Effective Investing for the Dithering Ethicist

May 5, 2009 1:13 PM

Economists vs. philosophers: Is investing in the stock market (specifically mutual funds) a net good or evil? And the bonus question: Where should a socially conscious man of means put his money so that he can retire comfortably without contributing to a growing wealth inequality?

Please excuse the GYOB-ness of this post. I haven't studied a lot of economic or social theory, so my current conclusions are formed from a mishmash of internet editorials and unresearched speculation. This is why I would like the esteemed AskMeites to critique my current thoughts on the matter, which are:

1) People buy stocks because they think they'll be able to find other people later who will pay more for them. Absent dividends, this means that continued profit can only come from exponential growth in expectations for a company.

2) This drive for exponential growth in "perceived profitability", coupled with a legally binding obligation to shareholders, forces corporations to eventually ignore all other motivations. This leads to things like massive layoffs, lobbying against regulation, tax evasion etc.

3) The actions of corporations to grow their shareholder value serve to concentrate the wealth of the company in fewer and fewer people's hands. This is driving the current growth in income inequality in most of the world. Why should having money entitle you to more money than those with less?

4) After reading "Why I Fired my Broker", I realized that most investors abdicate their financial power, entrusting it instead to fund managers who don't share the same interests. Given that most funds do no better than the market index, the personal finance industry smells like a giant scam to me.

5) And besides all that, it's an unstable system. You can't keep hoping to profit on exponentially increasing optimism. Most traders don't know the first thing about the companies they're investing in except for the meagre (and manipulated) earnings stats they publish. Instead everyone just follows everyone else - one giant positive-feedback system. It doesn't even do the job (efficiently allocating capital) it's supposed to!

OK, those are the reasons I stayed out of the stock market for most of my life, choosing instead to pay off my student loan and buy treasury bonds and GICs. However last year I sat down to plan my retirement and realized I couldn't make my goal without at least an average 6% annualized rate of return. So I switched sides and convinced myself that the stock market:

- serves an important role in moving capital to enable new technologies

- is an efficient way to price goods

- has some other justifications that I can't remember anymore :)

and I bought a bunch of mutual funds*. Heh, good timing. Now I'm back to square one. I still need to save up a reasonable amount of money for retirement (in 30 odd years), but I'm even less confident now that my mutual funds are the best (in terms of both rate of return, and public good) place to put that money. Am I wrong that the stock market is so bad? Are there any better options?

*They're called "Ethical" funds, but when you go through their holdings you'll find they own the same stock as everyone else. Also their "advocacy" efforts are more than a little underwhelming

posted by Popular Ethics to work & money (23 comments total)

Wow, what a doozy.

The short of it is, yes, one can invest ethically. Investing is the alternative to saving (hoarding) one's money, instead you lend it to others or put into vehicles for growth. This liquidity allows others to have business opportunities and for businesses to grow and prosper.

Not every company has short-term investor profit as a motivating factor. Many companies have long-term, healthy growth as a primary concern, with ethical actions and environmental responsibility as tenets. Investing in these companies is especially ethical. Just because many people have treated the stock market as a casino does not mean that the stock market exists inherently to be a casino.
posted by explosion at 1:26 PM on May 5

Absent dividends, this means that continued profit can only come from exponential growth in expectations for a company.

Bolding mine. You can't just say "absent dividends". Dividends are the way around this.
posted by smackfu at 1:38 PM on May 5 [2 favorites]

I think explosion touched on the right point -- you have to judge it on a case by case basis to determine if the underlying company deserves your implicit support as a creditor or shareholder. Even when you are buying securities on the secondary market (almost always, unless you subscribe directly to an offering) you are buying it from a third-party, not the company directly, you are still supporting the price of that security and thereby implicitly supporting the underlying franchise. If you consider it in the aggregate, if no one decided to buy Company A's stock, the stock price would plummet. The opposite is also true.

