I get asked this question a lot and my answers are frequently long-winded and rambling. It was no different during my Forbes interview when I was asked that same question. Mercifully, interviewer Susannah Breslin didn’t put in my full answer.
Allow me to answer that question in this blog. If I write it down, maybe I can articulate myself a little more clearly:
“Bad” is loaded term.
How do we define “bad” and “good”? Unfortunately, it depends on the person asking the question rather than on an external, measurable definition. Things get complicated as we dial in our own religious, political, and moral codes. Those codes, which may be stricter in some ways compared to the aggregate social codes will shape our definition of “bad.
Often, “good” and “bad” are defined in a comparative way to the social norms of the day. During Prohibition, we would define booze as bad but today it’s pretty commonly accepted.
We also define “good” and “bad” by how the underlying products of these sin stock companies are used. A gun, for example, can be used for defensive purposes or for military purposes (which we might generally define as good) or a gun can also be used for very horrible crimes (which we would almost universally define as bad). The same with alcohol: A bottle of wine over dinner with friends is good; a jug of whiskey while you drive is bad.
Infuriatingly, “bad” is also defined in degrees. Ask someone which is worse: Cigarettes or chewing tobacco; beer or wine or spirits; guns or helicopters; Blackjack or slots. You’ll get some interesting answers because whether we want to or not, we tend to rank these things in a certain order. Thus someone who feels that they are socially conscious and do not want to invest in sin stocks might not have any problem investing in a winery or in a company that manufactures condoms. Or you get someone who enjoys the freedom that was “bought” by military sacrifice and yet does not realize how essential an IPO was for the weapons manufacturer that supplied the military.
Here are a few other things to consider as you think about the “bad” and “good” of sin stocks:
- The stock market is a secondary market. By buying and selling stocks, you aren’t “supporting” the company or helping them to operate. That happened during the IPO. You also aren’t “voting with your dollars”. That kind of influence happens at the consumer level. As a consumer, I don’t buy cigarettes because I don’t want to smoke. As an investor, I really like cigarette companies.
- Many companies are conglomerates. Phillip Morris (now Altria NYSE:MO) was a cigarette company and therefore a “sin stock”. However, people are surprised to discover that the company used to own Kraft Foods, Oscar Meyer, Maxwell House, Jello, Kool-Aid. At one time, an investment in a “bad” sin stock included an investment in these good household names. And consumers who bought those products did more to “support” the sin stock than the investors who traded the stock in the secondary market.
- Socially conscious investing is often defined as “companies that are not sin stocks”. This blinds investors to the fact that there are many other reasons not to invest in a company: Socially conscious investors could invest in companies that promote obesity, rely on sweat shop labor, or do not source their products sustainably. To socially conscious investors I would counter: EVERY company has some sin. Sometimes it’s in the stuff they sell. Sometimes it’s how they run.
- I also wonder (although this is just speculation) that some of the higher returns of sin stocks raise the hackles of social investors who feel that these companies are “raking in” money at the expense of their customers.
Your conscience can help you make investment decisions and you shouldn’t invest in companies that you have a moral problem with. But be very careful when you label something as “bad” because that is a terribly inaccurate and naive label of a very complicated situation.