In complex adaptive systems like modern financial markets, a change the price of any one market has ...
The Price of Morality Investing
04/06/2012 9:15 am EST
The question about socially responsible companies is, whose moral values do we use as the litmus test? So asks Matthew Delman of Cabot Wealth Advisory.
It seems like every week there's either a news story about some large company behaving badly, or a new opinion poll showing the American public is angry or blames someone for something.
On a recent episode of CBS This Morning, Charlie Rose grilled the President of Shell Oil Company (the US subsidiary of Royal Dutch Shell (RDS.A)) about the tax subsidies given to oil companies. While that's not exactly a case of a company behaving badly, it was tied into rising gas prices at the pump and the news that 55% of Americans believe oil companies are mainly to blame for high energy prices.
On Friday morning, NPR ran a report on Foxconn, a Chinese company who makes iPhones, iPads, and other products for Apple (AAPL). You'll recall the name Foxconn from recent news reports about poor working conditions at their factories.
Apple got taken to task over the conditions too, especially given their public focus on ensuring safe working environments in all their supplier factories. It turns out Foxconn will now eliminate mandatory overtime and also improve working conditions after a visit by Chinese labor authorities.
I could go on with examples of bad behavior by corporations. The Deepwater Horizon disaster in the Gulf of Mexico is one example; the Gulf Coast still hasn't completely recovered from all the oil spilled there after the BP-owned rig failed. The class-action gender discrimination lawsuit against Wal-Mart (WMT), which was limited in scope only last year, comes to mind as well.
This completely ignores the "sin stocks"—companies in the alcohol, tobacco, and gambling industries—who profit from selling potentially damaging products to consumers. One example of a "sin stock" is Philip Morris (PM), the largest tobacco company in the world, with net sales totaling $7.671 billion in the fourth quarter last year. Their earnings per share was a healthy $1.10, which showed a 13% increase from the previous quarter.
I've already gone into the profitability of Philip Morris, but the other companies I mentioned—Apple, Shell, Wal-Mart, and BP (BP)—have all remained profitable for the past few years, and don't appear to be in any imminent danger of closing up shop. With the rising cost of energy, in fact, companies such as BP and Shell could possibly rake in even better numbers.
The companies above aren't the only examples of "bad behavior" in the corporate world. Look at the financial sector for more evidence if you need it. Collateralized debt obligations, junk bonds, and subprime mortgages are only a few examples of the bad behavior financial companies have engaged in to turn a profit.
How profitable all these "bad" corporate actors are led me to ask an interesting question: Is it possible to succeed at investing while also following a strong moral code?
After pondering this for awhile, I came to the realization that investing based on a moral code—even something as simple as "Do no harm"—would eliminate some of the most profitable companies in the world from even the barest of consideration.
Take Apple for example. A person following the moral code of "Do no harm" may have sold their stake in the company after the debacle with Foxconn came out. Sure, they could still have made a lot of money before then...but dropping Apple means you miss out on any future upside potential. I know, I know. This assumes there's upside potential still left for Apple (which many stock experts think there is).
The moral investor would also not touch any company whose products are made in sweatshop factories. Or a single one of those "sin stocks," since it wouldn't be right to make money off suffering according to his or her moral code.
In essence, this fictional investor would end up ignoring companies with tons of growth potential. Companies whose stock could fund a very, very comfortable retirement down the line.
Alternative energy stocks are a strong choice for the moral investor, right? Companies involved in alternative energy help the environment through decreasing carbon dioxide emissions, and can turn into profitable investments.
Except for every First Solar (FSLR) that nets gains of 321%, there's a Solyndra that falls into bankruptcy. The sheer cost to make alternative energy happen, and the lack of quick profits, can also make those companies a bad investment.
The moral investor might also ignore certain health-care stocks, automakers, food companies like Coca-Cola (KO) and Yum Brands (YUM), companies who've gained reputations for not playing well with others, and even manufacturing firms such as International Paper (IP) because of what he or she views as harmful practices.
Now, I'm not saying there aren't successful companies who do good deeds and create products in a sustainable way. And I'm not telling you to go out and place your money in the lost evil company possible because they'll always give you better profits than do-gooders.
I am, however, saying that allowing your moral code to dictate where you invest means you run the risk of losing out on gains that would otherwise bolster your portfolio's performance.
The only things that should dictate where you invest are the fundamentals, such as trading volume, historical performance, and the sales and earnings growth. Morality and investing are not the best of friends...I suggest not letting one influence the other.
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