So, you can scratch mutual funds or most other diversified investments off your list. From there, you have to evaluate what companies or industries you consider "ethical" or helpful to society, or simply not harmful -- however you loosely or broadly you want to define your standards. There are already investors and certain funds who boycott any stocks having to do with vices (gambling, alcohol, tobacco), but it sounds like you are taking that concept to a stricter level.

Taking a step back and looking at your other commentary, it sounds like you might be better off looking at bonds, preferred stock or high-yield dividend stocks. That way, you will feel like you are actually getting something of defined value for your loan/support, rather than supporting the ponzi-like nature of common stock.
posted by jameslavelle3 at 1:46 PM on May 5 [1 favorite]

1) People buy stocks because they think they'll be able to find other people later who will pay more for them. Absent dividends, this means that continued profit can only come from exponential growth in expectations for a company.

As an investor, there are plenty of opportunities to make money on companies you think are overvalued by short selling their stock. It carries significant added risk, but it can be done. I know a guy who made a killing on the recent crash.

3) The actions of corporations to grow their shareholder value serve to concentrate the wealth of the company in fewer and fewer people's hands. This is driving the current growth in income inequality in most of the world. Why should having money entitle you to more money than those with less?

There are a lot of things driving income inequality. Profiteering isn't restricted to public companies.
posted by mkultra at 1:46 PM on May 5

Seconding the 'what a doozy'.

I'm working as an analyst for an investment fund, and have been a life-long capitalist, so that will clearly taint my answers.

First, let me say that I think most small investors should only be holding a relatively small portion of their wealth in low-cost index funds.

Second, it probably helps to force yourself into a 'capitalism is for the masses' mindset. Companies do not take wealth from anyone -- they only profit if many many people decide that the product they make is worth more than their revenues and freely buy it. Wal-Mart has done more to reduce inequality (via purchasing power) without force than any other entity in the history of the world. Large companies have done well by winning the support of thousands of people.

Third, many companies DO depend on their stock price. A higher valuation allows them to get better debt deals, and issue new equity at higher prices. Buying a few shares of a stock is probably more helpful to that company than was your presidential vote in any election. That is, not very large, but it's there.

Fourth, I actually think very little of most 'socially responsible' investment firms. Many are easily fooled by corruption under the guise of 'responsibility'. I would trust a company who deals fairly, openly, and honestly with its customers, employees, and shareholders over one that charges customers more and reduces profits to give to charity (which most of the largest shareholders would be doing anyhow). CSR is usually just PR and marketing by a different name.

As far as the traders -- that's true to a degree. But over years, stocks at well-run companies obviously do better than poorly run ones.

And lastly, be sure that you understand that buying US treasuries is simply supporting the US government as much as buying debt in any company would.

... that's a start. I'm sure there are better arguments out there.
posted by FuManchu at 2:17 PM on May 5 [2 favorites]

As to this part of your question:

Where should a socially conscious man of means put his money so that he can retire comfortably without contributing to a growing wealth inequality?

I really don't think it's possible. Think about it - your investment income derives, ultimately, from the money other people make by actually doing work. It's called "passive" income for a reason; ultimately the money you put into investments is essentially a loan to someone else (even if not technically structured as debt), and the income you make on those investments, whether it's interest on bonds and savings, or dividends on equities, comes from someone else working to get the money to pay you back, plus a cut in return for the loan. That's just simply the way it works, it's the very nature of investment - taking money away from someone who worked for the money, and using it to pay someone else who already had a bunch of money in the first place.

Now that's not necessarily evil or unethical; it might also be true that the person you lend to had some great idea and it would never have gotten off the ground without your startup support. But it seems incontrovertible that, in the end, they are turning part of their sweat equity into profit for you. You may have to content yourself that each individual entity you deal with is better off than he/she would have been absent your capital investment, rather than thinking you can make profit while avoiding income inequality.
posted by rkent at 2:25 PM on May 5 [1 favorite]

I want to address these points via a common parallel: A savings account. Most people don't find savings accounts to be ethically troublesome.

