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Is It Ethical to Invest in Stock Market?

Here is a comment I received on a recent post from a tribeswoman.

Vishal, I have been reading your articles for a while. You come across as an open-minded, sincere and conscientious person. And since you are also spiritually inclined, I have one question for you: Is it ethical to invest in stock markets?

My argument is: The basis of capitalism and the industrial economy are rooted in principles that are often conflicting with all the spiritual ideals that you have presented.

The kind of business monopolies that Buffett and Munger love are often exploitative, psychopathic monsters that intensify the rich-poor gap by creating concentration of wealth.

And how about the harm caused to the ecology because of use-and-throw products, concentration of resources, reckless exploitation of nature and dehumanization of people.

Large corporations are doing to the ecology what the 6 men did to the girl in Delhi. And these are the very corporations that are excellent shareholder wealth creators.

These guys have financial muscle and bargaining power. Does sheer power condone rape, the victims in this case being the environment and tribals? Do you think producing more and consuming more is development?

Secondly, why should investors earn unlimited profits simply because they are providers of capital? How about the other stakeholders in society? How do you think Naxalism was born?

Tell me honestly, are we not simply trying to be opportunistic and vying to grab a share of the profits? Don’t you think we need to rethink our presumptions?

Of course, I am not putting you to test. These questions are not directed at you alone but towards all who care about the world that we live in.

If we cannot honestly think about these things then we are all armchair philosophers, massaging our egos with profound small-talks and grand theories.

Let me take the points one by one.

Point #1: The basis of capitalism and the industrial economy are rooted in principles that are often conflicting with all the spiritual ideals that you have presented.

Before putting down my views on the above comment, I need to clarify that whatever I write below are my personal views and you may/may not agree with the same.

The reason I am clarifying is because both spirituality and capitalism are areas where people have strong views.

My views are just based on my experience as a “spiritual capitalist”.

Anyways, one simple question that I can derive from the initial part of this comment is – Is capitalism a spiritual failure?

In other words, has capitalism led to the death of spirituality?

My answer is – it depends on how you define spirituality.

Let me assure you that I don’t know much about spirituality except that, to me, it means:

  • Belief that there’s a “power” overseeing my well-being
  • Love and caring for my fellow beings (humans, plants, and animals)
  • Integrity with which I conduct my life
  • Meditation that helps me let it all go

Now as far as capitalism is concerned, I don’t know its perfect definition either.

All I know is that capitalism has helped the world in ways like…

  • Better health…via technological advances in health care services
  • Social good…by way of Adam Smith’s “invisible hand” – While it may seem that everyone is selfishly working for their own money, dig a little deeper and it becomes apparent that every job has a benefit for someone else.
  • Equality…everyone has an opportunity to make it big (the basic principle being hard work and patience).
  • Advancement of human race…capitalism causes greed that causes competition that is an essential part of advancing the human race. Though excess greed and competition often damage society, one cannot deny that these have helped mankind move forward at a rapid pace.
  • Freedom…you can choose whatever life you want to live if you have sufficient skills to earn money required to do that.

However, like all good things in life, even capitalism has its sins. In fact, when left uncontrolled (like in the financial markets), capitalism imposes itself on us and we become its slaves and victims.

Uncontrolled capitalism leads to…

  • Unmindful production
  • Unmindful consumption – Interestingly, we consume to forget our worries and our anxieties. Over-consumption as a medicine is dangerous!
  • Corporations focusing only on profits and not wellbeing of society.
  • Destructive behaviour.

So yes, in a way, capitalism has somewhat polluted the spiritual ideals that the world used to live with. But I believe there is still hope to revive the old order. And the hope lies within each of us, as I’ll discuss below.

Point #2: The kind of business monopolies that Buffett and Munger love are often exploitative, psychopathic monsters that intensify the rich-poor gap by creating concentration of wealth.

And how about the harm caused to the ecology because of use-and-throw products, concentration of resources, reckless exploitation of nature and dehumanization of people.

“Exploitative, psychopathic monsters” are strong words!

Anyways, I believe all corporations that are engaged in manufacturing or services have to contribute both positives and negatives to the world.

The positives include creation of jobs, manufacturing things and offering services we need to live our lives.

The negatives include the harm many are causing to natural resources, and the income inequality they create by capitalizing profits and socializing losses.

There’s another category, and a large one at that, which harms the society by wasting precious capital on unprofitable ventures.

