Philosophical approaches in ethical decisions

The first course I took in my MBA was Business Ethics. One of the biggest lessons that I took from the course is that there are essentially three philosophies in ethical decisions

  1. Focus on Consequences (Consequentialist Theories): With this approach, decision makers focus more on the possible consequences. In other words, the ends matter more than the means
  2. Focus on Principles, Duties (Deontological Theories): with this approach, principles and abstract values matter the most in decision making. The question of “what is the right thing to do here?” is a major consideration
  3. Focus on Integrity (Virtue ethics): this approach focuses on the person trying to be a good person more than the act

Recently, there have been an increasing number of disputes between China and American businesses. American companies have to cave to pressure from the Chinese government when it comes to sensitive issues related to their sovereignty and politics. For instance, Apple hides the Taiwanese flag when users are in Hong Kong or Macau, and pulls the app that supports the protest in Hong Kong from App Store, even though it originally approved the app.

China is a huge market for Apple and houses the majority of its supply chain. In the beginning, they tried to do the right thing. Eventually, Tim Cook and the management team prioritized the consequences of his decision, thinking about the impact on the company’s financials, shareholders and to some extent his own bonus, I think.

I don’t think it’s clear cut to say an approach is right or wrong. It varies from one person to another, from one system of values to another. Personally, I would prefer seeing Apple keep the app on the App Store, but I understand the decision as well as I understand the decisions taken by other companies under China’s pressure.

Disclaimer: I own Apple’s stocks in my portfolio

The President, Economy and Stock Markets

Recently, I have come across quite a few posts on social media from my fellow Vietnamese back in my country about how the current President is responsible for the economy, evidenced by the unprecedented height of stock markets.

I am not so sure about that.

First, when a President takes office, he (since the US never has a female President) inherits his predecessor’s policies and economy. Discarding the existing policies takes time. New policies take time to go into effect. Then, it takes time to measure the effectiveness of the “new” economy. Economic policies aren’t light switches. Turn them on and the lights go on. Turn them off and the darkness comes. To determine whether the sitting President is truly responsible for the economy, one must be able to determine which policies were enacted and how the policies impacted the economy. I prepared a simple chart to illustrate the issue

To truly see how Trump stewarded the economy, one must be able to compare his performance with the trajectory based on what happened under Obama. Take all the factors, build a model and see how the predicted economy would have happened had Obama still been in office. Then, compare Trump’s performance to the model’s prediction which is the dotted line in the chart.

Take a look at the red line. The stock market still grew under Trump and still hit the all-time record. But then it is below what would have happened had Obama still been in the office. In that case, would you still say Trump did a good job? On the other hand, Trump should be credited for the stock market if his performance is the green line. Not only does the stock market hit the all-time high mark, but it also outperforms the model. No doubt about his credit here.

Here is exactly where the issue becomes tricky. It’s almost impossible to build an accurate model like that given how many unpredictable variables there are. As a consequence, I really doubt anyone can say with absolute certainty that one President is responsible for the stock market’s growth or that of the economy.

Now, one can definitely argue that as long as a President is in office, he or she should take credit for the economy and stock market’s performance. It’s fair to do so. But if that’s the case, he or she should also be responsible for everything wrong with the economy or stock market. You can’t cherry pick what to take credit for and what to avoid blame for. It doesn’t work that way.

If Trump takes credit for the stock market performance, he should also be held liable for the tariffs that are said to be suffered entirely by American businesses or consumers (CNBC) or for the huge increase in federal budget deficit (by 50%) since he took office (source: Heather Long).

It’s also worth noting that stock market performance, low unemployment rate or GDP growth or all together do not equal to increased wealth for average Americans. You can have all of them and increased income inequality, meaning that most of the increased wealth goes to the rich or the 1% or 10%, not the poorer Americans. And who should be held liable for that? The one who takes credit for the economy/stock market!