1) People buy stocks because they think they'll be able to find other people later who will pay more for them. Absent dividends, this means that continued profit can only come from exponential growth in expectations for a company.
Parallel: People put money in savings accounts which, absent interest, provide them no personal utility. They're just hoping the bank will pay them more for their account in the future.
Dividends (or liquidation) are ultimately the end-game of a company. The fact that some stocks don't issue dividends right this instant is only an artifact of their progress along their growth plan. There are plenty of companies (Johnson & Johnson comes to mind) for which people have no particular avenue for growth, but are still good companies to invest in because they are generating a return on capital.


2) This drive for exponential growth in "perceived profitability", coupled with a legally binding obligation to shareholders, forces corporations to eventually ignore all other motivations. This leads to things like massive layoffs, lobbying against regulation, tax evasion etc.
Parallel: The structure of a savings account is such that a bank must legally give you back your money when you ask for it, rather than doing the ethically right thing with it.
The reasons corporations are legally bound to the interests of their shareholders is because the shareholders own the damn thing. Just as a bank can't decide that a starving kid in Africa actually needs the money in your savings account doesn't mean in can give it away - the money in your savings account belongs to you just as much as a public corporation belongs to its shareholders.

3) The actions of corporations to grow their shareholder value serve to concentrate the wealth of the company in fewer and fewer people's hands. This is driving the current growth in income inequality in most of the world. Why should having money entitle you to more money than those with less?
Parallel: Everything you just wrote also applies to savings accounts. Why should having money in a savings account entitle you to get more money in the form of interest?

4) After reading "Why I Fired my Broker", I realized that most investors abdicate their financial power, entrusting it instead to fund managers who don't share the same interests. Given that most funds do no better than the market index, the personal finance industry smells like a giant scam to me.
No disagreement here. Most non-index funds are a rip-off.

5) And besides all that, it's an unstable system. You can't keep hoping to profit on exponentially increasing optimism. Most traders don't know the first thing about the companies they're investing in except for the meagre (and manipulated) earnings stats they publish. Instead everyone just follows everyone else - one giant positive-feedback system. It doesn't even do the job (efficiently allocating capital) it's supposed to!
It's not "exponentially increasing optimism" that's generating a profit. It's a return on capital. I loan you $10, you build a machine that lets you make an extra $2 per year, and you give me part of of that extra profit back. Return on capital. It's the same principle behind a savings account, but instead of earning interest via loaning your money to other people, you earn dividends via a return on capital.

The ability for corporations to raise capital through a common market system and for regular people to share in a return on that capital is a huge social benefit. Imagine a world without the stock market: You own a company and need to raise $100 M to build a factory that will employ thousands of people and will generate an extra $10 M / year in profit. Banks aren't going to deal in sums that large. There might be 10 million people each willing to give you $10 in exchange for something that pays them back $1 / year in perpetuity, but you can't effectively keep track of all of them or solicit that money through your own means. You'd probably end up talking to 10 rich people each willing to loan you $10 M each. The stock market levels the playing field here.
posted by 0xFCAF at 2:25 PM on May 5 [2 favorites]

I'll just make one small point.

When a company makes a net profit (after they have made all investment decisions), they have 3 options of what to do with that cash.

1) Give it out to the shareholders as a dividend (cash per share)
2) Buy shares on the open market (reduce number of shares, so increases % of company per share)
3) Keep it on the balance sheet accruing interest (gives each shareholder the right to that cash and future earnings)

No matter what a company decides to do (yes there are subtleties here but the general point underpins the CAPM model, all you finance folks out there), the stock price should be the same. From a valuation perspective, it's immaterial.

In other words, don't fixate on dividends - the question of legitimacy of the stock market is broader than that distinction.
posted by nyc_consultant at 2:25 PM on May 5 [1 favorite]

To make a broad comment and to paraphrase Ben Graham - you need to remember in the short term the stock market is a popularity contest, but that in the long term its a weighing contest (Weighing = cash). And if you are in your 30's you only care about the long term.

People buy stocks because they think they'll be able to find other people later who will pay more for them. Absent dividends, this means that continued profit can only come from exponential growth in expectations for a company.

