Paul Meloan – Vested Interest

I have some advice for you that may seem strange: if you don’t like a company, boycott their products and services but not their stocks. Stocks are a poor way for a diversified investor to effect change, and many better avenues exist.

Boycotts are blunt instruments: they exact a fair amount of collateral damage besides that on the intended target. When events pull out of North Carolina over the treatment of the LGBT community it’s certain that other non-bigoted businesses will suffer as well.

Banks and Guns and Boycotts

For some Americans banks and firearms manufacturers may be less popular than Congress. Both are the targets of wide-ranging boycotts dating back to Occupy Wall Street up to today’s March For Our Lives. I’m going to put my cards on the table face-up. I’m a bank guy, not a gun guy.

Everyone needs a bank and the services they provide. Because of the power that banks have over economic stability, they are heavily regulated (we can argue elsewhere if they are heavily regulated enough). Some banks, most notably Wells Fargo and Bank of America, still manage to commit violations of the law and regulations to the harm of their customers and society. The parade of misdeeds coming from Wells leaves me little alternative than to believe if anyone is still doing business with them, and millions are, then they are part of the problem.

We still have hundreds of other deposit-takers ready to open accounts and serve customers presumably without defrauding them. The pain of moving accounts, while real, is temporary. Rip that band-aid off Wells Fargo customers, it will only hurt for a moment!

“The gun business lives or dies by the grace of the government. The gun lobby spends billions every year on politicians and lobbying. If you want to defeat guns it will happen in the halls of Congress and state legislatures.”

While I’m less of an expert on guns, a few things seem clear to me. People who don’t like guns or feel threatened by the existence of AR-15s and hundred-round ammunition clips probably don’t own any or have plans to do so. They’ve already boycotted the local gun store. To some extent it’s working, as fewer American households own guns than 30 years ago (although the ones that do own guns own more guns. A LOT more guns.)

The more interesting argument is whether to boycott businesses that make a fair amount of their profit from guns and ammunition, yet also sell other things like Wal-Mart (America’s biggest seller of guns and ammunition) or Dick’s Sporting Goods.

The gun business lives or dies by the grace of the government. The gun lobby spends billions every year on politicians and lobbying. If you want to defeat guns it will happen in the halls of Congress and state legislatures.

When to Boycott (Or Not)

So if you believe me that some companies are bad enough to warrant a boycott, why not boycott ownership of their stock as well? It comes down to how much collateral damage one is willing to endure to keep their portfolios “pure.”

First, some assumptions:

  1. We already know that markets by and large work.  It’s hard to select companies that will beat the market so a growing number of investors (hopefully including you) have decided not to purchase the stocks of individual companies. Investors own hundreds if not thousands of different company stocks through index funds or ETFs. They know that having a concentrated position in any one company is generally not worth the risk, even if sometimes individual stocks can go to the moon.
  2. Index funds already hold the stocks of companies one may find disagreeable, at least politically. As a liberal I know I don’t agree with the politics of Marriott’s management or Chick-Fil-A’s, yet I do enjoy a clean, comfortable hotel room at a reasonable cost or a delicious chicken sandwich.  I also don’t want to get into grey areas on politics, because life is full of grey areas. If it’s just politics, then we’re good. (NOT YOU HOBBY LOBBY).

The S&P 500 index is comprised of companies engaged in all sorts of endeavors that offend people of certain sensibilities.  It’s hard to invest in American stocks without sooner or later owning something someone finds distasteful. Tobacco (Philip Morris/Altria); alcohol (Brown Forman, Boston Beer, etc); and gambling (Wynn, Las Vegas Sands) are all well-represented on the list.

Screening out companies that offend you is your right, but it comes at a cost. That cost includes a loss of diversification, higher trading costs (it costs $$ to go buy the 400 stocks you like to avoid the 100 you dislike). Some mutual funds attempt to do this, and they typically end up costing anywhere from 5x to 50x more than a simple market index fund. In my view, it’s cutting off your nose to spite your face.

There’s an App for That: Gun Boycotting Edition

If you wish to ignore this advice and screen gun stocks from your portfolio, of course there’s an app for that. Enter the web site Goodbye Gun Stocks.  At the site, enter the name or ticker of any U.S. mutual fund (it does not follow funds that invest in non-U.S. stocks) and it will enter the percentage of that fund’s assets invested in companies that manufacture or sell guns or ammunition. Here you will see the Wal-Mart effect in full bloom. As one of the largest companies in the U.S., Wal-Mart is typically one of the largest positions in any fund that mimics the S&P 500 or Russell 3000. Even with that said, the relative value of the position in Wal-Mart is well under 1%.

Social attitudes evolve over time and these are reflected in our politics. As a middle-aged man I can remember in my lifetime when tobacco use and drunk driving (two activities with zero social benefit) were far more common than they are today. Direct pressure on state and local governments brought about major changes in laws that have reduced these problems.

Ultimately, it’s your right as an investor to decide what you wish to own. You can certainly screen stocks or funds for their ownership of companies that offend you (here’s looking at you, Wells Fargo!).  However, if what you really want is social change call your state legislator or Congressman: that will almost certainly give you more bang for your buck.

Photo credit: Fearless Girl Statue by Kristen Visbal New York City Wall Street | by Anthony Quintano on Flickr

    Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

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