Should We Invest in Unethical Companies?

I had a telephone conversation last week with a new client and one of the questions he had for me was, "Do you invest in unethical companies?" He was speaking about Wal-Mart (WMT) specifically, it turns out, but there are a lot of investors who avoid buying shares in companies with which they disapprove of their products, their way of doing business, or both. Common examples include stocks with ties to alcohol, tobacco, firearms, casinos, Mideast oil, etc. It was a good question and one that I don't think I've addressed on this blog before, so I figured I would give my perspective.

Before I get into an explanation, the answer to this question is yes, I will buy shares in the likes of Anheuser Busch (BUD), Altria (MO), Halliburton (HAL), Wal-Mart, and MGM Grand (MGM) if I think the stocks are good investments. This assumes of course that the client is okay with this. If a client does not want to own certain stocks, I have no problem following their request.

The issue here, in most cases, is whether or not you want to support companies like this if you disagree (insert a stronger word here if you prefer) with what they stand for. Many people equate buying stock to supporting a company. The reality though, is that Wal-Mart does not benefit in any way if I were to buy 100 shares of their stock. That action simply results in one of their current investors transferring their shares to me, in return for cash. Wal-Mart does not benefit monetarily from that transaction. After an initial sale of common shares, the money changing hands is between individuals, so the company is out of the picture.

I have no problem ceasing support for companies I don't like. However, if I wanted to stop supporting Wal-Mart, for example, I would simply choose to never again set foot in one of their stores. No longer shopping there is adversely affecting their business. Not investing in their stock is not having the same effect. Since my job is to make money for clients, I will generally invest in the stocks that I feel can accomplish that goal, regardless of whether or not I like the underlying firms or not.

This reasoning of course assumes that you are not buying shares in an IPO or a new offering of stock through which the firm is directly receiving the proceeds from the sale. In those cases, not buying the stock does have an impact on them, even though there will always be someone else willing to invest even if you're not. Still, it's the principle that is important.

Full Disclosure: No positions in the companies mentioned at the time of writing, but not for the reasons discussed above :)