While I won’t comment on what Buffett and Munger are doing investing in “exploitative, psychopathic, business monopolies”, one way they ensure that they don’t do much wrong is by buying businesses that don’t waste precious capital and that are managed by honest people.

Plus, they are letting go a large part of their wealth towards solving some of the world’s biggest problems like clean water availability, medical care, and better education for the poor.

In other words, all they are doing are exploiting capitalism for the well-being of the society.

As Buffett often says, “If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”

Here is what he wrote in his 1988 letter to shareholders…

I don’t have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It’s like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GDP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don’t do that though. I don’t use very many of those claim checks. There’s nothing material I want very much. And I’m going to give virtually all of those claim checks to charity when my wife and I die.

In fact, he has often claimed that, in a market economy, the rich earn outsized rewards for their talents…

A market economy creates some lopsided payoffs to participants. The right endowment of vocal chords, anatomical structure, physical strength, or mental powers can produce enormous piles of claim checks (stocks, bonds, and other forms of capital) on future national output. Proper selection of ancestors similarly can result in lifetime supplies of such tickets upon birth.

If zero real investment returns diverted a bit greater portion of the national output from such stockholders to equally worthy and hardworking citizens lacking jackpot-producing talents, it would seem unlikely to pose such an insult to an equitable world as to risk Divine Intervention.

Of course, I don’t see anyone like Buffett in India who has earned it to give it away, I sincerely believe if each one of us can do our bit to live such a life, our purpose of living will be achieved.

Point #3: Large corporations are doing to the ecology what the 6 men did to the girl in Delhi. And these are the very corporations that are excellent shareholder wealth creators.

These guys have financial muscle and bargaining power. Does sheer power condone rape, the victims in this case being the environment and tribals? Do you think producing more and consuming more is development?

Not just large corporations, any corporation where…

  • Top men buy super-expensive private mansions and cars for themselves while half the country lives under open skies and without food
  • Growth is targeted at any cost, even at the cost of destroying precious capital that could’ve otherwise been used for the upliftment of the poor
  • Business provides fuel for corrupting the society’s morals (like liquor, tobacco companies)
  • Actions are taken to serve the interests of private owners without any regard to the society

…is like a parasite on our society, despite whatever goods or services it may be providing for our consumption.

There’s no doubt that companies and consumers must behave responsibly.

Over-production and over-consumptions are ills that we have borrowed from the western world, without taking many positive ideas from them.

Point #4: Why should investors earn unlimited profits simply because they are providers of capital?

Here, we need to understand the ways we earn money.

Since money is a social resource, earning money means acquiring more of that social resource.

Here are a few ways we acquire this social resource…

  1. Sell what we have…or buy, add material value, and sell (like most companies do)…or buy, add value by way of market inefficiencies, then sell (like stocks).
  2. Sell our time…via a job.
  3. Create a system that earns money…such as a business.
  4. Sell money itself…also known as “investing”. Here, investing in a good business is very different from investing in a bad business. One form of investing creates social value; the other steals it.
  5. Steal money…a popular option, but I won’t give it serious consideration here.

If I were to condense these classifications further, I can think of two ways to earn money:

  1. Make a contribution to the society (job, business), and earn money proportionate with the social value of your contribution.
  2. Take advantage of market inefficiencies (investing, gambling) to extract money without making any contribution.

This brings me to the very first question in the above comment.

Is it ethical to invest in stock market? In other words, is it ethical to invest in companies furthering the ills of capitalism?

First, if you are not investing in a company via an IPO, you are not lending it money and thereby not furthering its criminal intentions. So there can’t be a case of ethics here.

Alternately, if you are investing money in a listed company, you are just trying to play on market inefficiencies.

So one way to reframe the above question as – Is taking advantage of market inefficiencies unethical?

One part if my brain says, “Yes! If ethics is defined by your contribution to the society, there isn’t any when you take advantage of market inefficiencies. You are just trying to earn money without doing the hard work.”

The other part of my brain says, “Well, if you can earn it so that you can give it, there’s no harm in taking advantage of market inefficiencies!”

Here, giving it away means not just giving it all to charities or for the well-being of others, but also for the well-being of yourself and your family.

By not being dependent on a bank or anyone else for meeting your life goals, you will be doing a great service to the society. And if market inefficiencies are there to help you in this, don’t shy way.

Take advantage of such efficiencies and secure your future…for only then you can think about the world (this may sound a bit selfish, but that’s the way we humans are wired and there’s no harm in that!)

