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This is so true. If the companies we invest enable something that we do not support otherwise, we are financing that activity anyway.

Anurag
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Have I got some ETF's for you!

http://etf.stock-encyclopedia.com/FZB.html
The FaithShares Baptist Values Fund is designed to track the performance of the FaithShares Baptist Values Index, an index developed by FTSE KLD using proprietary ratings covering environmental, social and governance and ethics criteria to evaluate the performance of the 400 largest U.S. companies. The BV Index has zero tolerance for, and therefore excludes from its Index, companies involved in the following activities: direct participation or support of abortion; the manufacture of alcoholic beverages; the ownership or operation of, or support of, gambling facilities, products or services; the production of military weapons; the production, sale or distribution of pornography; and the manufacture of tobacco products.

http://etf.stock-encyclopedia.com/FCV.html
The FaithShares Catholic Values Fund is designed to track the performance of the FaithShares Catholic Values Index, an index developed by FTSE KLD using proprietary ratings covering environmental, social and governance and ethics criteria to evaluate the performance of the 400 largest U.S. companies. The CV Index has zero tolerance for, and therefore excludes from its Index, companies involved in the following activities: direct participation or support of abortion; the manufacture of contraceptive products; the use of embryonic stem cell or fetal tissue for research or in a product; and the manufacture of tobacco products. The CV Index also excludes companies that manufacture anti-personnel landmines or that derive greater than 5% of revenues from the production of firearms or military weapons. The CV Index avoids inclusion of companies that have been involved in predatory lending controversies and not taken steps to address them; have a pattern of racial or gender discrimination or labor rights controversies without taking steps to address such situations; and use sweatshops in the manufacture of goods.

http://etf.stock-encyclopedia.com/FKL.html
The FaithShares Lutheran Values Fund is designed to track the performance of the FaithShares Lutheran Values Index, an index developed by FTSE KLD using proprietary ratings covering environmental, social and governance and ethics criteria to evaluate the performance of the 400 largest U.S. companies. The LV Index has zero tolerance, and therefore excludes from its Index, companies involved in the following activities: manufacture of distilled alcohol; the ownership or operation of, or support of, gambling facilities or products or services; the research and development of nuclear, biological or chemical weapons; the production, sale or distribution of pornography; and the manufacture of tobacco products. The LV Index also has zero tolerance for companies that are major producers of toxic chemicals or have significant toxic waste releases, significant hazardous waste sites, or significant environmental penalties liabilities.

http://etf.stock-encyclopedia.com/FMV.html
The FaithShares Methodist Values Fund is designed to track the performance of the FaithShares Methodist Values Index, an index developed by FTSE KLD using proprietary ratings covering environmental, social and governance and ethics criteria to evaluate the performance of the 400 largest U.S. companies. The MV Index focuses on avoiding companies that derive specified revenues from business practices that conflict with the teachings of the United Methodist Church. For example, companies that derive 10% or more of revenues from the following activities will be excluded from the MV Index: sale, distribution or marketing of alcoholic beverages or supplying key elements for alcoholic production; the production of goods and services related to gambling; the manufacture, sale or distribution of antipersonnel weapons and ammunition; the production, sale or distribution of pornographic products or services; the sale, distribution, or marketing of tobacco products or supplying key elements to the tobacco industry.
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OK, this is off-topic slightly. Gabbrielle Giffords and Mike Kelly have started a PAC to offset the enormous power of the NRA. The website is http://americansforresponsiblesolutions.org/. I made my first contribution today.
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If the companies we invest enable something that we do not support otherwise, we are financing that activity anyway.

I have a different take--I don't think owning shares in a company provides any financial support to that company, except to the extent (infinitely miniscule in most cases) that it increases demand for those shares which increases the share price and the company can use the shares to make purchases. The company receives no money when you buy a share of stock from somone else.

What owning shares does is it aligns my personal wishes with those of the company for its financial success. That is the position that I find untenable to be in if I can't support what the company does.

If index funds were to divest themselves of investments in gun companies, how would that hurt the company? There would probably be a temporary decrease in share value due to high demand for selling, but once that was done, the share price should recover to it's prior value. Now buying a bond: that would be financing the company's activity (if bought when the company first issues the bond).
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One follow-up to my previous comments: I do think that acting with integrity by not owning shares in a company you don't want to support has a very real and beneficial effect in the world as well as inside ourselves--but it's more on the emotional/energetic level of what we bring to our community as opposed to having a real financial impact. Tons of people won't invest in Philip Morris, but I don't think the folks there are hard up for money.

