There are few words as vilified as the word “profit.” The word “oil” is probably on equal vilification footing, making “profitable oil company,” vilified squared (V² for mathematicians).
Given the societal hatred for profits, why are those societies with the strongest profit incentives also those with the highest standards of living?
The role of “profit” is poorly understood. Profit is the driving force behind innovation and efficiency, which drives our standard of living. If it wasn’t for the profit incentive, who would start new companies with new products? Who would be tirelessly trying to improve their products or services? What would be the point of working hard to beat the competition?
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Psychologically, it seems we feel if someone or a company is making a profit it is because they are taking advantage of someone else. However, if a transaction is not mutually beneficial to both parties, why would the transaction occur? Societies with high profit incentives also seem to be the ones with the most choices of whom to do business with.
“Greedy corporations,” is a common phrase yet it is the fiduciary responsibility of corporations and their boards to make profits, in fact, to be greedy. Those companies that do the best job of producing the best products, taking the best care of customers and employees and operating ethically are those that, in the end, produce the greatest profitability for shareholders. Do all behave in this manner? Obviously not, but those that do are generally more successful over time.
There are four main ways that individuals own stocks — through pension funds, mutual funds, exchange-traded funds (ETFs) and through individual stock ownership. Most Canadians are involved in a pension fund through employment or the Canada Pension Plan (CPP). Mutual funds remain the second-most popular way to own stocks with an estimated one-third of households owning them. ETFs have been growing in popularity but still lag mutual funds. The fourth way to own stocks is through direct ownership, which is the best way for an investor to know what companies he or she owns.
In a recent article, I mentioned that several ESG (environmental, social and governance) funds in the recent past were selling their Canadian oil stocks while simultaneously buying Russian oil stocks. How many investors in those funds knew they were doing this? My guess is very few.
Another clear example of the benefit of knowing what you own came during the last federal election. One party made an election promise of charging Canadian banks an additional profit surtax. The proposal got significant support because why not tax the “greedy banks”? Almost every Canadian owns bank stocks through a pension fund, mutual fund or ETF, but very few know they own bank stocks as part of those portfolios. I even had to look to see if the CPP owned bank stocks and, yes, they do. If everyone knew they owned bank stocks, would they have been as supportive? It was the equivalent of saying, “I want to pay more taxes.”
Coming around to “profitable oil companies,” after years of losses they are finally profitable and now also under threat of excess profit taxes. Britain has instituted such a tax and it is being promoted by a part of the federal coalition. This will only serve to further alienate needed investment in energy production.
Most investors don’t like owning individual stocks because they think it is too difficult to know which companies to buy. Yet there are more mutual funds than publicly listed companies, and as many ETFs as listed companies. How is it easier to sift through from this vast array of mutual funds and ETFs to find the best investments than to select from the smaller group of actual stocks? With individual stock ownership, you can examine the profitability of each company and evaluate them on their own merits.
If someone thinks a company is profiting off of them, the solution is simple. Buy shares in the company to participate in the company’s success.
Investing entails an educational component. The more educated and informed the populace becomes, the more likely we are to elect informed politicians who make better economic decisions.
Profitable companies drive employment and provide tax revenue for needed public services like education and health care. With a snowball effect, they buy more from suppliers creating even more employment and economic growth. That’s how the economic pie expands.
Profits should be celebrated, not vilified. Everyone benefits.