I’m reminded of a verse from an old Hindi devotional song here – “Doosron ki jai se pahle, khud ko jai karain” (Be able to achieve victory on ourselves prior to victory on others).

But there’s no point in running a rat race just because you want to consume everything you can afford to. So it’s important to have low expectations and then work backwards to achieve them.

Point #5: How about the other stakeholders in society? How do you think Naxalism was born? Tell me honestly, are we not simply trying to be opportunistic and vying to grab a share of the profits? Don’t you think we need to rethink our presumptions?

Of course, we need to rethink our presumptions while investing our money. And the way to act suitably is to avoid investing in companies that are…

  • Socially irresponsible
  • Financially irresponsible
  • Led by selfish, greedy, egomaniac, corrupt CEOs

If companies were left to their own devices then they would inevitably choose to maximize profitability without any accountability to society or the environment.

But companies are run by people and most of them have the ability to act in such a way that situations can be improved instead of degraded.

I would like to believe that by financially supporting companies, it is possible to engage with them and encourage responsible actions. Most are on the whole interested in the views of their shareholders, and if no one speaks up then it could be assumed that no one minds.

So we need to speak up when we must speak up. This is what is in our hands.

We cannot stop people and their companies from being corrupt. All we can do is avoid promoting their cause.

There probably is no such thing as investing ethically or unethically. All we must do is invest with due consideration to the actions of a company, and how it stand up to our own principles and beliefs.

Finally…
I think one simple solution to the conflict between capitalism and spirituality is – each one of us needs to put God back into the right place, within ourselves…like the wave that knows that water is not outside of her.

If we can do this, I sincerely believe, we can live happily right here, right now.

Instead of searching for happiness in over-consumption, if we wake up to the happiness within us, we won’t have to run after the things we believe are crucial to our happiness like fame and power.

If we individually stop creating despair and anger, we make the world healthy again (investing or no investing).

Let’s not look at those who have it all and ask why don’t I have a life like that too, a beautiful house, car and garden…and then abandon our values.

Also, as the author of the above comment writes, let’s not become armchair philosophers, massaging our egos with profound small-talks and grand theories.

Let’s go out and work hard to make this world a far better place than we found it…capitalism or no capitalism…investing or no investing.

Let’s practice “spiritual capitalism”…by living a life of integrity and commitment, and investing in companies that live by integrity, commitment, efficiency, and thus profitability.

What do you say?

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Unethical to invest in stocks??? It like saying

    We vote for a guy/party and he/they does scams and earns unethical (this is small word, theft is correct) money after that & exploite ppl (by demanding bribes). So are we who voted part of that theft & exploitation??????

  2. bro, i sure would like to meet you wen i come down to india. maybe some of what you have might rub off

  3. Vishal, I strongly recommend you read this article by Jared Diamond. It presents a brilliant perspective on human progress and the probable root cause of all our contemporary problems.

  4. Is it ethical to apply for a job? Someone else may need the job more desperately than I do!
    Is it ethical to eat? There are so many who might need more nourishment than I do!
    Psycopathic Monsters – One should read before forming an opinion! Rose Blumkin’s motto of sell cheap remains psychopathic …
    The computers that you and I type on – some Chinese immigrant from the countryside has assembled it working long hours.
    There is no business that earns unlimited profits … at least that I know of …
    Get a job, work hard and forget pondering about existential questions – not many are built for it!

  5. Amit Kinhikar says:

    Hi Vishal, I echo the same, below are some of my thoughts.
    Capitalism and Spirituality are the different side of same coin, in-fact they are not in conflict but in co-operation. In “capitalism profit/proof comes first and then belief”, In “spirituality belief comes first and then the proof”. They both work towards betterment of human being, spirituality corrects distorted human behavior so does the investing, spirituality teaches the values of caring and sharing so does the investing. As charity does not happen from the empty pockets, one needs to make financially strong to change the environment around. Finally ! “the goal of spirituality is to set us free, so does the investing.”

  6. A worthwhile question and an appropriate response.
    In fact it is this very capitalism that is helping us debate this and correspond on machines (network etc etc) which otherwise mat not exist.
    Various forms of ‘systems’ like anarchy, socialism, etc have been tried and as Vishal puts it, have positives and negatives. Man will keep trying to try and get better and better systems.
    So far basis what I have read and understood (with my limited mental faculties) capitalism used properly has been very beneficial to mankind. Look at the last 100 years of progress and the products around us. Today even Sadhu’s cannot do without mobile phones !
    Yes it has its flaws, like any system has, which are nothing but manifestation of the flaws of human nature ‘greed’ ‘anger’ ‘revenge’ ‘lust’ etc etc.

