We Don’t Confess to Avoiding the Sin Stocks

Our investment style is contrarian. We buy stocks that are out of favour with the expectation that there will be greater pricing upside when the tide turns. However, we won’t just buy anything that’s down in price. Our due diligence process requires a bunch of boxes to be checked before making a purchase. But, even if a stock is out of favour and passes our screening process, there are some industries we avoid for ethical reasons.

The tragic casualties reported this week in the Middle East, following a year-and-a-half of war in Ukraine, clearly required a strong military response. We believe democratic countries need a strong military to defend against tyrants and terrorists. That said, the publicly listed companies that manufacture armament are not the kinds of stocks we look to add to a client portfolio. Profiting financially from war is simply not something we want to do.

Some stocks are more obvious to avoid than others. We would never buy a cigarette company. The growing public campaigns to curtail smoking, not to mention the health consequences to that bad habit, make it a bad business on its own anyways. Gambling stocks that prey on addicts are an automatic “avoid”.

Others are more difficult. Is a retirement home an unethical investment? We know several people, including family members, that quite like the retirement home where they live, in addition to the staff that looks after their needs. There is always the occasional story of a rogue staff member, but what company does not have one of those?

What about pharmaceuticals? Without the dollars to invest in research and development, many life-saving drugs would never have been discovered. On the other hand, the prices that many of its consumers pay is often quite astounding. That one is more difficult.

We have our own code of ethics. Our clients may not agree.

For that reason, we always ask during the account opening process if the client has any companies or sectors that we are restricted from buying (or selling if the client brings in a security from elsewhere). Once that information is collected, we input the restrictions into a “restrictions list” and check that list before executing a block trade purchase.