Early Retirement Extreme Forums

jacob wrote:Inconsistent with ERE principles? Wait, what? As far as I know there aren't any ERE principles when it comes to investing other than: Be at least somewhat informed about what you're doing! That [lack of principles] goes for what and what not to invest in and how to run a company for that matter. Just to make that clear. Some day I might write an investment book, but until then there are no [official] ERE principles.

Sorry about how I worded the first sentence in my original post. I meant to say that things like processed food and fossil fuel dependence are inconsistent with the ERE personal lifestyle, not inconsistent with ERE investment choices. I'll try my best not to make ambiguous generalizations about ERE in future posts. Thank you for replying. (:

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To continue the discussion, if a person is trying to align their lifestyle with their investment practices, I do not think it would be consistent to invest in companies that are antithetical to that lifestyle. For example, if this person--who is trying to align their lifestyle with their investment practices--uses bicycling as their main form of transportation, or gardening & cooking for themselves as their main form of nourishment, I think it would be inconsistent for them to invest in Dodge or McDonald's.

I must admit, I am tempted to just say "fuck it, my capital is small enough to be irrelevant anyway" and invest in the 'inclusive' Vanguard Total Stock Market Index Fund, but, in principle, I'd like to invest in companies that are "ethical" to the standards I listed in the original post of this thread--even if my capital is only 10k. How can I be protesting for governments and universities to divest from natural gas and coal yet invest in them myself? It looks like I'll have to learn more about individual investing in a company or find an "ethical" mutual fund. Or keep pondering about my social responsibility with investing. Or both.

You'll need to do your research well, I had a peek at one of the Vanguard SRI funds last night and some of the inclusions surprised me (the largest holdings were oil companies etc.) I think my own subjective intepretation of ethical probably equates to 'not damaging to human health or happpiness, minimises environmental impact'.

Do I think there are enough companies out there that I can invest in that would actually meet that criteria? I'm really not sure. I know how you feel about SRI, but I think I'll just need to remain conflicted for the moment, trying to live up to my ethics, but realising that I can't do it in every area of my life.

Thanks for starting this thread, good contributions from lots of people.

*Edit: thanks to the animal for that link, will need to listen to it while cooking.

There are "social indexes" and such, but then you have other people deciding what is ethically right and ethically wrong. They may or may not agree with your views. Even companies that make a big outward show of greenness and progressive social values may not live up to their words/marketing when they need to show a profit every quarter.

I invest in markets, or market segments (via index funds). I see doing so as supporting and participating in the free market capitalist system, which I believe in. Does every player in the market share my personal ethics and values? Almost certainly not. But that's inherent to a free market. I do vote with my wallet when I make purchases, hire services, and make donations, so my ethics are sometimes reflected there. Unfortunately perhaps, I'm too often selfish, lazy, and greedy in that regard, as I place a high value on convenience and low cost.

theanimal wrote:Joshua talked about socially responsible investing on today's Radical Personal Finance podcast. See:http://radicalpersonalfinance.com/75/

Joshua's comments were interesting. He cites the wikipedia article on socially responsible investing, and calls out srs in general for not having a fund that represents his concerns -- corrupt investment bankers (Lehman Brothers was mentioned), and mentions a big 5 banking cartel that controls capital in the American consumer economy.

Socially Responsible Investing has traditionally involved staying away from companies the directly destroy or harm people or the environment.

In some ways, Joshua's desire to not contribute to corrupt financial institutions is even more radical - it is a challenge to the American capitalist system in its present form.

I like it!

my two bits: Invest in shares of individual companies that you feel fit your values. There is so much misleading branding out there...

Here's an ethical conundrum though. Suppose you manage the endowment for an environmental organization that does advocacy, sustainability projects, etc. And suppose you reasonably believe that shares in a very destructive company are going to do very well. For example, suppose you think the price of oil will move up soon, and this will benefit a particularly leveraged oil stock, creating a sort of call option on oil, without the theta burn of an actual option. Is it ethical to invest, to take the money from that and use it for something positive? For general purpose investing I guess the answer is no. But lets complicate it further: Suppose your personal ERE plan is to achieve FI so you can put all your time and energy into 'doing good'. Now is it ethical to buy these shares? This isn't totally abstract for me... I think it depends on whether you really honestly are doing that, or just saying that in order to feel good, but really just chasing the dollar. Thoughts?

One could also argue that by investing in unethical but highly profitable companies you are actually making money and hurting that company. Why? Well, most of the time, a successful company is raising their dividend and doing stock buybacks when their stock is high making both more expensive. The reverse is true when their stock is low. By supporting them when they are doing good you are forcing them to pay more by creating more demand for their stock. This increases their cost of capital making them less competitive. In turn, you make money and can use it against them if you so choose.

