I’m very skeptical of writing of writing about “social contracts” in the American employment landscape because there is a good argument to make that they never existed in the first place. Namely, large employers do not hire people for the joy of “creating jobs”, but rather, because they actually need a living, breathing human being to do something in order to make a profit (unless you own a cemetery, in which case you will also need non-living, non-breathing human beings to make a profit).
Johnson & Johnson does not hire an engineer to make Listerine more effective at fighting cavities simply because they desire to pay someone $180,000 per year, but rather, because successful innovations will make Listerine a more indispensable item in the bathroom cupboards of Americans nationwide, and will drive up sales and ultimately make more profits. More profits mean bonuses for executives making the calls, and nice little dividend checks in the mail for the owners of the company (and if you hold the stock long enough, it’ll turn into nice big dividend checks).
But despite this truism—there has also been a renewed ruthlessness in corporate life that manifests itself in the form of corporate layoff during prosperous economic times. The traditional social contract, as I understood it, is that companies only cut employees during times of business hardship to remain viable or to protect the existing profit model. But in the 1990s, Boeing, Lockheed Martin, and Dr. Pepper pioneered a new form of layoffs that involved firing employees as a means of achieving even higher record profits. Recently, this has caught on at Bank of America, Pepsi, Procter & Gamble, and I’m sure a bunch of companies in your hometown as well.
You know how airlines have cut services from the luxurious days of the 1970s when you had leg room and steak dinners to the modern-day “thou-art-cattle-and-thou-shalt-not-complain” business model—well, that’s a shorthand form of synecdoche that describes what has happened in America as well.
This new economic model, which also involves layoff off employees during years of record profits, should cause you to ask yourself the question: Cui Bono? Or, if you don’t have a thing for randomly switching to Church Latin: Who benefits?
And the answer is the shareholders of the companies.
I used to think there was something immoral about buying shares of a company that is cutting workers—it reeked of feeling like a scab in a 1950s union town that is crossing the picket lines to personally enrich himself.
But the more I thought about that, the more I realized such a moral distinction is misplaced—Bank of America management is going to lay off 30,000 workers whether I approve of the decision or not. I could own 100 shares, 1000 shares, or 1 million shares and the action would still happen. My decision not to buy the stock does not give those guys their job back, nor does my decision to buy the stock ensure that they will lose their job. It has no effect on their livelihoods, and it would be a form of smug arrogance to think of myself as a better man for avoiding companies laying off employees. If anything, I should feel the imperative to become ridiculously affluent enough to influence the Board of Directors that is worth having earnings per share slide $0.05 in exchange for not gutting out the country’s employment infrastructure (to put it in more traditional economic terms—the utility of having a robust workforce that can continue to purchase the goods being sold is worth the temporary decision to decline profit maximization).
The lesson is simple: if you are an employee, you should never forget that it is the imperative of the owners to pay you as little as possible without losing you. After all, every dollar they pay you is a dollar that does not end up in their own pockets. And if you are not productive enough, you will be gone.
That is why you owe it to yourself to acquire cash-producing assets. You need to be the owner. Guess what—owners never get fired. No one is going to say, “Hey, I don’t like your attitude. I’m going to take those 1,000 shares of BP you accumulated over your life because you’re a jerkface.” Or no one is going to say, “Cindy, you sleep in late in the morning. You have a shoddy work ethic. You don’t deserve those 250 shares of Coca-Cola, so I’m going to take them from you.” Likewise, no one is going to say, “Nope, Carlton, everyone else is going to collect the Procter & Gamble dividend but you, because let’s be honest, you’re not that intelligent.”
They only people who can take away your stock ownership is a judge (as part of going bankrupt, getting divorced, or failing to pay Caesar or a third-party his due). Other than that, it can’t be taken away. It’s yours.
Get a dozen people in line that are gainfully employed, and statistically speaking, one of them won’t have that job next year. With ownership stakes, you are never forced to give them up. When you buy 500 shares of General Electric and click the reinvest button on your brokerage account, you are finding guaranteed cash flow in the form of dividends that you cannot get with a job. General Electric has a $200 billion backlog. It’s going to get filled, and shareholders are going to get their dividends. If you are screwing in lightbulbs at a GE factory, there is no guarantee that you will be doing that in 2018. In fact, the company is actively devising ways to ensure that you won’t be doing that in 2018, because machines don’t have to get paid, get sick, or demand worker’s comp.
That means you have an economic obligation to spend less money than you make. That means you have an obligation to acquire cash-producing assets with the difference. You must become an owner. When you own something, everyone else is your agent—your servant—trying to deliver profits to your bank account. When you are an employee, you are at the mercy of an employer that you hope will need you years from. Understand how those terms will shape the quality of life that you lead on this earth. When you think about it extensively, you will make the acquisition of ownership stakes in high-quality businesses a top priority in your life.