  7. A good question and correct response. Good work Vishal!
    Vishal, I like your phrase, “Spiritual Capitalism”. I too see investing in stocks in the same way.
    I see investing in stocks as: We are investing in businesses –> business use that capital to make things –> people buy things to make their life better –> businesses earn money –> we get some share of it.
    I don’t thing we are being capitalists here. Buying gold is capitalism because that money which is used to buy gold is blocked which is benefiting none but the owner and hence its no good for society.

  8. Let me draw a parallel with Education….

    Just because a student puts more effort and always stands first, will we call it a monopoly and hence want marks to be evenly distributed to all students

    However, having said that there might be some students who cheat and get good marks. But that cannot fault education/school as a concept.

    Good companies are like good students who work hard and create wealth for all stake holders, MOST IMPORTANT CREATE JOBS FOR SOCIETY

    Just because they profit from it there is nothing wrong. Nothing prevents another company from giving a better service and compete

    Why should a innovator not make super normal profit??

    There are acts to prevent undue profiteering from Monopolies.

  9. Ashish Gulati says:

    Hi Vishal,

    Very interesting topic. Don’t want to give a long view on the subject. My two cents:

    While capitalism does have its demerits, it is probably the best option for humanity. Socialism and communism haven’t worked in the past across countries just because they do not create the right incentives for a person to work for self-progress. Capitalism results in innovation and destructive competition. In the end, it’s the survival of the fittest.

    Also, monopolies by itself doesn’t mean that the company will remain at that position forever. I think Charlie once said that of the 30 stocks in Down in 1928, only one exists now (GE). Moreover, many times monopolies arise as a result of great execution and scale advantage. Scale then results in lower costs, which can be passed on to the consumer.

    It might be true that capitalism increases the rich-poor divide. But as you rightly said, the onus is on us (and the ones who profit the most) to ensure that we return back part of what we got. Most people would fight for their rights, but very few (if any) will fight for their responsibilities. Unfortunately, people like Charlie, Buffett and Tatas are exceptions and not the norm.

    Talking about Tatas. A family friend, who is a doctor, told me that whatever cancer treatment exists in India is all thanks to Tata Memorial. Without any exception, all good oncology doctors in India have started from or had a stint in Tata Memorial. Think about the number of lives they have saved. I am one of them and I hope I am able to pay back to the society in some form in the future.

    Finally, the issue is not capitalism, but greed.

    Thnx,
    Ashish

    • “without any exception” – is a very strong phrase. For those of you who don’t know, the Adyar Cancer Institute is as old, as capable, as hallowed, but does the service in a more quiet understated way.
      The issue is not opinion or hearsay but facts!

    • I would like to add something here… While we love to glorify the Tatas for their seeming honesty and integrity, it would be worthwhile to remember that Tatas built their earliest fortunes through illegal opium trade in the 19th century. It was this illegal profiteering from this trade that gave them the real competitive advantage. Check out these two links: here and here.

      Mind you, opium causes cancer.

      I am not rejecting your view. But it is important to consider how many rats the cat has swallowed before going on pilgrimage (popular hindi idiom).

      Take even Buffett for that matter. He pays little heed to the social and environmental consequences of the businesses that he invests in. He has made money on tobacco stocks. During the RJR Nabisco, Inc. hostile takeover fight in 1987, Buffett was quoted as telling John Gutfreund: “I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”

      He has made a fortune out of Coca Cola. Apart from being an extremely unhealthy drink, the company is known for excessive exploitation of natural resources, ground water, pollution, etc. Check one of the many links here.

      Buffett is often full of contradictions. After having called complex financial derivatives financial weapons of mass destruction, he got allured by them. What about his endearing support and big ticket investments in Goldman Sachs, the most unscrupulous bank around?

      We really want to worship these kind of people? It only reflects our own hypocrisy and double standards.

      Vishal, any comments?

      • Thanks for your views, Sachin! It isn’t about worshiping anyone for anything…it’s all about borrowing good ideas from others and apply them to make our lives and this world better.

        And show me a man who isn’t full of contradictions. 🙂

        • Of course, I didn’t mean worship in a literal sense (though Indians in general are easily given to worshiping anyone famous and successful).

