@@ Angie

Good talkings here!

I believe there is a benefit beyond dollars and cents to putting your investment dollars in socially responsible companies, too.
--There is, but its tricky in economics to quantify intangible goods. And you're talking to an economist, so... yeah. I mostly focus on tangibles. The intangibles ARE important. We have little statistical tricks (called shadow prices) to try and figure it out.

Do you not find it even a little bit reprehensible that major corporations might, say, use sweatshop labor?
--Sweatshop labor is not necessarily bad. In India, a sweatshop town started around a sweatshop (I think its a northern city, gotta fetch the article). It drew alot of folks who were working on subsistence agriculture (not a good life). Once everyone got to the city (mostly women, young girls, teenagers) and worked in sweatshops, living standards somewhat improved (though nothing like what you or I would think are good living standards). The problem occured when the sweatshop closed down. They couldn't go back to agriculture (nor did they really want to). There were no factories. So they resorted to prostitution. I'm not excusing it, I'm just trying to build a framework around why some labor is better than others, and why for some economies, they have to go (grow) through using sweatshop labor. Some countries have tried to skip basic economy building steps, and well, financial crisises results as the necessary KSA's are not built up.

Or build factories in third world countries because there are few to no restrictions on air and water pollution compared to those in the US? Both of these things are common in this great globalized world of ours, and many companies regard these as legitimate ways to cut expenses, boost the bottom line.
--They do, though I think that consumer preference (intangible) is shifting based on what were seeing away from companies that do this (pollution, mainly)

Is the bottom line really all that matters? Just tough luck to the manufacturing workers in the US whose jobs, with all those unprofitable labor-law protections, were sent to cheaper plants overseas--they're just proles who lose as a matter of course? Tough luck to the locals near those factories who have to live downstream of the factory?
--Unions protect American jobs, dontcha know? (sarcasm). They only protect those who are in the union, and in many industries not then. In a way yes, tough luck, because free trade marches onward and we can't pull back from it (because then we risk recession and lagging behind other countries in terms of growth and wealth). Not tough luck, if we used the penalities for company who do such activities to promote worker education programs (Its what Clinton tried to get started, and he's a pretty smart economics dude).

--In the end, there are competing responsibilities. We have a responsibility to our family to provide as best we can (thus here, ONLY the bottom line matters), and we have a responsibility to the future/outside world (and here, the bottom line DOESN'T matter). No easy answer...

Some upside. Do you really think those chickens won't come home to roost someday? Do you really think they're not coming home to roost already?

All this seems very far away when you're staring at the bold print on your quarterly statement, but if you're going to be a Provider of Capital, it's worth giving some thought to who you're providing it to, and what they're going to do with it. Or does being an investor mean that you're exempted from being a good citizen, too?[/quote]

Indeed--I'm enjoying this conversation.

its tricky in economics to quantify intangible goods. And you're talking to an economist, so... yeah. I mostly focus on tangibles. The intangibles ARE important.

I recently heard activist David Suzuki (who I have many disagreements with in general, fwiw) point out that economists regard money, which is entirely an abstract concept that only works because we collectibly abide to use it as a mechanism of exchange and value, as "tangible". And that many other critical things that people actually see and feel, and indeed upon which life depends (like clean air and clean water) are "intangible". I do agree with his point that this is a pretty cockeyed and limited frame for viewing the world.

I am well aware of the allure of numbers (my doctorate is in the natural sciences, and I am all kinds of quantitative). But my long association with the chemical field, with its well-known shortcomings when it focuses just on the bottom line, convinces me that numbers are part of the picture, but only part.

Being a parent also affects me in this regard. My children need to live in the future and I have the power to affect how that future manifests. Toward that end:

In the end, there are competing responsibilities. We have a responsibility to our family to provide as best we can (thus here, ONLY the bottom line matters), and we have a responsibility to the future/outside world (and here, the bottom line DOESN'T matter).

I disagree with this dichotomy. Fact is that the "social capital" of the US is such that all but the most impoverished citizens live with material comforts that most of the world population envies. Electricity, clean running water, toilets and sewers, abundant food and clothing. We could get into a long diversion about what it means to "provide as best we can", but I posit that children can and do grow up well with less emphasis on the consumerist ideal, and American children in particular would be way better served with more emphasis on the future and the outside world.

More on my mind, but I have to get the kids and myself ready to face the day. The though what I'll be mulling over is how much more "growth and wealth" the world's only superpower really needs to attain...

I'm still stuck on this notion that a company receives no benefit whatsoever if I buy its stock. If that's true, then it shouldn't matter whether I own stock in, say, Exxon-Mobil (whose gasoline I have boycotted for more than a decade now due to their obstructionist tactics on climate change) or General Motors (which I avoid on the same principle, although frankly I would never buy a GM car anyway simply because the quality is so mediocre).

I understand that investing with a firm like Calvert or Domini could indeed have more of an effect in terms of shareholder pressures, so that's a reason to do socially responsible investing, but still it seems like the effect on either "good" or "bad" companies is relatively small, and that the main benefit to a "socially responsible" investor is psychological.