I really wish my fellow Vietnamese would be more informed

Apple Card raised the bar for easy and smooth credit card application & activation

I got my Apple Card this weekend. While I don’t have intention to use the physical card itself due to its low cash back (1% compared to the standard 2%), I am happy with the how easy the application and activation of the card is.

To apply for the card, you only need to have an eligible phone (iPhone 6 and later I believe), open the wallet application, fill in some basic information, take a photo of a valid ID such as State ID or Driver License and be done with it. The application is processed within seconds. When I applied for other credit cards, the process was a bit more tedious. Online forms and sending physical proof of identity are usually required. With Apple Card, everything is done via the Wallet app, right on the phone.

To activate an Apple Card is even easier. The screenshot below shows all you have to do to activate it

Connect your phone to Wifi, hold it close to the package Apple sends and that’s it. Your card will be activated.

With Apple’s appeal, marketing prowess and a sleek design, I think there will be a lot of activations. Yet, I doubt the physical card will be used much. The benefits are inferior to what the market offers. I won’t be surprised if Apple and Goldman Sachs work together to give users a reason to use the physical card more often. Nonetheless, I am pretty pleased with how I came to receive the card.

Disclaimer: I own Apple stocks in my portfolio

Costco – An amazing business

Charlie Munger said that the only real threat to Amazon in retail in his opinion was Costco. I think he has a point. Costco has a remarkable business model.

This part in the 2018 annual report summarizes the business pretty well

We operate membership warehouses based on the concept that offering our members low prices on a limited selection of nationally branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventory turnover. When combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnover enable us to operate profitably at significantly lower gross margins (net sales less merchandise costs) than most other retailers. We generally sell inventory before we are required to pay for it, even while taking advantage of early payment discounts.

We buy most of our merchandise directly from manufacturers and route it to cross-docking consolidation points (depots) or directly to our warehouses. Our depots receive large shipments from manufacturers and quickly ship these goods to warehouses. This process creates freight volume and handling efficiencies, lowering costs associated with traditional multiple-step distribution channels

The model can be illustrated as below

Costco’s customer base enables the retailer to buy goods in bulk and at discount from suppliers. The lower prices make Costco appealing to customers. The cycle keeps going on. Costco has every reason to keep the margin low so that the cycle is robust and going strong. To solve the margin issue, Costco resorts to membership fees which are mostly purely profit.

Source: Costco Q4 earnings

The graph above shows that the membership fees make up the most of the net income. It’s not unreasonable to think that the SG&A expense for memberships is minimal.

The membership fees give Costco breathing room in a cut-throat business. There is only so much that a retailer can do on a margin side given a litany of fearsome competitors. Plus, there are so many foreseen and unforeseen factors that can put Costco’s margin at risk. If Costco removed the membership fees and raised the margin, they would become less competitive.

Being able to convince shoppers to pay an annual fee is a competitive advantage. So is the freedom to laser-focus on keeping the costs low. An additional advantage of a membership fee is that Costco can have more cash for their operations. Operating in a business in which a lot of goods are moved around every day and plenty of capital is required for upgrade, openings and renovation, Costco benefits greatly from the instant dose of cash the members bring in.

Weekly readings – 5th October 2019

Grab Accounts for 73% of Ride-Share Trips in First Half of 2019 in Vietnam.

Retailer Adoption of Apple Pay Quickens. Since I was able to use Apple Pay on my phone, I have been using it as the first payment method, even in a city as small as Omaha. I have been a pretty happy user ever since.

Source: Loup Ventures

Comparison of smart digital assistants by Loup Ventures

Meet the Women Leading Netflix Into the Streaming Wars

The man who built his own Lamborghini

Dog-walking startup Wag raised $300 million to unleash growth. Then things got messy. SoftBank doesn’t seem to be the Midas that some hyped it to be with its massive checkbook, does it?

