Last week, I knew I had to fess up and admit I bought a newly launched Gold Juniors ETF which I was rather conflicted about, but too alluring to ignore based on my assessment. While I don’t think gold’s lofty prices are supported by fundamentals and I’ve trashed its prospects compared to other investment vehicles before (like why Platinum, Silver ETFs are better to exploit a tanking dollar), I’ve resolved myself to the fact that this ETF may very well continue to run given the secular trend in commodity prices from a continued weak dollar trend and mainstreet hype. Since I am very transparent with my readers on trades and investment strategies, the right thing to do was publicize my holding, even though I had previously railed against it and had to eat my proverbial hat.
I bought something I didn’t necessarily like – because I think the investment will be more successful than other options at my disposal.
While nobody could reasonably argue that buying gold is “unethical” or gold itself possesses nefarious properties, investors are often confronted with ethics in their investments, especially if they are keenly aware of the societal and ethical impact the underlying investment has on the world.
Examples of “Conflicted Investments”:
- Some people think investing in tobacco, alcohol or firearms companies are unethical. These companies produce products that kill people, right? (with the help of people performing the act of course)
- Some people think investing in big oil companies is unethical since they believe they manipulate oil prices and enrich terrorist nations. Recall the PetroChina/Darfur controversy.
- Some people think buying financial firms now is like rewarding the crooks that brought down the economy with an orchestrated housing bubble and subsequent collapse.
- Some religious beliefs prohibit certain types of investments like interest-bearing instruments or investing in a company that does business with a particular country like Israel.
Whatever your beliefs are, do you actually let your conscience guide your investment decisions? Would it even matter?
There are countrary arguments to this question.
1) Ethical Investing Makes a Difference:
Let’s say you have a relative that smoked for several years and died of lung cancer. You reasonably deduce that their condition was likely the result of years of smoking. You find tobacco companies to be morally repugnant and refuse to support big tobacco in any way, shape or form. You figure for every share that someone buys, that’s increasing the share price. That, in turn, is helping the company raise more capital to kill more people with each equity offering. It’s raising the executives’ options prices. It’s helping a “killer corporation”!
2) Your Decision to Boycott an Investment has No Negative Impact and Your Decision to Buy Has No Benefit Either:
Efficient Markets will instantaneously act like gas filling a vacuum and displace any void of inefficient pricing that exists assuming all material information about future prospects and liabilities are known by the public at large. If you decide not to plop down $2500 on Altria, some other investor that was on the fence and considering buying something else will. If too many trendy college endowments and Warren Buffets were pressured to sever their holdings of controversial holdings, arbitrageurs immediately move in to fill that void – at a discount until that discount becomes fair market value. In effect, what you do doesn’t matter, kind of like why Gas Boycotts are Just Plain Silly.
Do “Ethical” Investments Perform any Better Than a Broad Basket of Stocks?
Based on my assessment, there is no evidence of sustained positive alpha (risk-adjusted “better returns”) than the market index at large. While there will be certain time periods where “green companies” outperform or “vice stocks” outperform, in my estimation, this is more a function of sector performance in general and not corporate behavior resulting in superior performance. I have found some obscure studies like one comparing companies whose CEOs lied about their credentials to honest CEOs and how the liars’ companies underperformed over time (I’m amazed by how many professionals engage in this practice) and other possible correlations between ethical behavior and outcomes, but I have yet to find a mutual fund or ETF routinely outperforms the S&P500 or relevant benchmark index in all conditions.
I had previously posted about the Vice Fund (gambling, tobacco stocks, etc.) outperforming an Socially Responsible Fund, but that trend was later reversed. In retrospect, I really think it just came down to what sectors were hot at the time. In 1999, it was internet stocks. Last year it was energy and commodities. This year it’s been financials and tech. Next year, it might be housing. If one of these sectors happens to be viewed as “ethical” or “unethical”, then of course, a fund with a heavy proportion of holdings geared toward that sector will perform accordingly.
What if You Know You’re Leaving Money on the Table Just to be Ethical?
So, if you end up being convinced that you’re no better off avoiding stocks you find to be unethical, or you may actually be making an inferior investment because of increased transactional expenses, lower diversification and higher fees for an actively managed “ethical” fund, is it worth it? Perhaps for 1% a year to know that you’re adhering to your moral and ethical beliefs, that’s a fair price to pay, right? I mean, people tithe, people contribute to charitable organizations – these are the antithesis of “building wealth”, you’re instead sharing wealth and helping your fellow man or fostering a better future for an institution you believe strongly in. So, is ethical investing just another form of philanthropy?
Where do you Stand on This?
Does it Matter?
Do you focus on the underlying behavior and societal impact of your investments?
I’ll weigh in Later on How I Feel About it.
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