Pearlstein’s column is bad. Not just because of what it says. But because of how it’s structured. We get half a column of wonderfully written stuff about Ackman. Then we pivot on a quote from Ackman: “I believe in what we do.” And finally the back half of the column lists a bunch of fallacies:
1) Short sellers – who bet on failure – are equivalent to investors who bet on success
2) Financial instruments have economic value
3) Liquidity is always a good thing and
4) Short-selling profits are a net gain for the economy
The fallacies Pearlstein lists are interesting. Before we get to those, I should point out that Pearlstein only quotes Ackman as saying: “I believe in what we do.” That’s unquestionable. Ackman believes in what he does. For most people, that’s all that matters and all we can analyze simply. After that, things gets real complicated real fast.
People who work for non-profits – even those doing things directly at odds with other non-profits – believe in what they do. We accept that. We accept that pro-abortion and anti-abortion advocates, Democrats and Republicans, lawyers for foster parents and lawyers for birth parents – and hundreds of thousands of other people – are doing things at cross purposes that can’t literally be contributing to some social good. Half of them must be hindering the good. Whatever that is.
Unless – and here’s where Pearlstein, The Economist, and most moralizing econopundits duke it out – society benefits from the informational thrust and parry of financial markets.
In the very long-run, yes. History has shown that letting people split off into groups that set goals and serve themselves works a hell of a lot better than everybody working together. We have multiple political parties. We have snarky crosstalk in academic journals. We have Microsoft and Apple, Coke and Pepsi. In the long-run, diversity of opinion – interpretative antagonism – works.
But does it work in the short run? Does it work for the individual parts? And does it matter?
Let’s take the last question first. Yes. It seems to matter a great deal to most people whether things work out today and whether they work out for you and me personally. We worry about whether General Motors or Barnes & Noble (BKS) will go out of business. Economically, this doesn’t make a ton of sense. You and I are pebbles on the scales.
I’m a Barnes & Noble shareholder. But if you asked me if it would be better – for the whole country – if Barnes & Noble survived and thrived or withered and died – I don’t know. I don’t. I can’t. Because I don’t know the alternatives.
Economics – and morality – is really just alternatives. It’s choosing. And I’m not real good at choosing when I don’t know what will be created when the thing we’ve got now is destroyed. Say Barnes & Noble goes under – say you cut up the labor, the locations and spread them around – will America be better or worse?
Let’s bring this back to “capital allocation”. What do you think of e-books? Are they a social good? Are they a net gain for our economy? For our society?
I don’t know. Let’s answer a more practical question. We know we’re going to have a ton of e-books real soon. We know print is dying. Why?
There are a lot of answers. Only two are right. And they never get mentioned. E-books are coming on strong for two reasons: Amazon and Barnes & Noble. That’s it. Those two companies chose – for their own reasons, which we’ll call greed and fear – to parlay their big gains in print books into big losses in e-books. They risked the present so they could bet on the future.
Or more accurately – and economically – they saw two untraveled paths and took one.
Frost said something about this once:
“Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could…
I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference”
The point of the poem is the narrator. He’s a non-conformist dope. Before he chooses, he says the paths were worn “really about the same”. But, afterwards – oh afterwards – he’ll be telling this with a sigh that he took the road less traveled by (he didn’t) and that has made all the difference (maybe).
We have e-books because we had Amazon and Barnes & Noble. We have Amazon because we had an internet bubble. Idiot investors gave us e-books. Just like dumb European money built that great American genius: railroads.
Economies are panda’s thumbs. We build tomorrow from the stuff we’ve got lying around today.
We all have different plans. We all end up surprised.
Capitalism is surprise. Socialism is disappointment. Feudalism is low expectations.
Who cares if MBIA fails? Or General Motors? Or Barnes & Noble?
I care about Barnes & Noble, because I’m a shareholder. If you work at GM you care. But do your neighbors care? Your children? Your grandchildren?
No. In fact, you’re probably hurting them to help yourself. The more you try to save stuff not worth saving, the more you hurt your children’s children. You force them to live in your world. Because you picked it out. It’s cozy. Like that road less travelled by.
Morality is selfish. Because we are selfish. We see two equally worn paths, make a choice, and tell ourselves we made all the difference.
That’s the problem with Pearlstein’s column. None of his fallacies really make sense when seen from the whole. They don’t deal with what is better or worse for society. They deal with what selfish little ants like us think is right and wrong from our perspective – which is normally the ass of the ant in front of us.
A great example is the liquidity argument. Maybe adding liquidity isn’t always good. Maybe it encourages irrational exuberance. Now – as we’ve seen – irrational exuberance builds internets, railroads, and sundry other wonders of the world.
So let’s take the flip side. Maybe Pearlstein is wrong. Maybe liquidity is always good. Then Bill Ackman is a hero. And Warren Buffett is a villain. Buffett buys and buys and never sells. He takes liquidity out. Warren Buffett is a stock sucking vampire. A real monster.
So here’s our choice. Either buy and hold investors like Warren Buffett and Granny insert old-timey name here are immoral or the folks who paid for the internet and railroads are immoral.