Originally posted 2013-11-06 08:00:23.
Tim:
You have a gift for explaining the guts of dividend investing. You lay out nicely why we do what we do. Love the articles. Keep up the great work.
BTW….. thanks for the translating the Latin for us. I love dividends, but they need to speak to me in English. .
Great article, Tim.
In addition, it's a good idea to run your own business as an entrepreneur so that you further control your own destiny and cash flow. Furthermore, you can invest X% into your own business at Y% returns, and you can invest whatever is left into other businesses, particularly high quality dividend paying businesses. One engine feeds another engine, and both are under your control.
Hey Tim,
I like the concept of being the owner vs. being the worker. It will stay in my mind.
One nitpick:
You might not have noticed, but I think you are arguing two sides of the same argument, choosing each of the sides where it is beneficial to your article.
First you say:
"Bank of America management is going to lay off 30,000 workers whether I approve of the decision or not",
but later you say:
"the utility of having a robust workforce that can continue to purchase the goods being sold is worth the temporary decision to decline profit maximization".
And that seems contradictory. If you are too small a stock market player to affect the price of the stock in any meaningful way, then bank of america is too small of a labor market player to make a big enough dent in the labor force – one that will meaningfully harm their profits.
It's large scale prisoners dilemma both ways: if everybody would have cooperated, a better outcome would have been achieved, but the small player by itself would be better off if he makes the "bad" move – such as laying off employees or buying the stock of the company that does that.
You speak too much financial sense. You must be a time traveller from the future to warn our generation of the economic mallaise from the ignorance and stupidity of the financially illitrate of this time.
Good article Tim.
You holding up ok after the World Series? Cardinals are set for many more good years I think.
You should write an article on the similarities between the Cardinals methods and dividend investing. Slow solid growth in the farm system, a few select trades, not blowing money on past performance with a sure declining future(Albert). I am sure you could do a great article.
Fred Bird
Yeah, the Series was rough. Seeing Descalso, Jay, and Kozma bat below the Mendoza Line all month long was probably the worst of it.
As for investing "The Cardinal Way"? I love it already.
I do think shareholders should come out and vote against board recommendations and actions.
As for firing people, the situation is very complicated. As a bit of devil advocate, modern technology means a single worker is more efficient than in the past, so it is possible employees becoming redundant due to increase of efficiency. At the same time, I can fully understand your view.
Henry Ford once argued that he wanted pay his worker more than his competitors because he wants his folks able to buy the stuff Ford makes while retaining the best of his staff.
A problem with executive pays is that it is based on short term profit instead of longer term shareholder value; firing to boost short term profits benefits the executives more than long-term shareholder and overall economy. This is where shareholder becomes an issue. Institutional investors are a rather modern phenomena – during Henry Ford, Thomas Edison, Ben Graham, or J M Keynes days, institutional investors didn't exist. The rise of institutional investors creates a double-agent problem in which the big fund managers are also rewarded by short term increase of share price, so they back short-termism in company executives for their own self interest.
Jason Zweig – the editor and commenter in the published version Intelligent Investor argued that retail shareholders should organize to be willing to go against long-term shareholder value destruction by board members. Zweig said the reason why Graham removed discussion importance of shareholder activism from his later edition of the book is that Graham got tired preaching to deaf years – people just owned the stock and don't vote his/her shares at all! Warren Buffett and Peter Lynch also more recently argued that shareholders must think of themselves as business owners, and go out and found out what is going on inside the company. Once you start thinking as business owner, you will be far more serious in medium-long shareholder value destruction. That is why I like companies with strong insider ownership or board members that have been with the company for very long time. Their personal interest and passion is now fundamentally tied with the ups and downs of the company.
(I hope you read comments in older posts…)
Your answer to the “Who benefits?” question…
>>>And the answer is the shareholders of the companies.<<<
is not really correct.
While the shareholders do benefit, they are not the main beneficiaries of cost cutting (layoffs or otherwise).
The vast majority of benefits goes to the management, specifically those at the top, the upper management. This is why they are able to grant themselves such outrageous pay packages, boatloads of stocks, and multiple perks.
While, as shareholders, you and I benefit from whatever increases in income or equity that might accrue, it is a reality that the vast majority of corporations are really run for the primary benefit of the management, with the shareholders getting second place.
No question that the management are also part of the shareholders group. But image what dividends would be if the upper management granted themselves normal salaries. Then the corporation would have enormously more money to spend of dividends and corporate expansion.
–Joe
Rather curious. Got some new ideas. But investigating this matter I came across some sensational website where I could find complete information on this question in one place. Compacom.com offers not only one personal opinion but the chance to compare various authors, experts and companies and provides arguments so that you could choose the one close to you.