Should morals and money ever mix?
It's a million-dollar question. A collection of mutual funds exist to help people avoid "socially irresponsible" companies. Those frequently excluded? Tobacco companies, casino operators, alcohol distillers, and even gun manufacturers.
A student once asked Warren Buffett what he thought of investing Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) money into industries that are ... well, not so "socially responsible," and the answer may surprise you.
Just one degree of freedom
Buffett and Charlie Munger once thought about buying a chewing-tobacco company. They traveled to Memphis, entertaining the idea along the way.
They never took the deal. Buffett later said the following:
In the end, we decided we didn't want to own it. We would buy stock in a tobacco company, but we didn't want to own it.
This is interesting. Buffett would own shares of a tobacco company, but he wouldn't own all of it. He wants some barrier between Berkshire Hathaway and the company, perhaps for liability reasons, and probably also for insurance on his reputation.
He later added:
A good example is Charlie's favorite company, Costco (NASDAQ:COST). They are the No. 3 distributor in the U.S. of cigarettes, but you wouldn't avoid buying it because of that. You'll drive yourself crazy trying to keep track of these things. [W]e'll buy the stocks without any problems, but we just won't be in certain businesses.
Mixing morals and money will drive you crazy. Buffett's right -- Costco really is the perfect example. Sure, at the time, Costco was one of the largest cigarette distributors in the United States. But Costco isn't exactly a company known for participating in out-of-favor business practices.
In fact, Costco is often held up as one of the most socially responsible businesses on the planet. It offers health care and 401(k) plans to all of its workers. It closes on major national holidays -- including the upcoming Thanksgiving holiday. And its employees earn some of the highest wages in all of retail.
Compared with Wal-Mart, Costco is a saint. But behind all its employee-friendly practices is a less-than-desirable business: cigarette distribution.
Where do you draw the line?
Ultimately, it's difficult to know where moral becomes immoral. Costco takes great care of its employees. Should investors avoid it because it distributes so-called "cancer sticks"?
Is Apple a better company because it sells cell phones, not cigarettes? Well, only if you ignore the fact it contracts its manufacturing to third-world countries, paying wages that don't even come close to the American minimum wage. Working conditions are so poor at its factories that suicides among its workers made news in recent years.
At the end of the day, it's great to think that you can find an investment that is pure. But with the S&P 500's smallest stocks being billion-dollar businesses, you can find something to dislike in just about any public company. Don't drive yourself crazy thinking about it. Buffett doesn't.