Not buying guns would financially impact the gun companies, but I don't believe that not buying their stock would.
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Not buying stock leads to fall in share price leading to fall in ability of company to raise equity to expand and exodus of ppl depending upon compensation. Trading stocks is not equivalent to playing some card game. It is investing into the company. They company gets your money directly or indirectly or else why any company would give you ownership and pay you dividends (those they do) without getting your money?

Without developing a strong sense of what stock ownership means it is not possible to enjoy sustained superlative returns. Once this is understood intrinsically the investor's actions are very different.

Anurag
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They company gets your money directly or indirectly or else why any company would give you ownership and pay you dividends (those they do) without getting your money?

The company receives the money from the IPO and any subsequent secondary offerings. But from day-to-day trading in the open market, they don't receive a dime. If you buy a share at IPO for $10, the company gets your money. If I later buy that share from you for $15, you get the $15, not the company. The company will pay me dividends because I purchased the right to them (from you) that you had purchased originally.

By and large, in theory anyway, companies trade at share prices based on the future expected financial performance of the company. To use MO as a textbook example of a company that probably more people refuse to own than any other, how has that impacted their share value? They trade at a PE of 16.5. If more people were willing to buy them, would they trade at a PE of 20? Why? Are SRI investors less value-conscious than non-SRI investors?

What impact does the size of the pool of prospective share-buyers have on the share value? I’ve owned a stock where it wasn’t at all unusual for days to pass with 0 trading volume. Very few people were interested in buying the stock. Did that mean that it traded for super cheap? No. Did the company founder? No, they grew and are doing just fine. Their financial performance was strong because people wanted to buy their products regardless of how many people wanted to buy their stock. In the long run, lower demand for buying shares leads to lower trading volume, not lower prices.
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While it's a difficult case to prove one way or the other that my not buying a stock makes it go down, allow me to state with certainty that my buying a stock doesn't necessarily make it go up. :-)
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Well, I think that owning shares of a public company does imply SUPPORT -- that one is OK with being part owner of whatever it a company in question is doing. The whole "part owner" argument. True, selling the shares in a situation like this may not directly hurt the company right now, but it is taking a stand against whatever it is the company is doing to make their money. Those of us who are vocal about it are spreading that idea -- that we don't want to make money from companies/industries that do x, y, or z.

As far as big institutional investors divesting, that is a pretty big deal. Calstrs is a the biggest public pension fund, and it has announced that it is divesting from gun manufacturers (even though the process might take years). The idea of course is that a lot of this type of business will, over the long haul, not only have a detrimental societal effect, but also will lead to losses due to lawsuits, regulation, etc. So from this standpoint, it's not just a social stand but a financial consideration too.

No matter what, I think buying/selling/holding stocks can be signals. Not wanting to profit off of certain industries is becoming a more powerful motivator for more investors, too. That sends a message to the corporations.

Interesting discussion, folks! I think I'm going to have to tackle the topic for my column, because it is an interesting one. Whether you're using your money to buy a gun or using your money to invest in the company that manufactures the gun, I do believe both add up to support of that product, philosophically.

Alyce
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The company receives the money from the IPO and any subsequent secondary offerings. But from day-to-day trading in the open market, they don't receive a dime. If you buy a share at IPO for $10, the company gets your money. If I later buy that share from you for $15, you get the $15, not the company. The company will pay me dividends because I purchased the right to them (from you) that you had purchased originally.

The secondary market for shares sold in IPO exists primarily on the potential of the company to provide returns in the form of dividends or share price appreciation - both of which require expansion and money that came come from equity markets or debt markets both of which look at the prevailing share price created by the purchasers in the secondary market. In addition, the stock based compensation works on the share price supported by the secondary market. This is how the players in the secondary market affect the business of the company over long term.

Anurag
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The secondary market for shares sold in IPO exists primarily on the potential of the company to provide returns in the form of dividends or share price appreciation - both of which require expansion and money that came come from equity markets or debt markets both of which look at the prevailing share price created by the purchasers in the secondary market.

Agreed, but does having a smaller pool of prospective buyers actually negatively impact share price in the long run, after those who are divesting have sold out? How? That is the issue. I don't think it does. I think share price is determined in the long run by the company's financial performance, regardless of the size of the pool of prospective share-buyers.

I'm not against SRI--I've been doing it for 25 years, when I first began investing by buying shares in an SRI fund. I firmly believe that both I and the world are better off for it. But I think that's because it's impact is more along the lines of "sending a message" rather than doing any actual financial harm to the companies whose shares I won't buy.
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.... but does having a smaller pool of prospective buyers actually negatively impact share price in the long run, after those who are divesting have sold out? How? That is the issue.

It is like voting. One vote does not matter so should we stop voting? The bottom line is that charity begins at home.