          And I totally agree that we are all full of contradictions. My point of contention is this: Why don’t you present him with all his contradictions? You could have said he is brilliant at picking great businesses, , lives a simple life, he is a charming speaker, does big charity also… but hey look… he has his flaws… he makes big statements and contradicts himself… he’s a propagandist… he is a cold-blooded capitalist. Why the hesitation from presenting a more realistic and holistic view of him? Will it endanger your own self-pride and identity?

          When you say, “Plus, they are letting go a large part of their wealth towards solving some of the world’s biggest problems like clean water availability, medical care, and better education for the poor.”

          Let me present a perspective. Do you know Coca Cola has been guilty of depleting ground water levels and pollution in the places where it operates? Do you know in certain rural areas people have been forced to walk miles to fetch water thanks to this beverage manufacturer? Also, is it right to invest in tobacco companies? And then wash off your guilt by donating wealth towards “some of the world’s biggest problems like clean water availability, medical care, and better education for the poor.” Who created these big problems? Create cancer and then donate towards medical care. Ruin ground water and then donate to provide clean water.

          Do you believe it is fine to exploit with one hand and be a benevolent donor with the other? Do the two cancel each other off? If your answer is yes, then would a person be absolved of a rape crime if in another instance he saves a girl from harm? I don’t think you can resort to simple arithmetic in matters of ethics.

          Vishal, please do not take these arguments as personal attacks. I believe a healthy, multi-faceted debate helps us see things with greater objectivity. 🙂

          • Sachin, my numerous losses in stock market have taught me to never take anything to heart, so don’t worry, I am not taking your points as personal attacks.

            Two, my self-pride and identity is not dependent on what I think and write about Buffett (or anyone else), but purely on what I think about myself and how I act in my daily living.

            Three, all I am doing via Safal Niveshak is spread the teachings of Buffett that matter to this tribe. I sincerely believe that we must not try to emulate anyone, but just take the positives from them. So, even as Buffett invests in derivatives himself, I have never promoted this WMD here just because Buffett uses it.

            Four, Buffett has not put down his money in most of these businesses. All he has done is take advantage of market inefficiencies that he was presented with in respect of stocks like Coca Cola. And btw, even while Buffett loves Coke, I hate soft drinks (so I’m not following him even here!) and no one in my family consumes this acidic stuff. And I agree with you that companies like Coca Cola are doing great harm to the society.

            Comparing what Buffett is doing to a rapist takes the argument too far so I won’t comment here.

            Five, at Safal Niveshak, I am not trying to make any personality larger than life (Buffett included). I’m just trying to help my tribesmen think big and think independently by learning some simple rules that have made other “investors” successful.

            Finally, if Buffett is guilty on a big scale of promoting cold-blooded capitalism, each one of us is guilty in our own ways via the “capitalistic products” we consume in our daily lives.

            So as SPV has written above, let’s work hard and forget pondering about existential questions. 🙂

            Thanks anyways for your views. Regards.

            • Thanks for the response. I agree with SPV. We must indeed work hard and forget pondering about existential questions. But I saw a lot of your articles discussing spirituality, ethics, love, kindness and compassion. So I just poured in with my views. Maybe, we should just stick to plain investing, what say? 🙂

              • Thanks for your suggestion! Even I don’t attempt to answer existential questions. All I do when I write on spirituality, ethics, love, kindness and compassion is share my experiences.

                So it’s not preaching that I do. It’s the connections that I create from my heart to my reader’s heart.

                Also, practicing these is what makes me a better human being and thus a better investor, and sharing about these is what helps me connect with the mind and heart within my tribesmen.

                Speaking in Munger-ish sense, these – spirituality, ethics, love, kindness and compassion – are some mental models that act as a latticework on which I hang my experiences. And that’s what I’ll continue to share on Safal Niveshak, for that is what this tribe is all about.

                Plain investing is what one can seek elsewhere. Not here. 🙂

  10. I believe that the stock market was created for the purpose of enabling companies to raise capital. To enable investors become share holders of companies and receive dividends.

    It is utterly wrong to own a stock to turn a profit. I believe, the right purpose to own a stock is for its dividend, not how much you can make profit by trading.

    Dividend investing is the only purpose you need to own, buy and sell stocks.

    By the way, if you focus on dividend stability and dividend growth, the price action will take care of itself. Selling small chunks of your portfolio for your monthly needs in retirement sounds lousy and unsustainable in terms of passing your wealth down the family.

  11. bharat shah says:

    interesting indeed to read the post and comments and replies!

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