Why is it that so many patriotic Americans (including some REASON subscribers) vehemently denounce the growth of the US government and its huge deficits and yet are the biggest buyers of Treasury securities and "all-government" money-market funds? They criticize the waste and corruption in Washington while lending the Treasury their money to further the very ends they oppose.
I can only surmise that this unrecognized hypocrisy hearkens back to World War II, when Americans felt it their duty to buy US Savings Bonds to support the war effort. Since then, the Treasury's debt financing has grown immensely. Without a war and patriotic fervor, the government has resorted to other methods to entice investors, banks, and institutions to purchase Treasury securities—paying higher interest rates, for instance, and emphasizing safety. Banks, brokerage houses, and other financial institutions have played a major supporting role by issuing 30-year "zero-coupon" bonds, using T-bills as collateral for margin accounts, and promoting "all-government" money funds.
But now we need to look beyond security and high yields. The new patriotism demands that investors stop buying Treasury securities and funding wasteful and nefarious government activities. It's time to tell Washington: "Not with my money, you don't!"
Investors of the '80s, welcome to the enlightened age of "ethical investing"—investing profitably without sacrificing your principles.
What! Allow your personal ethics to keep you from maximizing your profits or minimizing your risks? That's financial heresy. "Never let your political views interfere with your investment decisions," investment advisor Doug Casey warns, for one. "You give up a lot of speculative opportunities when you let your patriotic feelings influence your investment decisions." Casey, author of the iconoclastic bestseller Crisis Investing, has never been afraid of speculating in "unorthodox" investments that raise one person or another's ethical eyebrows, including nuclear utilities, South African gold shares, and Rhodesian real estate when "blood was running in the streets."
The president of a women's investment club in Virginia dealt with this dilemma. She told me that she was opposed to the club's purchase of a gambling stock because she was personally against betting. But she was chagrined when she learned that the gambling stock proved to be the best performer in the club's portfolio in the past year.
On the other hand, Amy L. Domini in her challenging new book Ethical Investing (Addison-Wesley, 1984, $17.95), argues that the "ethical" investor often does better than the "average" money manager or mutual fund. She cites several examples: Among the Fortune 500, companies that didn't invest in South Africa outperformed companies that did. The market performance of non-nuclear utilities was better than that of nuclear utilities. The Dreyfus Third Century Fund, the largest "ethical" mutual fund, returned 373 percent between 1974 and 1982, compared with only 110 percent for the Dow Jones Industrial Average.
But selective statistics can be misleading. Domini ignores other statistics that prove just the opposite. For example, United Services Gold Shares, which invests in South African gold shares, returned over 500 percent between 1974 and 1982, far better than the Dreyfus Third Century Fund. Other mutual funds that don't limit themselves to "ethical" investments have performed even better (Nicholas Fund, Explorer Fund, Mutual Shares, and Twentieth Century Select Investors, to name just a few).
Limiting your investment opportunities probably does limit your total return. But that doesn't make "ethical" investing necessarily bad. After all, "making a buck" isn't the beginning and end of one's financial life.
Investing without compromise isn't a cut-and-dried issue, and it can be taken to the extreme. Do you invest in IBM which is one of the strongest recruiters of blacks in the country, or do you avoid IBM because it sells computers to the communists? Do you stop buying gasoline from Exxon because it trades with the Soviets? Things can get out of hand rather quickly, and your investment choices will be extremely limited in no time.
The morality of investing is very much an individual decision. Objectivity is difficult. Should you buy the South African gold coin, the krugerrand? Antiapartheid groups oppose the sale of the krugerrand because it is a legal-tender coin issued by the South African government. The gold is mined by private companies, but they are required to sell their gold to the government. The purchase of the krugerrand is therefore giving indirect support to the South African government's discriminatory policies. But ban the sale of the krugerrand? No, I'm opposed to legislation forcing others to agree with anti-apartheid beliefs. After all, some could argue that it's all right to buy the krugerrand because the South African government is removing some racial barriers and mining gold keeps blacks employed. The decision to make ethical investment choices must be individual and voluntary.
Writer Amy Domini suggests three approaches to ethical investing. First is the avoidance approach: refuse to invest in companies or investments of which you don't approve. Second, the positive choice method: seek companies or investments offering products or services that serve a purpose you support (instead of T-bills, for instance, buy nongovernment money funds). Third, the activist approach: seek to change the policies of companies by writing letters, attending stockholder's meetings, engaging in takeover bids, etc. I endorse all three approaches.
The truly rich man is the one who uses wisdom and virtue in all his investment decisions. Perhaps those who throw caution and ethics to the wind can become financial tycoons, but in the words of investment writer John Pugsley, "Being the richest man on a sinking ship is a bitter victory."
Mark Skousen is the editor of Forecasts & Strategies. a monthly financial newsletter.