This is called "Greater Fool" Investing. People who are good investors don't do this. Additionally dividends historically make up around 50% of long-term returns on the S&P. Having said that it shouldn't matter to you if a company distributes its profits to you if they have a decent return on the money they can reinvest in the business. Either way you end up with cash today, or asset value tomorrow. Both are good.

This drive for exponential growth in "perceived profitability", coupled with a legally binding obligation to shareholders, forces corporations to eventually ignore all other motivations. This leads to things like massive layoffs, lobbying against regulation, tax evasion etc.
The reason why there is an expectation of profit growth over time is a function of the growth in capital invested in the business. I had a dollar in equipment. I made .10 cents, if I don't give any of that money to my investors then I can buy .10 worth of new equipment, and if I do that well I can make .11 cents next year - and at current interest rates .11 cents a year from now is worth more then .10 cents today.
If I said I can't grow my business anymore then I would give my ten cents I made to my investors so they can put money elsewhere instead of reinvesting it. Additionally economies grow - usually through population growth and inflation (which isn't real growth of course but its a reason why stocks create an inflation hedge whereas bonds do not). There is no relationship between this and having to lay people off or lobbying against regulation. Indeed companies that generate long-term sutainable earnings tend to not need to do these things (especially the lay-offs thing - usually a huge sign a business sucks). Finally there is no legal obligation to shareholders other then do what the shareholders (through the Board of Directors) want you to do. There is nothing inherently more evil about a public company then a private company.

The actions of corporations to grow their shareholder value serve to concentrate the wealth of the company in fewer and fewer people's hands. This is driving the current growth in income inequality in most of the world. Why should having money entitle you to more money than those with less?
All shareholder value means is maximzing the price the market is willing to pay for an asset. Its pretty much a bogus term invented in the 80's by mgmt consultants and embraced by GE et al. It really has nothng to do with the increase in income inequality(look to taxation policy as cause #1 on that). If you have 50 bucks you can buy the shares of pretty much any company you want. its not limited to the rich. More importantly nearly every pension plan in the world is invested in equities - that's how most of the world is exposed to the equity markets.

After reading "Why I Fired my Broker", I realized that most investors abdicate their financial power, entrusting it instead to fund managers who don't share the same interests. Given that most funds do no better than the market index, the personal finance industry smells like a giant scam to me.
This is regrettably a true statement - most active fund managers underperform the index. Unless you think you have the skill to select someone who outperforms over time then you should just be investing in index funds. You do not need a broker to do this. I encourage you to spend the time to take control over what you do with your money.

BTW those GIC's you own have an implied fee in them that probably puts to shame all but the most absurdly priced mutual fund.

And besides all that, it's an unstable system. You can't keep hoping to profit on exponentially increasing optimism. Most traders don't know the first thing about the companies they're investing in except for the meagre (and manipulated) earnings stats they publish. Instead everyone just follows everyone else - one giant positive-feedback system. It doesn't even do the job (efficiently allocating capital) it's supposed to!

Cash. Companies generate cash. That is worth something to you - it doesn't matter if the company bought more assets to make more cash or gave you the cash itself - its fungible. Its (generally) not a big scam. There is real money. The first question to ask yourself as investor is "would I be happy owning this company if the stock market closed forever" If your answer is no, then you shouldn't be buying it.

Any reasonable money manager knows a lot about the companies they invest it. Yes there are idiots out there - just like I'm sure there are idiots in your business.

As to your general question on the stock market - if you want to earn a higher return you have to take more risk. Plain and simple - there are no free lunches. The data shows that over the long-run stocks outperform, but this also means they are riskier. They are riskier because if something goes wrong with a company you take the first loss. We are currently enjoying one of those periods when this higher level of risk has really truly manifested itself. So right now sucks - but it also means its the absolute best time to be investing in the stock market.

I personally think sociallly aware investing is destined to underperform in the long-term (it makes people feel good, so people will overvalue it). Also my personal experiences with SRI investors have been less then inspiring.