Latest memo from Howard Marks: On the Other Hand

Researchers Discover the Tallest Known Tree in the Amazon

Measuring Apple’s Content Distribution Arm

WeWork Used These Documents To Convince Investors It’s Worth Billions. A long but good article on the accounting jujitsu that WeWork employed

Book: She Said: Breaking the Sexual Harassment Story That Helped Ignite a Movement

I came across this book on actress Hayley Atwell’s Instagram account and decided to pick it up. Boy, I couldn’t put it down. The book is about the three year journey of two reporters: Jodi and Megan, who spent hours and hours investigating, cross-checking and writing about the sexual harassments by powerful men towards women.

Reading the book, I came to know the challenges and difficulties the victims of sexual harassments had to encounter whether they came forward. If they don’t, they have to live with their nightmares for the rest of their lives and watch the culprits go unpunished. If they do, they have to face death threats, disruption into their job, life and their family’s.

Over a long dinner, she made clear why she was so scared to travel to Washington. Her family had been forced to hire twenty-four-hour private security. It was uncertain when it would be safe for them to return home. Ford had already experienced enough disruption and danger.

She pressed Play on her phone at the dinner table. “You lying fucking cunt!” came a voice from her phone. The lawyer told Ford she was right to be frightened by the messages and encouraged her to share them with the FBI. “You’ve got three months” another voice said. Others repeated similar phrases and sounded like they might have come from the same voice-altering machine, making her think they were somehow coordinated. “Don’t be messing with my boy, Brett”. “Don’t be messing with my boy, Trump”

I have been so baffled and stunned by the length by which people are willing to go for something that is not related to them personally at all. How can you threaten a stranger’s life for something that is not related to you?

It’s also inconceivable to read what powerful men like Harvey Weinstein could get away. Non-disclosure agreements were signed, inflicting acute restrictions on the victims who, in some cases, didn’t even have the copies of the NDAs. Here is an excerpt on Harvey Weinstein’s behavior

Each morning, Perkins, or whichever assistant from the London office was on the early shift, had to rouse the partially or fully nude Weinstein out of bed in his hotel room, and turn on his shower, as if he could not rotate the handle himself. Sometimes Weinstein tried to pull Perkins into bed with him, she recalled

Last but not least, I appreciate and admire the tenacity of the authors, their colleagues and editors for pursuing the stories despite the intimidation, intricacies and difficulties. At one point, the story was going to collapse since evidence was exceedingly hard to secure while there was no victim going on the record. Massive massive appreciation towards Ashley Judd and Laura Madden for taking the leap of faith to be the first women to go on record, paving the way for many others.

It’s sad and disappointing to see that despite advances in so many areas, we, as a race, still have sexual harassments all around the world. I am sure what is covered in the book is just the tip of the iceberg.

Charles Schwab removed US stocks, ETF and options commissions

Yesterday, Charles Schwab announced on their website the move to lower commissions for US stocks, ETF and options down to zero. The fine print is below

Beginning October 7, 2019, the company will reduce U.S. stock, ETF and options online trade commissions from $4.95 to zero. And with no minimum account size3 to open a full featured Schwab brokerage account, every investor, no matter how large or small, can benefit from the expertise and support of a firm that has been entrusted with more than $3.7 trillion in client assets. Every Schwab client using our web and mobile channels automatically qualifies for the new pricing, without opening a new account, making a new deposit or maintaining a minimum balance of any type.

Source: Charles Schwab

I have been a Robinhood user for more than two years. What drew me to Robinhood is the ease of making trades. Instant, straightforward and especially free of commissions. If a trade incurs a fee, whether it’s a buy or sell, your return will take quite a hit, particularly when you take into account the compounding interest. Without the free-commission feature, I wouldn’t use Robinhood and I am confident that it wouldn’t have taken off among millennials without it.

Charles Schwab’s move is to lure the retail millennial customers to their platform. I see it as a win for consumers who now have options to make free stock trades.

As for Robinhood, the startup has received a lot of accolade for its disruption. But now it will have a fierce competitor who aims to take away the appeal of its biggest selling point (no commission). Neither the current user experience nor the brand awareness guarantees a competitive advantage in the long term. To get traders’ business, these brokers have to somehow offer more values and do it on a consistent and regular basis.

In short, the competition is on now