I don't think it does.
Recently some funds decided to divest from some gun firms. Stock price did fall. Company wealth can get impacted by social perceptions.

I think share price is determined in the long run by the company's financial performance, regardless of the size of the pool of prospective share-buyers.

That is one part of the story. A larger force is risk perception. Explain to me why COST sells at such high P/E to WMT consistently when WMT metrics on almost every count are superior to COST? I can give you many such examples. Best run and most admired organizations with products of timeless utility sell at high P/E simply because the risk is relative lower. Incidents like recent school shooting impact public perception and IF it gets anti-guns for 75% of the people - not saying it will happen - but if it does that regulation follows and there is permanent destruction of market cap. That is a risk that does not hang on a relatively socially acceptable business.

Just look at Alyce's portfolio. It has been beating the market consistently. Look at others in the rising star portfolio section. She is beating most of them. All the other Fools competing are similarly smart. By choosing ethical and socially acceptable businesses she has automatically ended up choosing firms with best practices. Stock Advisor has achieved phenomenal results for a decade rather consistently due to choice of firms with highest quality management. Such firms has much less risk relative to others.

The share price component that may be attributed to risk is very real and unfortunately discussed the least. Much of the investing community is focused on discounted cash flow. Why does Appl trades so low today despite super financials and no slowdown in growth? It is the risk perception that Apple may not be able to innovate fast enough going ahead despite any evidence to support it. Over long term the share price will reflect firm's performance AND shareholder friendly management (this is critical, eg. look at CHK or FCX) but only if major risks do not come to pass - regulation, obsolescence, disasters (natural or market) etc.

Anurag
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Sorry, have to disagree completely with the 'great piece' assessment. I found the Reuter's blog to be a very biased piece of drivel with absolutely no useful take away.

Get enough people to start listing companies in an index that sell or do something that they consider irresponsible or not socially acceptable and there won't be any companies left for the fund to hold after it takes everyone's position in to account.

If the author doesn't want index funds to own firearm companies, or any other type of investment, he's free to either find a fund that fits what he wants or start one of his own.

On second thought, maybe there is one useful takeaway. What constitutes socially responsible investing is very much dependent on who gets to define 'socially responsible'.
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It is like voting. One vote does not matter so should we stop voting?

I've gone out of my way in my posts to state that is not the point I am trying to make. I firmly believe in SRI (according to each individual's values, of course) and have been doing it every day of my 25 years of investing.

Recently some funds decided to divest from some gun firms. Stock price did fall.

Totally agree there is a negative effect on stock price during divestment, as there is any time a major holder sells out of any stock for any reason. But does that effect last after the divestment is over?

There are other ways of reducing the number of potential buyers of a stock besides social concerns. Take market cap, for example. Many funds and institutions cannot buy stocks below a certain market cap, so that greatly reduces the number of potential buyers of small and micro cap stocks. Does that mean that small and micro cap stocks trade for dirt cheap? I don't think so--it just means they trade low share volumes.

I'm in agreement that picking the right "socially responsible stocks" will lead to superior returns over the long haul. But there are plenty of dogs in that pool also, so you have to pick the right ones, which Alyce has been very good at doing.

This seems to be borne out by data. Over the past 10 years ended 12/31/12, the S&P 500 has returned an average of 7.1% per year. How have, say, the top 10 SRI large cap domestic equity funds (by amount of assets as stated at socialfunds.com) that have 10-year histories done during that time?

Gross returns (before the companies deduct expenses)(sorry for the lack of formatting):

Parnassus Equity Income 9.0%
CSIF Equity Portfolio A 6.4%
Neuberger Berman 8.6%
Domini Social Equity 7.0%
Vanguard FTSE Social Index 5.7%
New Covenant Growth 7.4%
Dreyfous Premier Third Century 7.3%
Sentinel Sustainable Core Opportunity 8.3%
Pax World Growth 9.3%
Walden Social Equity 7.6%


Most are beating the S & P with their gross returns, although not by huge amounts and they may fall below when you deduct expenses.

By the way, one I found in making that list that I hadn't been aware of but some people may want to peruse their list of holdings, is the Parnassus Workplace fund, which seeks companies "with outstanding workplaces". It has been performing quite well, though it doesn't have a 10-year history.

http://www.parnassus.com/parnassus-mutual-funds/workplace/
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The pernassus fund has 47% turnover which is very high..

Correct portfolio management is whole another issue

Anurag
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Thanks everyone -- this has been such a good discussion. I've enjoyed reading all these posts. Great points all around and things to think about.

BTW, I didn't realize it originally but the individual who wrote that piece actually works for Domini Social Investments, and his piece was distributed via Reuters blogs. Just thought I'd clarify...

Alyce
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