If I might make a suggestion - take a look at "Stocks for the Long-run" by Jeremy Siegal. Good starting primer on why you should be invested in equities.
posted by JPD at 2:31 PM on May 5 [2 favorites]

No matter what a company decides to do (yes there are subtleties here but the general point underpins the CAPM model, all you finance folks out there), the stock price should be the same.

But in #1, the stock price does, as a rule, drop by the price of the dividend. So you're left with two cases: either case #3 causes a stable stock price, and #1 causes the price to go to $0, or #3 causes a rising stock price, and #1 causes the price to be stable. Reality is the latter case.
posted by smackfu at 2:33 PM on May 5

to paraphrase Ben Graham - you need to remember in the short term the stock market is a popularity contest, but that in the long term its a weighing contest (Weighing = cash).

I came to say this.

Also, I wouldn't do anything until you educate yourself and amend (or not) your worldview as it pertains to investing and the markets. I recommend the following books:

Ben Graham's Intelligent Investor - source of the quote from JPD and the bible of value investing

Dave Swensen's Unconventional Success - Swensen is Yale's endowment manager. This is his personal finance book, which is part screed against the personal finance industry and part asset allocation advice. This book will guide you to an intelligent allocation across asset classes (using low-cost index funds) along with an intelligent explanation. Websites like bogleheads.org take this sort of thing and run with it.

Robert Reich's Supercapitalism - Not an investment book, but an interesting look at the interaction between democracy and capitalism in this country. I recommend it because Reich's framework is a good way to bridge the gap between a liberal worldview that deplores income inequality and a pragmatic approach that appreciates the economic advantages of a free enterprise system.
posted by mullacc at 2:49 PM on May 5 [1 favorite]

First, let me say that I think most small investors should only be holding a relatively small portion of their wealth in low-cost index funds.

Are you advocating that small investors should be stock-picking here?
posted by Calloused_Foot at 2:53 PM on May 5

1) You can look at it from another angle- the stock market (and other financial marketplaces) is actually a democratization or socialization of the businesses or assets involved. Rather than concentrating wealth, it diffuses it. I don't have the wealth to be able to build or purchase a company. I never will. But I can buy a small piece of some company and through that small investment, profit. Remember, every share of stock started with someone investing their hard earned dollars in some company.

2) The stock market is two things at once- it is, on a pure level, a way of buying and selling stocks, and coming up with an accurate value of the underlying company. But it's also very much psychological and almost parimutuel in nature. Like horse racing. You aren't just betting on the horses, you are betting on the other betters. "Winning" on a stock trade isn't taking money from anyone except the other better who bet the opposite of you.

3) There is nothing wrong with the profit motive, as long as it is done ethically. It comes down to this: raw materials + labor + good ideas = profit. I could probably weld up a homemade car out in the garage for less money than a new Pontiac. But I am not very good at making cars, Pontiac is better at it than I am. So, I go out and do what *I* am good at, and trade my money for what they are good at. They invested their money and time becoming good at making cars, in order to make a living. As long as people don't manipulate the marketplace (including lying about the true status of their business), we are all free to choose the best vendor for the stuff we want or need.

4) There is no reason why you can't invest in only the companies you believe in. In fact, that's what you should be doing. You find a company that's doing something right, that you also believe has a stock price that is undervalued compared to what it should be. We buy a piece of that company, literally buying the investment that someone made in that company, believing that we will profit by owning that piece. When it comes time to sell, and the price is higher, congratulations, some other investor has the same idea that you had when you bought. Will they be right? Who knows- that's their gamble. Nobody is forcing them to buy at that price.

5) Remember that stock prices are literally derived from owners offering their shares to buyers. Buyers only buy when they like the price. Nobody forces anyone to buy or sell at any point, or to take a price they don't want. Prices fall because there are people selling who are willing to take that price, and prices go up because there are buyers willing to pay higher prices.

6) So, dividends are what you make (hopefully) from investing in a profitable company. Profits from buying and selling shares are what you make by being smarter or luckier than the other investors out there.

