Financial Jungle

One of the greatest investing dilemmas I reckon with is ethical investing. Loading up on sin stocks doesn’t exactly align with my moral conscious. After all, most people like me have issues buying controversial companies like Lockheed Martin that thrive in times of war. But giving up these little devils doesn’t bode well with generally accepted investment principles such as diversification and return. Pull up a chart of S&P 500 and Lockheed Martin, and you’ll be surprised at Lockheed Martin’s low correction with the index, as well as its marvelous long-term out performance.

In his My Stocks Must Pass The Goodnight Test article, John Heinzl “vowed never to invest in such a vile product again.” The offending product he’s hissing at was tobacco. He recounted an accident where a driver was pronounced dead from a heart-attack that was possibly induced by cigarette consumption. A few weeks after the incident, John sold all his shares of Altria, the largest tobacco company in the United States, with approximately half of the U.S. cigarette market.

I personally don’t own any cigarette stocks, but I must confess; it’d be very tempting to wake up tomorrow and find all cigarette stocks on a fire sale. Not to mention, cigarette stocks have historically been most generous at puffing dividends at shareholders.

How do we measure the sin scale of a stock? Where do we draw the line to discern evil stocks from the ethical ones?

It’s interesting to note that prior to John Heinzl’s horrific car crash experience, he was content to hold Altria for their lucrative dividends. Tom Connolly of the Connolly Report also refuses to buy tobacco stocks because his sister died of lung cancer. That begs the question what if you own a stock that’s hurting everyone else except the people you know. Does that justify investing in a tobacco stock? Should it take a dramatic life experience before we evaluate the morality of a stock?

I also ponder how much of our perceptions are influenced by the media. We often don’t hear enough of the other evils that don’t illuminate as brightly on the radar screen. If you think tobacco stinks, how about oil? Last I heard, our energy consumption is punching holes in our ozone layer leaving irreversible damages to our precious environment. While the Earth is being worn down, the real causalities are the wildlife habitats and our future generations. Too bad for them, their mourning doesn’t garner nearly the same attention as tobacco. If we can somehow systematically measure sins in concrete and quantifiable units, I’m sure you’ll agree that cigarette, booze and gaming stocks are like little baby angels when standing next to these oil devils.

As Canadians, our love affair with energy stocks is best exemplified by the whopping 29.1% sector weighing on the TSX, beating financials to the top spot. Chances are, if you’re an equity investor, you’re probably heavily vested in energy stocks. To make matters worse, even if you’re not investors, the unconscionable is foisted upon you. An interesting fact is that in 2005, the Federal and Provincial governments collectively inhaled $7 billion in tobacco taxes. So much for trying to remain pure in our virtues. See the pavement you drive your car on? It’s built with cigarette money.

Although it’s virtually impossible to construct a completely ethical portfolio, looking at my core holdings, I’m relieved to say that my portfolio is relatively light on the sin scale.