Jacob, I agree exactly with your points about ethical investing! I wrote an article about a year ago called “Faith-Based or Socially Responsible Investing: Delusions of Righteousness” in response to a certain financial advisor’s guest post on a popular Christian PF blog (the most popular one if you can work that out). Quite frankly, it’s just another shill for asset management at a high price (unless you’re going to pick your own stocks).

I was going to say you can Google my article if you want, but it’s not showing up in the results for some reason. 🙁 Here’s the link, but feel free to delete it if you don’t want it, Jacob: http://www.providentplan.com/298/faith-based-or-socially-responsible-investing-delusions-of-righteousness/

I agree with Mr. Brewer, but I think that not buying a company’s product/service will do a lot more to affect the company as a whole. Like Jacob said, if you don’t buy the stock, someone else will at the lower price.

I want to add a few things to your remarks on ethical investing.

I got interested in ethical investing some forty years ago as I believed that when we invest in a company we share in the responsibility for the activities of the company as well as participate in the outcomes of the company’s activities. Therefore anyone valuing their personal or spiritual growth has to take these things into account when investing.

I also believe that if everyone does invest according to their personal values, then, since so many of core values are alike — and are supportive of higher ideals — that in the long run, only companies employing these higher values will truly prosper.

For anyone interested I have a globally popular site that covers the latest news and research on ethical investing. It’s at http://investingforthesoul.com/

Best wishes, Ron Robins

Being a mathematician, I’m rather good at most concepts involving numbers, and I’m not bad at psychological jugglings either… but for some reason, I struggle with financial ideas. Maybe that’s because economy is mostly fiction and fashion 😉
In any case when I started buying shares, I worried quite a bit about the ethical implications of this since it seemed to be about gambling money to try to win money, at other’s expense. This is certainly true in part (though unlike poker, say, there is no fixed pool) but it was explained to me that my greedy opportunism was a small price to pay for a company to have my money in order to flourish better. That sort of made sense if I were to buy shares during periods in which new shares were being emitted, but otherwise, as this blog entry points out, my money would hardly have any effect on the company at all.
The bottom line: if ethical investment in shares generally doesn’t make much ethical difference, then investment in shares must be mostly unethical all in all.

Am I overlooking something here?

(At least, I quickly stopped daytrading, once I’d realised that that was very unethical – and stupid.)

There is one other reason to choose more ethical companies: They ought to be more profitable.

That’s not been true of course. Generally, the costs saved by ignoring laws on things like pollution and worker safety have added up to much more than the cost of getting caught (in the rare circumstance that there’s any cost at all).

But I, like most people attracted to ethical investing, yearn for the day that this will change. That the laws to protect workers and the public will someday be enforced with enough rigor that companies that violate them will end up spending so much more in fines, cleanup, and restitution, as to motivate them to do the right thing.

Such a shift, if it were to occur, would produce a big windfall for investors in ethical companies (as stock prices adjusted to take into account the change in companies’ relative future prospects).

I disagree with your conclusion in the last paragraph. Even though we’re selling stocks from A to B without involving the original company, B is a shareholder of the company. And given that B is looking to make a profit, he wants high share prices. If fewer people are willing to buy his shares, the price will go down. If the reason there are less buyers is because people object to the company’s practices, the company will have incentive to change them in order to protect the interests of their owners, or shareholders. Thus the process actually works because B is greedy, rather than in spite of.

Of course this presupposes enough of a critical mass of people have strong enough objections that they won’t be ‘bought’ by the stock prices dropping. But I’d just argue that really any movement requires a strong enough support to get going. Though, as you mention, boycotting products can be more effective and direct. Even then, I don’t see any reason to only attack on one front when you can on two. And sometimes what services/goods a company provides is so far removed from the end consumer market, it can be difficult to do effectively.

@Britz – You can divide stock market players into four classes

1) Lesser fools (buy low, sell high)
2) Greater fools (buy high, sell low)
3) Owners (controlling rights)
4) Income (dividends)

A substantial part of the market is composed of fools although there’s a lot of disagreement of who are greater fools and who are lesser fools. There are even magic formulae to determine what the share price should be. It does somehow connect to reality, but there’s the a fudge factor in there, which to me seems it can almost be whatever people aggregatively wants it to be, the P/E factor. From a “real world” perspective, the only things that matter are the cash flow you either get as a mighty controller (private equity valuations, i.e. EBITDA/EV) or a humble income investor (dividend yield). I try not to be a fool tempting as it is. In fact, I think it would be great if it was only possible to trade stocks on January 1st.

@Britz – Ethical … alright, suppose you worked and instead of spending the money on drinking beer, you spent the money on buying a house. You did not build the house yourself, but nor did the beer drinker brew his own beer.

Now you decide to rent out the house. Essentially, you are receiving money even though you do not do any work. If you think this is ethical, then buying stock is ethical, because it’s the same deal.

This is income investing.

Now, in lesser/greater fool investing, you decide to buy a house but let someone live in it for free. It is your hope that the nonpaying renter will somehow improve your house so that you may sell it for more. It may be that the renter (management) instead of spending your money on new paint instead spends it on a new car (corporate jet) to drive around in. It may also be that management does a really good job and makes the house twice as good. Who should profit from this? This is all determined in the company guidelines. Normally workers receive a guaranteed salary in return for their time, whereas investors receive a profit (if any) in return for risking/not spending their money.

I don’t think you can make blanket statements one way or another. It’s kind of like asking whether guns are ethical.

@Jacob: Thanks for the answer! I think I understand it better now. In particular, income investing, like renting out a house, actually acts as a trade in which both parties get something (loan of money/use of house vs. dividends/rent). And, as you say, that trade can be evaluated according to whatever set of ethics.
In contrast, ‘fool investing does not seem to involve any trade, or any other potentially beneficial act to commerce and society – it really just boils down to detrimental and greedy gambling, which gets my blanket UNETHICAL stamp 🙂
Damn! That includes my bloody Vestas shares 😉

@Britz – Holding nonpaying shares is essentially like renting out for free. Maybe the renter (manager/worker) is doing good things for the house which he wouldn’t be doing if you hadn’t bought it. If he uses the money to improve the house rather than paying you a rent and you then eventually sell the house/company, why shouldn’t you profit from that rather than the rent?

This is the lesser fool category from a value perspective. Of course there are also lesser fools based on a quantitative trading perspective who care nothing for the company and just consider shares to be pieces of paper trading on a technical basis.

With so many players, it’s pretty hard to issue blanket stamps — especially since money is money.

“Lately the forums have been discussing ethical investing, that is, investing according to personal beliefs rather than financial beliefs.”

This seems to be another case of trying to put your life in separate little buckets, believing one has no connection with the other. If “personal beliefs” involve principles we live by, then won’t those principles impact where we put our money? I have no fantasy that my decision to not invest in a company is going to impact their growth. I am simply trying to hold to a standard I have set for myself as to where I put my money.