7) Income inequality isn't really involved here, except to the extent you invest in companies that pay their people in line with what you believe to be fair. As a part-owner in that company, that decision is yours. Beyond that, it's none of our business what other people do with their money. You can't blame someone for taking a job for a wage that is being offered. So what if some CEO makes eleventy bajillion $? That's not your money. The owners of that company believe they are getting a value for that price. On the other end, how can you blame an employer who pays minimum wage when there are workers out there willing to work for that price? Even if it has been shown that higher paid workers are more productive, that isn't our problem. If someone else wants to be penny-wise and dollar-foolish with their money, let them. If they aren't smart enough to give their productive employees raises, their loss. That employee has value, and will go find someone who will pay for their experience. Or, that experience may not be worth what they think it is.
posted by gjc at 2:55 PM on May 5

...small investors should only be holding a relatively small portion of their wealth in low-cost index funds
Are you advocating that small investors should be stock-picking here?

Ooh, no I'm not. Sorry, that was written poorly. It's the standard: most of wealth in bonds and deposits, less than half in equities, that which is in equities should be index funds.
posted by FuManchu at 3:10 PM on May 5

I think you're going to have to define the outlines of your morality more clearly if you're going to get an answer that will satisfy you. For instance, are you prepared to accept capitalism as a good, as many of the respondents already are?

Just to take one of gjc's points as it outlines a couple of the issues pretty well:
There is nothing wrong with the profit motive, as long as it is done ethically. It comes down to this: raw materials + labor + good ideas = profit.

In fact, the actual equation is:

raw materials + labor + good ideas = product.

If that product is sold for a price greater than cost of the sum of its parts, then a profit will be made. In practice, this only comes from paying the workers less than the value they are creating. Furthermore, to obtain the maximum profit the price of the inputs must be kept down. That puts necessary pressure on wages: they must be kept as low as possible, and additionally in many working hours must be as long as is rewarding, with as few vacation days as possible.

Marx called this exploitation of labour, and it's going to be a key moral question whether or not you agree with him on that. If you do, those profits, therefore, are coming at the expense of the staff. Will you then find it fair to say that this extraction of wealth is acceptable because people "choose" to take those jobs at those wages, when they are living in a broader capitalist society that gives them effectively no alternative?

Worth too noting that organising society around companies obligated to seek a profit means that full employment will never be more than a temporary state of affairs. If employment is full, employers will be unable to threaten employees with being laid off. This strengthening of labor's bargaining position will mean that wages will rise. When they rise above a certain point, to maintain profits firms will either have to invest in previously uneconomical technology to increase worker productivity or will ultimately go out of business. Either way, newly surplus staff will then be laid off, demand will drop (workers also buy products), and unemployment will rise again. If you support profit-seeking companies, you're supporting this cycle.

Of course, in the real world the alternatives that aren't open to such charges of exploitation are virtually nil: there are co-operatives and direct lending schemes, but the return on your investment there is likely to be far lower, by definition. So the moral question is going to be "am I willing to participate in a system where value is extracted from other people for my own personal gain, or do I have a given moral imperative that prevents me from so doing?". There is no such thing as a free lunch: if you earn without producing, where are those earnings coming from? Who is losing on the deal? The capitalist is taking a risk on his money, but is it a fair game?

There are of course, plenty of very strong arguments in favour of capitalism: it has produced incredible wealth and increased the living standards of many people to a previously unimaginable degree. But there has been a cost: a social cost (society has been reorganised to meet capitalism's needs), an environmental cost (owing to the extensive exploitation of natural resources), and an ethical cost.

If you feel those are costs worth paying, then you can invest in the stock market with a clear conscience. Of course, you have little choice but to operate in a capitalist world. But you may be able to judge how deep your participation in the system will be.
posted by fightorflight at 3:48 PM on May 5 [1 favorite]

Thanks everyone so far. I've got a lot of digesting to do, keep them coming!