Now this is a very shaky argument, but no more so than only investing in "ethical" companies. Good luck finding enough truly "ethical" companies to invest in.

Another argument for investing in unethical companies is that it might give you a larger voice in shepherding them to be more ethical.

Again, it's a weak argument, but none of these arguments are very compelling unless you are a Carl Icahn type. This brings me back to my prior post suggesting our investments don't have a real impact as they aren't big enough.

Hurting the company; That's an interesting rationalization. I always assumed that it helped them because it raises the share price at which they can issue shares. But I guess the effect depends on whether they are buying or selling. Of course, it does reward the execs who have stock options. Anyway, I think I'm with Sclass on this. Common stockholders don't really have much influence; what counts is what you spend the profits on.

WillS wrote:Hurting the company; That's an interesting rationalization. I always assumed that it helped them because it raises the share price at which they can issue shares. But I guess the effect depends on whether they are buying or selling.

Ideally they would be selling, but it's usually opposite because a rising stock price usually signifies high profitability. This means they probably have enough cash to fund capital projects and do share buy backs. Apple is a prime example. Bonds would factor in a little, as a very successful company gets better rates. Let me state again...this is a weak argument.

There are lots of ethical indexes and ethical funds out there to suit investors. Just be sure to select something that aligns with your values.

I personally am not too concerned about Coke because customers who drink it do so voluntarily. What does not agree with me more are the vulnerable who suffer without consent, e.g. animals that are slaughtered for food, sex slaves, etc.

Furthermore, there are funds out there that do away with the negative screen approach and invest in unethical companies with the aim of changing them, e.g. Australian Ethical Climate Advocacy Fund.

Lots of interesting responses from the full spectrum of opinions - from not considering ethics at all when making investment selections to not buying a single share in an unethical company.

I'd like to point out the fallacious reasoning in thinking that one's investment selections make no difference because the amounts involved are so small. It actually makes a large difference, the reason that it seems small is that you are not considering all of the other persons who are in the same position and making the same decision. There are huge numbers of people interested in socially responsible funds. Collectively all of these investments make a large impact. But if ALL of these individuals think, "I can't make a difference, I am going to invest in anything that will make me a profit," then this VERY ACT of thinking causes the person to invest in the unethical company, which perpetuates whatever abuse is occurring, and at a large scale, is actually a cause of it.

If I spend $10 on cigarettes, I am supporting that tobacco company. The profits can be used for additional advertising (which is highly effective), to create more addictive materials for future cigarettes, or for any other purpose. Spending $10 on a tobacco company stock is supporting that company just as much, in fact it can be and has been argued that it supports a company MORE by buying the stock than by buying the product. If one feels that they cannot make a difference by purchasing stock, then they should also feel that they cannot make a difference based on their purchasing habits, and so one might as well purchase processed foods, meat, cigarettes, and anything else. This difference in behavior is probably because the result is removed from the action. By buying a processed food (or whatever the OP or anyone considers unethical), you are seeing the impact that decision right in front of you. By buying a stock, you don't see what happens, so it seems more distant. But sending money to someone to support child abuse, eg, does not make the decision any more moral even though you cannot see what is happening. I think because it is more removed, combined with the incentive of profit which always skews things, is what causes ppl to try to separate investments in their mind. But it is really no different than buying a product in a store. One can make the same argument that was made above. "I don't have much money now but I will have much more money in the future and will be able to make a difference, so I might as well buy whatever is cheapest now, be it processed foods, from companies that support slave labor, and so on, and in the future when I have much more money then I will really be able to make a difference on these causes and will stop purchasing unprocessed foods and so on." Sounds completely ridiculous right? When does the time come when one has to suddenly switch from the current lifestyle to the better lifestyle?

The point above about harming an unethical company by purchasing shares and selling at a higher price is simply wrong economically. One could argue that one could harm an unethical company by selling its stock short in order to make a profit, but this is very controversial and I believe that it does not actually hurt the company in question.

