or overusing alcohol. I know. My wife and I lost three of our four parents to cigarettes: my father to multiple heart attacks in his fifties (3 packs of unfiltered Camels a day. I have the same genes and I have lived to be 30 years older and am still taking regular two hour bike rides and hikes. I’ve had an entire lifetime since the age cigarettes killed him. No exaggeration. He was a healthy adult for thirty years, I have had more than thirty years more), my wife’s father to cancer of the throat (horrible way to die, air being pumped in through a tracheotomy), her mother to lung cancer.

So, you can’t protect people from themselves, but would you have invested in a cigarette company, that knew for 30 or 40 years that cigarettes were killing loads of people but still urged people to smoke. Yes, morality does matter.

I remember a number of years ago when people on MF were talking about a little drug company that was growing like mad. It was taking two generic, over-the-counter meds, that anyone could buy in their pharmacy, was packaging them together, and was selling them as an expensive prescription medication. Their conference calls didn’t even mention whether the combination was working well, it was all about how many doctors they had conned into prescribing their patched together medication, and how their revenue was rising. I felt that yes, it was immoral, and I wouldn’t invest in it. Yes, morality does matter, to me at least.

I also wouldn’t invest in a chain of weight loss salons with some magical way to help people lose weight, because I felt that they were just taking advantage of people. My opinion. It didn’t matter to me that they were quite profitable at the time.

When people say morality doesn’t matter, the only thing that matters is how well the business is doing… let’s carry it to an extreme. For a while (there still may be) there were gangs who were importing young teen age women from Eastern Europe (or other countries), telling them they would get jobs as nannies, and then keeping them prisoners and selling their services as forced enslaved prostitutes. Very profitable business. Tell me how morality doesn’t matter, and the only thing that matters is how the business is doing.

Now obviously, that’s not what Affirm is doing, or anything like it, and everyone has their own ideas of where the dividing line is. I have now taken tiny starter positions THREE times, but I couldn’t stand to hold the positions more than a couple of days each time. It just made me very uncomfortable. That’s just me. But we haven’t had this kind of discussion about any of our other companies but Affirm, not for many years.

Best,

Saul

And answer off-board if you must. On board responses will be deleted.

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