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Money and Ethics – why reconciling them can be difficult

Money and Ethics – why reconciling them can be difficult

The goal of investing is to maximize the growth of your invested capital. However, this goal can sometimes be in conflict with other factors such as ethics and moral obligations. This conflict may arise when investors are contemplating to invest in so called ‘sin’ stocks. Sin stocks (also called Vice stocks) are stocks of companies that make a profit by doing business on the borderline of the unethical. Examples of sin stocks are those operating in the gambling, tobacco, alcoholic beverage and weapon/defence industry.

The Financial Benefit of Sin Stocks

Despite the fact that there is a lot of justified criticism against investing in these companies, it must be said that these stocks generally provide excellent returns. To make matters even more complicated, the returns of these companies might actually be higher in times of political or economic chaos.

This is because during hard times, people tend to consume more alcohol, smoke more cigarettes and fall back to bad habits such as gambling. In times of political chaos, weapon and defence stocks are a very good investment opportunity since these companies simply profit from the act of war.

Sin stocks generally yield a steady demand for their goods regardless of economic conditions. Additionally, they tend to have a high margin on their products, making them very profitable. In turn, these steady profits generally lead to sin stocks paying a steady and generous dividend to investors. This makes them an attractive option for income/dividend investors.

High Barriers to Entry

Most sin stock companies tend to operate in high entry barrier industries, which solidifies their positions and protects their market share from new competitors. Companies like Heineken, Wynn Resorts and Lockheed Martin have been strong companies for decades, and are likely to continue to be.

The Ethical Debate

In many cases I would advise you to put your emotions aside when it comes to investing, this way you are able to make to best investment decisions and ultimately makes you the most money. However, in this case it’s a matter of personal preference. Where do you draw the line? Do you choose to invest in companies that, despite being financially very favourable, operate in ways that are questionable? Or do you let your moral compass decide?

Corporate Social Responsibility

The age of Corporate Social Responsibility has made it much more important for companies to behave socially. Meaning that they shift their focus from mainly being focused on profits, to partaking in the well-being of their fellow citizens. Research shows that companies that make a genuine effort to be socially responsible and engaged have much better relations with their customers. Customers and investors feel proud to be involved with companies like that.

Milton Friedman

Milton Friedman was a huge opponent of corporate social responsbility. He argued that the only responsibility a company had, was to its shareholders.

He said:

The social responsbility of business is to increase profits

In a paper under that title he talks about why businesses have no other responsbilities than increasing its profits. Any amount of money invested into a business by an investor should be used to increase profits, he argues. Not doing so would be using someone else’s money for purposes that don’t necessarily benefit that person financially. The full paper on corporate social responsibility is an interesting read. I don’t agree with his view but it’s worth reading.

Evaluating a Business

Social goodwill can be extremely valuable. Many models use it as an indicator of how valuable a business can be in the long term. Customers that are extremely loyal towards a company are a fantastic asset. One way to make these customer extremely loyal is by being a decent company. It’s really no different from being a decent person in life 🙂

 

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