Maybe bad people can do good things?
Maybe. Or maybe we’re all just selfish, judgmental jerks like that guy who took the road less travelled by. Maybe we see a choice and call it a moral dilemma.
Here’s a real moral dilemma. You’ve seen this one before if you’ve read one of Charlie Munger’s favorite books: “Influence”.
Reporting a suicide kills people. Covering up a suicide saves lives. It’s statistically proven. When a newspaper exposes its readers to a suicide report, it increases the chance they will kill themselves. Just like when I expose my readers to the words: yawn, yawn, yawn – I increase the chance you will yawn yourself.
It gets worse. Some people kill themselves while driving a vehicle like a car, train, or plane. This is a documented fact. So, when a newspaper prints a suicide report they increase both the chance that people will kill themselves and that they will kill others. These points aren’t debatable. Numbers don’t lie. Newspapers kill people.
Now, what if I said any newspaper editor who prints a suicide report is a bad, bad man?
Would you agree with that?
A lot of people don’t. They say reporting a suicide isn’t immoral. Even though we know doing it risks both the lives of people who are thinking about suicide and people who might just get in the way – we still want to absolve the newspaper editor. Even though for society as a whole, printing a suicide report and recklessly endangering your child’s life are exactly the same – most of us feel one is a lot worse – morally – than the other.
When we talk about morality, we aren’t talking about social good. We’re talking about judging somebody. We aren’t talking about the big picture. We’re talking about the little picture.
We want to judge the murderer a bad man. We want to absolve the newspaper editor.
And we want to sit in judgment of Bill Ackman.
All these articles about the morality of short-selling on Wall Street – and here I am writing one – are really about one guy or gal sitting in judgment of somebody else. We can jazz it up with fancy prose, fallacies, economics – hell, maybe even a poem. But really it’s just one guy sitting at his keyboard judging another guy.
Is Bill Ackman a moral man?
He’s obviously better for society net-net than that bastard newspaper editor. But I don’t think he’s any more moral. I know I’m not.
Bill Ackman said one thing in Pearlstein’s column: “I believe in what we do.”
So do I. So does Pearlstein. And so do mass murderers.
I write investment articles for GuruFocus. I like to think I help make people better investors. But it’s a zero-sum game. If I make you a better investor, I make it tougher for somebody else to make money in the stock market. The better you are, the higher the bar is for them. Net-net, I can’t make everybody a better investor. Only people who read my articles.
And Bill Ackman can’t make everybody rich. Only his investors.
I think Bill Ackman does what he does because he loves doing it. Same as Warren Buffett. Same as me.
I love analyzing investing related things for you. Things I think I know something about. And two things I know nothing about are whether short-sellers are good or bad for society and whether Bill Ackman is a moral man.
Personally, I think both are unknowable.
Was the internet bubble good for society? Were the railroad booms good for society? Will e-books be good for society?
Is reporting a suicide good for society? Is covering up a suicide good for society?
All you can do is live by a code. We have a code for newspaper editors and writers. We’re very forgiving about writers writing stuff that hurts – even kills – other people. Kind of kooky. But that’s the code.
What’s the code for investors? For short-sellers?
That’s the problem. The folks who write about Wall Street and the folks who work on Wall Street don’t agree on a code. We’ve got nuns judging samurai.
Our time is better spent on other questions. Like what Bill Ackman is buying. And – better yet – how he analyzes a stock.
That’s what I spend my time writing about. But – for one day – I thought it made sense to justify why what I write about – the nuts and bolts of investing – is morally superior to what Pearlstein writes about.
It’s morally superior because it clears. I talk with my readers using words and numbers we both agree on. We can argue about everything else. Often do. But we’ve got the vocab down.
The moral philosophy of finance doesn’t:
“The fallacy behind the traditional defense of short selling is that there is some rough equivalent between those who are betting that a company will succeed and those who are betting that it will fail. The Wall Street view starts from the assumption that financial markets are an end unto themselves. But if you start with the assumption that markets are meant to help companies create real value, then treating ‘longs’ and ‘shorts’ as economically equivalent looks pretty absurd.”
Why would you start with that assumption? The stock market is a secondary market. Is your buying a used car meant to help GM build better new cars?
And – by the way – Pearlstein is eliding an assumption here. If markets help the whole economy create value that doesn’t mean they can’t – or shouldn’t – destroy individual parts of that whole.
By that logic: the moment a surgeon’s scalpel cuts flesh he’s not doing his job, because he’s destroying a part instead of saving the whole.
Pearlstein is saying that a “Yes” is better for society than a “No”. Creation is better than destruction. I guess there’s no conservation of economic energy. The market should poof companies into existence but never out of existence.
That’s how silly these moral debates about finance get.
When you and I debate whether to buy or sell a stock, there are points – called data – on which we both agree. When Pearlstein and The Economist debate financial morals they can’t even agree on what allocating capital means.
Does allocating capital mean saying both “Yes” and “No” or just “Yes”?
Is the social utility of no implied by the social utility of yes?
Does financial ontology truly exist?
I exist to analyze stocks. We’ll get back to that tomorrow.