Saturday, May 20, 2006

Companies you refuse to invest in

In our quest to become better investors, self-knowledge is crucially important. With that in mind, I ask this question, “Are there companies you refused invest in?” I’m not referring to companies with poor performances that you want to avoid, but rather companies with whom you don’t want to be associated with based on moral or ethical grounds.

This post was in part spurred by a well-known article written by Jeremy Siegel on the only stock owned by Ben Bernanke: Altria (MO, formerly Phillips Morris). In addition to recounting the great performance of Altria, the venerable professor offered this insight:

Why did Big Mo (as traders affectionately call Philip Morris because of its ticker symbol "MO") do so well? For a simple reason, there are millions of investors out there who won't touch this stock with a 10-foot pole. And that keeps its price down and its returns high. I'm not criticizing investors who won't buy Philip Morris stock on moral grounds. I abhor smoking, believe it is a leading cause of death, and grant that threats of litigation and legal liabilities plague the company. Furthermore, the trends for its primary products are bad: The number of cigarette smokers has steadily declined in the U.S. over the past decade and will soon do so in the rest of the world. But these fears are precisely the reason Philip Morris has done so well for those that stuck with the stock. Everyone worried so much about this company that its stock often traded at ridiculously low prices.
With the recent traumatic drops in the stock market, investors may well regard risk as another four-letter word. It’s timely to let the sage words of Prof. Siegel should remind us that risk is to be embraced when it is overestimated. When fear runs rampant, it’s usually the best time to go shopping!

All right, pardon that digression. Now it’s time for me to answer my own question. Personally, I’m for both social and economic freedom and I’m a firm believer of personal accountability. So I have no qualms about investing in the following:

  • Energy and base metal mining companies that may irk some environmentalists
  • Companies related to nuclear energy (see also Uranium: the big picture)
  • Tobacco or alcohol related
  • Gaming (casinos)
  • Defense (weapons)
  • Countries with questionable governments (certain emerging markets)

There is what I consider the grey area, i.e., company about which I haven’t made up my mind yet

Finally, after much introspection, there is one industry that I have decided not to be a part of. One example of this industry is FCFS (First Cash Financial Services) which operates pawn shops and pay day loan (PDL) stores. Pawn shops have become more respectable in recent years and I will admit they serve a useful function for a market segment that has no other recourse for loans. However, PDL stores charge usurious fees and entrap the economically weak. They have even gone as far as targeting inexperienced military personnel which I find totally unacceptable. The business is lucrative alright. The chart below shows the performance of FCFS along with some of its competitors. During the last recession, FCFS suffered with the market until the beginning of 2001, but then sharply changed course and never looked back. These companies enjoy sizable institutional support while fly under the radar of most individual investors. Even if the economic slow down I have been predicting fails to materialize, the ever increasing dichotomy of the American society should provide them a fertile ground. In spite of all these, I refuse to invest in them. It’s a price I’m willing to pay.

So, dear readers, here are my questions to you: What are your limits and limitations? What are the companies you refuse to invest in?

PS There are a couple of related websites of interest:

  • Socially responsible investing: a collection of high-minded mutual funds some of which have benefited from recent strength in the alternative energy sector
  • The Vice Fund (VICEX): the diametric opposite of the above, a mutual fund specializing in the tobacco, alcohol, gaming, and defense industries