With investment themes like “socially responsible” funds, ethical funds, religious funds, green investing and the like springing up to cater to the whims of conscientious investors, I thought I’d get your thoughts on various types of investments I’ve come across or invested in myself.
Lending Money at High Interest Rates – These days, it’s tough to find a blog that isn’t highlighting peer lending groups like Prosper.com or LendingClub.com as a great way to either invest or lower your interest rates. In essence, through some nifty financial innovation and the web, if you’re currently paying 25% on a high interest credit card, you can now borrow at say, 13% through a peer lending group and investors might be able to lend at say, 12% while the spread goes to the company for facilitating the transaction. Everyone wins, right? It does sound reasonable to me, but some people view this as taking advantage of people, akin to payday loans, albeit at nowhere near the interest rate. Some states have usury laws and other prohibitions against personal lending of this sort. Then, there’s always the microlending world where even triple digit annualized loan rates are seemingly acceptable. If some villager can borrow enough money for a cell phone and some inventory, they might completely change their lives and pay back the loan with interest no problem. But like any financial innovation, there are always unintended consequences and extreme examples of abuse.
Life Settlements – Is it unethical to invest in something where the payout depends on someone dying? In a nutshell, there’s an entire industry brewing where investors can buy out life insurance policies of people in need of immediate cash and they capture the difference in “anticipated” future premiums plus a profit. I was recently approached to invest in a fund of life settlement policies and questioned whether this might be a life settlement scam (many possible red flags to consider) or a legitimate high yield investment. I’m still thinking through the ethics piece, then the due diligence on the advisor before I consider any further. But if you were offered a 7% return for no volatility, no correlation to equities and tax-free (possibly, need to confirm), would you invest in these instruments? Depending on whether you assess these transactions as “predatory” or just a benefit to the policy holders who would rather have cash now while they’re alive, I guess your perspective can change dramatically.
Tobacco Stocks, Gun-Makers and Other “Bad” Companies – Tobacco stocks are the most obvious poster-child for ethical investing case-studies. Any time an ethical fund or “socially responsible” fund is being cooked up, it’s Big Tobacco that’s first on the list of stocks to avoid. Usually weapons manufacturers make the list as well since we know what their products are for. Then, you might have some alcoholic beverage companies, perhaps some genetically modified seed manufacturers and then you may even make your way over to health insurers, Wall Street Firms and finally, BP. It’s more a matter of personal opinion and agenda than a science when justifying who’s in and who’s out, but no doubt, tobacco’s always on that list. So, knowing that you’re investing in a company that makes a product that is factually known to harm and kill people and arguably, targets young adults and children, would you invest? Typically, these stocks tend to have abnormally high dividend yields and trade at low multiples to account for the litigation and social risk you’re taking. Many retirees and pension plans tend to favor these stocks for the yield. Would you invest?
I’m sure there are other investments I didn’t think of. I’d be interested in hearing your take on what’s missing, what your thoughts are on ethical investing and whether it even matters. I ask, because some would say that in an efficient market, even if you don’t invest for ethical reasons, someone else will at the right price, so avoiding “unethical” investments doesn’t matter in the grand scheme of things.
What’s Your Take?