I’ve often heard people talk about “investing ethically”. What they mean, of course, is that they believe in supporting companies that they feel do good things, or they at least avoid supporting companies that do bad things. The one crucial problem with this line of reasoning is that except in a few special circumstances, investing in a company doesn’t really “support” it at all.

This can be illustrated with a few examples. Let’s say that you are a wealthy investor and that company A sells children’s books. You feel that company A’s books are educational, wholesome, and deserving of your financial support. They earn $7 million per year, and are currently valued at $100 million dollars. Seeing some growth potential in the company and wanting to support their cause, you buy $1 million of company A’s stock. The question is, how much did company A earn from your million dollar purchase? The answer is nothing. They still earned $7 million dollars this year; the only difference is that you now own 1% of company A and they will pay you next time they issue dividends.

If company A’s business improves, you will make money from your investment; if it deteriorates, you will lose money. Either way, your effect on them is non-existent unless you buy the stock directly from them (e.g. in an IPO), or they decide to sell more shares after you’ve made your purchase. Had you simply bought a million dollars worth of books, you would have increased their earnings from $7 million to $8 million and had a huge effect on their business for the year. Investing though, won’t help them a bit. If their earnings falter, you’ll lose your money, but it won’t have done them any good.

Likewise, if you don’t want to support company B which sells oil refinery equipment, you’ll have to find a better way than just not buying their stock. In fact, even selling their stock would do nothing to them in the long run. Suppose Bill Gates, Warren Buffet, the Vatican, Opera Winfrey, and the estate of Colonel Sanders managed to secretly buy all of company B’s stock and then agreed to sell all of it on the open market at a prearranged time.

The stock price would plummet, yes, but company B’s earnings and business prospects would stay the same. Opportunistic people, such as myself, would recognize how under-valued the stock was and buy it at a fraction of its true worth. Very quickly, the stock price would climb back to its actual value, give or take a factor of two, and our sneaky “pentavirate” would have accomplished nothing more than throwing away their own money.

When it comes to ethics and corporations, I have to make rational choices. That doesn’t mean I don’t think the effect of my actions is too small to matter. It just means that making investments based on ethical evaluations of companies doesn’t make much sense. If there’s a company I want to support, I’ll buy its products. If I don’t want to support a company, I won’t buy its products. If it’s a really evil organization, such as the RIAA, I might even try to get others to boycott it or write to my congressional representative. However, barring an IPO or an SPO, I’d buy stock in any of the RIAA’s member companies if I found the valuation attractive. Heck, I might even be able to influence them with the voting privilages that came with the stock…