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I don't want to invest in oil and tobacco companies: Advice
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L.A. Times consumer columnist and guest host David Lazarus answers your questions this week.
Jamie from Milwaukee, Wis., is a new investor and she keeps receiving mutual fund options from her investment adviser. In the bundle of investments, each fund has a handful of companies that she avoids in her daily life. Is there any way that she can avoid these companies with her investments as well?
"Jamie, what you're talking about here is what's known as socially responsible investing. In other words, you want to put your money into companies that you believe in," says Lazarus. "There's an entire cottage industry that has sprung up to address this. Historically so-called SRI funds -- Socially Responsible Investing funds -- they sort of lagged the broader market, the S&P 500, because they didn't really have the diversity of investments to weather the storm. So you slept better at night, but you didn't quite get a better return. I'm here to say, though, that's kind of changed a little bit. A lot of these funds have grown more diverse over time. They don't have the breadth of the S&P 500, but they might have 100, 200, maybe even 300 companies that you can live with a little bit. So the returns increasingly are matching the S&P 500. So you kind of get the best of all worlds."
A list of socially responsible investing websites Interested in learning more about socially responsible investing? Check out our handy list of websites where you can learn more and get started.
Jamie says she would like to avoid investing in big oil companies and big, day-to-day companies that do testing on animals. But she is unnerved by her options.
"In a sense, Jamie, you're doing exactly what Warren Buffett would tell you to do and that is: buy companies whose products you use. I've always thought that made a lot of sense. It made me feel like my money was going into something that I actually understood and I think that's important as an investor," says Lazarus. "But that said, you do want to maximize your investments and we live in a complicated world. So for example, you might not want to invest in an Exxon or a Chevron. On the other hand, those companies do put money into solar power, wind power, alternative energy -- albeit maybe not as much as you'd like. But they do do that. So it becomes a little tricker now when you try to parse your investments."
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Both Jamie and Mr. Lazarus misunderstand the nature of investing with this conversation. When one buys the stock of a company, either directly or through a fund, one is not buying a part of the company. Unlike bondholders or banks, stock investors provide a company with no working capital. Nor do they contribute their efforts in "sweat equity" on behalf of the company. Even the initial offering of stock doesn't benefit the company itself, only its employees and investors. The stock market is simply a sophisticated casino, with the investors as bettors. So, a purchase of a company's stock is not a moral decision at all, just one of evaluating risk and reward.
SRI funds are a marketing gimmick. By not investing in the stocks that hold the greatest promise of paying off for their investors, they do them a great disservice. To those who argue that institutional ownership of a block of stock enables the owner to exert influence on the behavior of that company, it would be a breach of fiduciary duty of most funds to buy enough stock to exert that kind of influence, especially of the massive companies that SRI investors shun. Only in aggregate, independent action, such as the mass divestment from companies in S. Africa, for example, can there be such influence.
So, Jamie really has no ethical quandary here, and Mr. Lazarus needs to re-think his perspective, too.