A few points of clarification: I own Canadian treasury bonds, so worries about American T-bills propping up a bubble are not applicable. And while I recognize that the actions of independent agents in the stock market are outside my control, I am concerned about not participating in systems with structural weaknesses that expose the world to the risks taken inside. We are certainly seeing now how the actions of people inside the financial industry can "leak out" and effect society broadly.

This is actually where I could use some help in my understanding. Most of my screed is based on the assumption that companies react to the desires / actions of their shareholders and creditors, and that the stock market is dominated by "parimutuel" (good word!) profiteering. If so, then the influence of the companies' "owners" would not encourage stable long-term growth. If not, please call out my assumption.

My worry is that the regular advice for the small investor: diversifying using large mutual funds, buying index funds, removes their influence over which equities best suit their long-term stability interests. If everyone bought an index fund, we'd all be effectively placing "side bets" on the direct-investing gambling types, giving them disproportionate influence over the market.

Evidently I need to look more closely at dividend funds. I'm not limiting myself to the stock market either, though I appreciate your defenses of the institution. Are there other places to look for a 6% (wealth-equality-generating, sigh) rate of return? Real estate? Numismatics? Pumpkin farming?
posted by Popular Ethics at 3:50 PM on May 5

(er, wealth-inequality-generating)

As to the broader question about my morals, the Jury's still out. I was hoping someone like fightorflight would point out some of the aspects to consider. Generally I don't care to get rich, but I do want to live a good long life, and I'd like to know that at the end of it I've made a positive contribution to humanity in most of my dealings. Measuring "positive" is a trickier question, but I heavily weight the effects on humanity's weakest members.
posted by Popular Ethics at 3:56 PM on May 5

Many good points here. I would like to add a few.

If you want to live your ethics in a highly-integrated capitalistic society, you should realize that out of all of your behaviors, your choice of investments probably has the least ability to impact, either for good or for ill, your society. Unless you are very very wealthy, whether or not you personally buy a stock or bond will have little effect on the behavior of the entity you are investing in.

You should first focus on your your ability to effect change in different areas.

1) Are you doing everything you can to effect change in the political area? In general, an individual has a far greater chance of effecting change through the voting franchise and through community activism than by selecting whether or not to invest in Walmart or Whole Foods. If you find yourself unwilling to participate directly in the political process by aggressively advocating for a particular point of view both at the national and the local level, then my general thought is that your attempt to invest ethically is not a sincere attempt to live ethically, but rather a way for you to feel better about yourself.

2) Are you doing everything you can to effect change through participation in non-profits and charities? Especially, local charities that affect your neighborhood. If you are not on the board of some local non-profit that you believe in, if you have not donated a significant chunk of your disposable income to causes you believe in (say 10%), then again, my general viewpoint is your attempt to live your ethics is somewhat shallow.

3) Have you examined how you spend your money? The spending behavior you have, the companies you support by buying their products, is a far more direct way of supporting companies that you can believe in than any stock or bond purchase. Furthermore, if you truly want to help a company that's behaving ethically, you should advocate for it. Tell your friends or your family -- write a letter to people referring them to that company. If you haven't looked at your latest credit card statement to see where your money is going to and you would like to live your ethics in a capitalistic society, you should.

Ten hours spent trying to determine the most ethical company to invest in would be far better spent in any one of the three areas above, if you truly want your ethics to have some sort of impact on society.

Finally, if you feel like you've done your part in those three areas I mentioned, and would still like to spend some time investigating your investments, I'd say that trying to invest in a way so that not a single cent is gong to some social actor you don't like is like trying to dodge raindrops in a thunderstorm.

You might love the company Wholefoods, or Costco, because of how well they treat their employees, but Wholefoods or Costco, will buy gas from Exxon Mobil. Costco will benefit from lower distribution prices thanks to Walmart. You might buy a Berkshire Hathaway A share to be involved in their charitable programs, or because you like the political positions of Warren Buffett, but Berkshire Hathaway is a significant shareholder of the Washington Post, and you might hate how they do journalism.

In sum, I do not think this is an area an ethical person in a capitalistic society should spend much time on. There are much bigger fish to fry. Remember the words of Emerson, "A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines."