One alternative that hasn't been mentioned yet is the "social accounts" that many banks are offering now. These do have direct and local benefits: you open up a regular checking or savings account with your bank but they use that money to finance environmental or social benefit projects in the community. I had a money-market account in one of these programs when I lived in Vermont, and am considering opening up one at my credit union here in Montreal -- they have an interesting set of options for checking/savings accounts, mortgages, and retirement accounts:

http://www.cecosol.coop/

(in French only, I'm afraid).

I am, too.

Aren't there even indirect benefits to the company? How many shares of its own stock does a company typically retain? How much does ownership and management have? Doesn't the fluctuation of stock price affect these groups?

They receive no benefit if you buy the stock from another investor, rather than the company itself when it's trying to raise capital.

Stock trading is pretty much just legitimized gambling, and as I said upthread, for most investors it appears it's just regarded as a chance to get free money. Place your bets and see if you get a return, no engagement otherwise necessary.

If the stockholders don't get dividends (cash payments from the company), yep, the value of the stock entirely depends on the herd mentality of the market. If investors thinks the stock is valuable it's easier for the company to generate cash to expand. Support or demand is reflected in the stock's price.

My participation in the market is only ever going to be spit in its financial ocean and subject to forces that I have essentially no control over. (This is one of many reasons why I'm not so enthusiastic about investing money in the market.) Yours probably will too. If I'm gonna play at all, the least I can do is throw my support behind the least unseemly sectors.

Brad, I'd never heard of social accounts, but I think they sound cool. I also try to keep my finances where they'll benefit people locally. I adore the credit union where I do all my banking. As a CU, it's not for profit, and it's the only financial institution I've every worked with that doesn't seem like it's trying to screw me at every step. They hold both my mortgages--we just refinanced our second house so that our CU holds its note, rather than Chase, which was pretty much appalling in every way. My CU is a state-wide institution. If I'm going to pay all that money in interest, I would much rather support an institution I respect and admire, that hires people in my home state and has terrific customer service, rather than some voracious financial behemoth with crappy customer service from ridiculous call centers in who-knows-where. I like that the CU also uses its capital to the benefit of other members in my home state.

And I'll add, for the sake of the numbers guys in the audience, that their rates for mortgages and CDs meet or better the national benchmark figures I see for those products. Their savings accts have lower rates than online-only banks, but we only keep a few thousand dollars in liquid reserves there which do ebb and flow a bit. I'll take a few percent less as the cost of instantaneous, reliable access.

yeah, companies make money from the initial offering, the rest were just playing gamblers anonymous, sometimes.

I think this is where I refer to what we call the "problem of the commons" and why following the dominant strategy for yourself often leads to a non-optimal outcome....you know, nash equilibirum kinda stuff. Real game theory is some fun stuff.

I would love to say more, but I am way tired.

Angie made a good point in stating that investing is like gambling. However, the risk associated with gambling can be mitigated and the same is true for investing. One way to reduce risk while investing in stocks or mutual funds is to make an educated gamble. Another tool to reduce risk is to diversify in order to protect against down turns in individual companies. With that said, socially conscious investing means that a person will have to limit the number of companies in which they can invest. Limiting the investment pool of companies and mutual funds decreases the opportunity to be diversified.

What I am struggling with is my ability to meet my retirement goals within a universe of "green" companies. Socially conscious mutual funds just haven't performed as well as most index funds. Based on the data at Social Investment Forum, the S & P 500 has outperformed a majority of the listed funds in the last year. There are other benchmarks and time periods that one could compare mutual funds to, but I haven't seen a largest enough group of funds that have a rate of return on investment that is satisfactory.

I applaud and utilize sound personal finance decisions that use local and sustainable practices. Can I still be considered "green" if I use the "blood" money from my investments in the broader markets to achieve a retirement goal? Do the means justify the ends?

If I were in my early twenties again, I would pursue socially conscious investing with gusto. I could live with a lower rate of return on my investments and with higher risk. By investing over a longer period of time, but with a slower rate of return a person can still meet financial goals.

Gambling has odds in favor of the house; this means the longer you play, the greater that chance of you loosing your money. While the same logic applies to trading (trying to beat the market), this is not the case for investing in capital markets.


On being "green," many of the companies that successfully pass screens to be included in SRI funds still do indirect business with companies or own shares of companies that do not pass those same screens. For example, a green company may hold vice stocks in its corporate pension plan. So if they can still be “green,” even with a few drops of “blood” money, I don’t see any reason why you can’t still call yourself “green,” Paul. Unless you’re a litter bug.

Very few people can be 100% socially responsible, we do our best within reasonable limits. Even vegan vegetarians eat harvested grain despite the fact that millions of field rodents are killed during the harvest process.

One of the key distinctions in capital markets is the separation of the corporation from its shareholders. A corporation is a distinct object. It is an entity. It is a "being". It makes its own money. It pays its own taxes. Even if the corporation goes billions of dollars into debt, the shareholders do not share the same fate. Their loss is limited to their share value going to zero.