Personally I have multiple objectives. I want to make profits and I want to improve the world. If I had one objective then it would be easy because I wouldn't have to consider other factors. But I need to balance the 2. Everyone is like this. No one makes decisions in their life based on one factor. One thinks about how a decision is going to affect one's relationships, one's health, financial factors, and so on. So I look at profits as well as investing in ethical companies (which I define differently from other ppl, because everyone has a different idea of what is ethical which we can see in this thread). I invest in a lot of ETFs and mutual funds. A big consideration is profit. But with ETFs and mutual funds frequently 10 companies make a large % of the investment in that fund (can even be greater than 50% of the value). I look at what those companies are and make a decision based on it. Eg I will not buy a fund that has a tobacco company in its top 10 holdings. There are also many socially responsible or environmentally friendly funds. I invest in these also, ONLY if I think they will also be profitable. You can do a search and find a list of them. Now what each one considers to be ethical might be different to me. So I apply the same process in looking at what they are holding. But for most of these investing in them is going to be OVERALL better than investing in another nonethical fund, so even if I do not agree with one 100% I might still invest in it.

I know there are ppl with different beliefs as me and whose aim is to maximise profit and I respect those beliefs (with exceptions like if one is physically harming another). But it shouldn't be considered that the decision are aethical.

Yes, a lot of people with small amounts can make a difference. Whenever you get them all to agree, let me know.

If one feels that they cannot make a difference by purchasing stock, then they should also feel that they cannot make a difference based on their purchasing habits, and so one might as well purchase processed foods, meat, cigarettes, and anything else. This difference in behavior is probably because the result is removed from the action. By buying a processed food (or whatever the OP or anyone considers unethical), you are seeing the impact that decision right in front of you. By buying a stock, you don't see what happens, so it seems more distant. But sending money to someone to support child abuse, eg, does not make the decision any more moral even though you cannot see what is happening.

Not purchasing a product/service directly impacts that company by denying them money directly. When you buy a stock you are not sending money to the company. You are sending money to some other investor. The only way the company benefits is if it drives up the price of stock and they sell more stock, but most do buy backs when that happens (tons of current examples for this).

The point above about harming an unethical company by purchasing shares and selling at a higher price is simply wrong economically.

It's not wrong economically, but it is a very weak force against a company. The oil companies are great example, as many consider them unethical. They were doing huge stock buy backs at high prices, but have stopped doing almost all buy backs now that their stock is cheap. Thus, they were using resources to pay shareholders when the company's price was high. Obviously, they still had money for some drilling investment, but you were costing them more money buy helping to drive up the price. However, like I said before, this is a very weak argument.

The final question is what companies are ethical? Apple? They are making a big investment in solar right? Or, are they human rights abusers in poor countries? Is Patagonia ethical because they source their fibers and production ethically? Or, are they unethical because they burn a lot of oil shipping there stuff all over?

It's all really gray. I don't fault anyone for trying to be ethical or mostly ignoring it in their investment decisions. All I suggest is that most ethical investing is rather pointless for the average person.

Chad wrote:
Not purchasing a product/service directly impacts that company by denying them money directly. When you buy a stock you are not sending money to the company. You are sending money to some other investor. The only way the company benefits is if it drives up the price of stock and they sell more stock, but most do buy backs when that happens (tons of current examples for this).

This is the part that isn't correct. Because buying a product sends money directly to a company does not mean that it benefits a company more than by buying its stock (one has to consider indirect effects). It is not correct that the only way a company benefits from a stock increase is by issuing more stock. This has been written about pretty extensively. A smaller benefit is by issuing more stock. Much larger benefits are from being able to borrow money at lower interest rates and there are all sorts of other benefits: negotiation with other companies, mergers/acquisitions, press, etc.

I contend that it does not hurt a company to buy its stock and drive its price up. Buybacks are not done based on a stock price, they are based on expected future return. So it would help a company to sell its stock and drive the price lower, because the company can do buybacks at a lower price.

About what companies are ethical: Aside from tobacco companies I have no idea.

trfie wrote: . "I don't have much money now but I will have much more money in the future and will be able to make a difference, so I might as well buy whatever is cheapest now, be it processed foods, from companies that support slave labor, and so on, and in the future when I have much more money then I will really be able to make a difference on these causes and will stop purchasing unprocessed foods and so on." Sounds completely ridiculous right? When does the time come when one has to suddenly switch from the current lifestyle to the better lifestyle?
.

I actually stole that from a Warren Buffet interview with Charlie Rose. It actually sounds pretty reasonable to me. He said this about refusing to make charitable donations when he was younger. His advice to the organizations was to wait for his investments to grow.

I don't eat cheap processed food. And I'm retired, no longer a slave. I do recall eating a lot of fast food as I was working. I actually knew the Whopper was killing me but I promised myself I wouldn't be doing that stuff for long.

I remember a blog post here that said people who consume unhealthy food, tobacco products etc do so out of their own free will. No one is forcing or coercing them into it.

@trfie
Yep, as I had already said, it's a weak argument.