(As to the personal advice industry being a scam, I'd have to disagree. But I'm biased, and that's a post for a different time. )
posted by davidamann at 5:02 PM on May 5 [3 favorites]

Well, first off, investors do not buy stocks anticipating selling them later at a higher price. That's not investment, it's called speculation. IMO, one of the fundamental problems in the market right now is that there are a lot of people who think they're investors, but who are actually speculators.

You are correct that if you buy purely for speculative purposes, you are entirely dependent on growth. It's growth that keeps stock-market speculation from being a zero-sum game.

However, you could buy stocks and make money from the dividends, and the stocks would still have value, even in a hypothetical zero-growth world. The value of the stock would be the net present value of the future estimated income stream due to dividends, plus a risk premium.

Some industries just wouldn't function in a zero-growth world because their business models are premised on continued growth, but others would, and would pay dividends.

To get back to your core question, I think the solution for you might be to eschew brokers and instead invest directly in the stock of companies that you feel are both economically and ecologically sustainable, and meet your ethical guidelines. Pick companies that aren't growth-dependent and are engaged in activities that you support, or are at least not opposed to, and are profitable and you think will pay steady dividends over the long haul. You will probably underperform the market (let's be honest; evil is often profitable, at least in the short term) but if you diversify across industries and markets, you will probably not lose anything and will probably out-do a savings account.* Just resist the temptation to move your money around in response to volatility once you've decided to get into something.

* And it's not like just keeping your money in a savings account is morally neutral; the money there is probably used to make residential housing loans, among other things — your savings could be financing the McMansion development that's buying out the family farm down the street, or for any number of more odious things.
posted by Kadin2048 at 7:09 PM on May 5 [1 favorite]

Correction: I mean "eschew managers" not "eschew brokers." You will probably still need a brokerage account to buy stocks, although it may be possible to invest directly in some firms via Direct Purchase Plans or similar vehicles. The companies you want to invest in will dictate whether you want to go through a broker to buy shares or get them directly from the source.

Some people swear by DPPs and DRIPs, but personally I have found that they generally have higher expenses and transaction fees than just buying them through my bank's brokerage arm.
posted by Kadin2048 at 7:12 PM on May 5

Evidently I need to look more closely at dividend funds. I'm not limiting myself to the stock market either, though I appreciate your defenses of the institution. Are there other places to look for a 6% (wealth-equality-generating, sigh) rate of return? Real estate? Numismatics? Pumpkin farming?

No - not with taking more risk. And a dividend fund has no intrinisic benefits over a fund that does not focus on dividends. In fact I hate dividend funds because they often force companies to do things that are irrational in the name of sustaining the dividend - I can name five companies off the top of my head who should have stopped paying a dividend a year ago but stopped only recently because they didn't want dividend funds to get upset.

Here is a link to long-term unlevered real returns by asset class.

This is actually where I could use some help in my understanding. Most of my screed is based on the assumption that companies react to the desires / actions of their shareholders and creditors, and that the stock market is dominated by "parimutuel" (good word!) profiteering. If so, then the influence of the companies' "owners" would not encourage stable long-term growth. If not, please call out my assumption.

All things equal companies that will be bad investments in the long-term are the ones where the CEO/CFO constantly focus on the share price. Companies that will be good investments are those run by people who care about running the business first and assume evenutally the market will figure out they are doing a good job.

If everyone bought an index fund, we'd all be effectively placing "side bets" on the direct-investing gambling types, giving them disproportionate influence over the market.

No because as was stated earlier - in the long-run the market pays for earnings not for perception. The cliche used is to say the gambling types are just collecting nickels in front of a steam roller evenutally they get run over.
posted by JPD at 5:50 AM on May 6 [1 favorite]

Does anyone else feel this conversation is presicely the logical conclusion to this commercial advertisement?
posted by jefficator at 11:31 AM on May 6

(That was supposed to take you to the "Do You Own an Oil Company?" ad...)
posted by jefficator at 11:32 AM on May 6