As such, if you buy a corporation's shares, the corporation does not receive a direct benefit. As I stated previously, there are indirect benefits. However, not a single penny of your purchase goes directly into the corporation's coffers.

Buying shares of a corporation may directly benefit some of its shareholders. It does not directly benefit the corporation.

That's my story and I'm sticking to it.

squished

Gambling has odds in favor of the house; this means the longer you play, the greater that chance of you loosing your money. While the same logic applies to trading (trying to beat the market), this is not the case for investing in capital markets

I don't know about that.

The house still always gets its cut, whether in the fee per trade for individual stock purchases, or in the management fees for a mutual fund.

Whether or not you make a profit once the fees have all been paid depends on how many suckers are interested in buying what you've owned....

OK, maybe it's "gambling with certain elements of a Ponzi scheme".

Angie, I’m not sure which part you’re uncertain about.

Casino gambling and trying to beat the market are both less-than-zero-sum games. This is can be demonstrated with simple math.

On the other hand, investing in capital markets has no such mathematical restriction because you are relying the growth of the market, a variable. Historically, the long-term stock market investor has been reward by that variable growth more often than not and by enough to overcome costs including fees, taxes and inflation. Unlike gambling and trading, the longer someone has been invested, the more successful they were.

While there is no absolute guarantee that capitol markets model will continue to work, you are not guaranteed to always face unfavorable odds as you are with gambling and trading. This is what makes investing different from gambling.

OK, let's take it from the top.

We've already established that "investing in capital markets" bears no relation to the actual function or profitability of the companies with which those stocks are associated.

We have established that the cost of a particular share of a company's stock reflects demand by other investors.

The "growth of the market" relies on the number of people who are willing to invest in capital markets and the number of dollars that they bring to the table.

Historically as now the vast majority of the capital in the markets is in the hands of a relatively small number of very large investors. Let's reasonably assume all of the extremely wealthy individuals in the country if not the world are already as fully invested as they are ever likely to be in the capital markets.

Where does the growth of the market come from then? Since, what, the '80s, mutual funds have allowed an ever-increasing number of very small investors to throw money into the capital markets. The small investors still make a pretty puny fraction of the overall market compared to the major investors, but their money continues to pour in and drive prices up. Good old supply and demand.

Is that going to continue forever? Are there limits on growth? Please do not force me to trot out the old saw that in the natural sciences, another name for unchecked growth is "cancer".

Investors don't realize profits on investment in captial markets until they sell, of course. If few people are willing to buy what you've got to sell, prices drop. If there is a limit on growth, who is the one who experiences the most risk? Financial advisors hide behind the fig leaf of "past performance is not an indicator of future returns", big investors shrug, but the small investor who might actually need that money to put food on the table is just f*cked.

Angie, I think there is one point that was overlooked; these companies that we invest in (and when you invest in the markets as a whole you are investing in all of the companies that make up the market) are not empty shells. They have earnings, and for many of these companies those earnings grow over time as our economy expands. As a company earns money and does not distribute profits to shareholders, then those retained earnings add to the value of the company. Real value is what separates investing from Ponzi schemes. Over the long term, a company’s value will effect its price. In the short-tem, pricing is a subject to ever changing supply and demand driven by random events. This is exactly why ths stock market is considered a long-term (decades not years) investment.

If you invest in the markets, for example a broad market index fund, you can sell that as long as there is a market. That’s what a market is, sellers and buyers. Without one or the other, there is no market.

It sounds to me like you may be questioning the future of capitalism, and I suspect that you are taking a bigger “gamble” in planning for free markets to fail. But this is just my opinion.

I just came across the following information that came from the "2005 Report on Socially Responsible Investing Trends in the United States, 10-year Review," from Social Investment Forum, January 24, 2006:

- Shareholder resolutions implemented on social and environmental issues increased by more than 16%, from 299 proposals in 2003 to 348 in 2005.

- Social resolutions reaching a vote rose by more than 22%, from 145 in 2003 to 177 in 2005

- Institutional investors that filed or co-filed resolutions on social and environmental issues controlled $703 billion (US$) in assets in 2005, a 57% increase over the $448 billion (US$) in assets counted in 2003.

Practically speaking, the number of resolutions and proposals submitted during shareholder meetings is must make these statistics mere drops in the ocean. It does however provide some evidence that socially conscious investing is doing "something". A critical mass of investors that follow socially conscious investing principles has not been established. The addition of more people with similar social and environmental ideals to the market place will eventually lead to our ability to make a greater difference.

Interesting statistic. It *still* seems to me that the investment would be better made in companies that are not socially responsible, with an eye toward improving their record.

In other words, $703 billion could buy a very small percentage of a large number of socially responsible companies. But what good are shareholder resolutions there? "We resolve that Whole Foods should keep on treating their employees well."

Or, $703 billion could buy a controlling interest of a small number of socially irresponsible companies, and *real change* could be instituted. Maybe that's what's going on, but the sentiment I seem to be reading from the SRI crowd is that they're trying to avoid investing in the Exxons and Walmarts of the world.


Sam