A Contrarian Way To Invest Like A Catholic

See what I discovered: God made man simple, but they get lost in their many thoughts.—Ecclesiastes 7:29

Just in time for the year-end wrap ups, I saw an article the other day over at Our Sunday Visitor about Investing with a Clear Conscience (and earlier this year over at Crisis Magazine was a similar one called How to Invest Like A Catholic, to which this post was initially addressed). Being a former stock broker, one who let my Series 7 License (and all the rest of my assorted licenses) lapse as soon as I left that field (1995!), Joe Six-Pack, USMC knows a little bit about investing. So reading the articles, to me it sounds more like “How to be neurotic about investing, like a Catholic.”

As if there weren’t enough things to get ulcers about.

Do you want to really add another log onto that fire? I know I don’t. I have enough stuff to worry about already, and my time is at a premium. Besides, here is a nugget of truth by William Bernstein, author of the book you see above:

“There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor – the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”

Truer words about investing could not be written. And on top of that, most folks have little to no control over where to invest for retirement, so these articles demand a rebuttal of sorts. You see, you are held hostage to the menu available by your employer’s retirement plan. That is, if your employer even offers a plan. If they don’t, you’re on your own. And if they do, you have to choose, sometimes from among 300+ funds, none of which are the ones from these articles. What to do?

There is an even more Catholic way to invest, and it’s even simpler than the solution proposed in those forums. Own everything via index funds. Yep, own every single stock and bond (available on the exchanges) in the entire world. Saintly companies and the sinner companies too; both foreign and domestic. Own the whole enchilada. Bonds too. Three funds, and you’re done. Call it an unholy trinity, but it doesn’t get any more Catholic than that. Or call it the Zacchaeus School of Investing approach. Or call it what Bill Schultheis calls it: profound simplicity, which is why this post starts with a passage from my favorite Old Testament book.

It doesn’t get any cheaper either. By cheaper I mean less expensive, which matters a lot to your returns in the long run. How much do costs matter? A whole heap. Because high costs compound like compound interest, only in reverse (on your account balance). I bet you didn’t know that.

Look, I’m not going to bore you to tears with a bunch or reasons why indexing works. The main reasons happen to be low costs, and broad diversification. You can hire mutual fund managers that actively try to beat the returns of the indexes too. And they might even be successful in this pursuit (especially ones that keep their costs low) for a while. But you’ll never identify the winners in advance. And the managers that screen for socially responsible companies? Have you ever heard of survivorship bias? Now you’re making me get boring.

Here’s a quick class for you. The first, and last, thing you need to know about investing in the capital markets is this: you are buying used cars. Better yet, you are buying trading cards. Sure some of them pay you dividends and cool stuff like that, and you never had a baseball card that did that, did you? That’s a neat trick. By now, you may be thinking “Huh?” What’s Frank talking about!

Here’s what I mean. If you invest in the capital markets via mutual funds, exchange-traded funds, or even directly in securities through a brokerage account, you are not providing new investment capital to the companies that you are investing in. Only in an “Initial Public Offering (IPO)” are you given the opportunity to actually provide capital to a firm. No. What you are doing is just buying shares of companies (or their bonds) that were already sold in an IPO many moons ago. Then the value of your investments rise and fall with the general market.

Want to know a little secret? Little guys aren’t invited to invest in IPO’s. Unfair you say? Write your congressman, but it ain’t gonna change anything. Now that you know this fact though, this knowledge should relieve you of the ponderous burden that the Our Sunday Visitor and Crisis Magazine articles were offering you. And it is one almost as burdensome as living under the Mosaic law before the Messiah came. Think about that for a second.

But what of the sinful companies Frank? Like I said, you aren’t providing them capital. Spend the money they earn you (via dividends, capital gains, etc.) in a virtuous way, which is the only thing you can actually control. And what, pray tell, is a sinful company? In the corporate world, companies are legal persons and, ahem, all persons sin. Qoheleth, puts it so:

Wisdom is a better defense for the wise man than would be ten princes in the city, yet there is no man on earth so just as to do good and never sin. —Ecclesiaties 7:12

You could say the same thing about companies. Not a single one of them is pure. If purity is a criteria, then you would need to bury any savings you had in a hole in your backyard. Remember Christ’s parable of the talents? I don’t recommend the “bury it in a hole” strategy.

What else did Christ say about sin?

Do you not realize that everything that goes into a person from outside cannot defile, since it enters not the heart but the stomach and passes out into the latrine?

And,

he who has not sinned, cast the first stone.

Consider this too: most, if not all, of the companies in the major indices employ Catholics in some way, shape, or form. Either as actual laborers or as customers, or as business partners. Do you see the fallacy of screening away companies based on their alleged virtuousness? There ain’t no such animal. Chasing it will lead Catholics to the ghetto, the kind that was in Warsaw.

Consider this teaching from St. Paul,

Eat anything sold in the market, without raising questions on grounds of conscience, for “the earth and its fullness are the Lord’s.”

Otherwise, you would starve buying only what the virtuous farmer produced. Do I need to remind you of the “unclean sheet?” Or that capital markets are, ahem, markets too?

I don’t doubt for a moment that many will disagree with what I am saying in this post. But simplicity in my investing life is more important to me than micromanaging my IRA. Because by owning the whole world I can concentrate on serving God in ways that I couldn’t if I was obsessing about everything under the sun in my retirement account. There would be no time to write posts, or garden, or run errands, or read great books, etc. Or spend in prayer, or in putting a new inner-tube in my daughters bicycle tire, etc.

Obsessing over investment decisions? Phooey on that. I’d rather just go to Mass.

Though I am not a client of this service, much good common sense is provided by Bill Schultheis at The Coffeehouse Investor. Caveat emptor. Also, the books by William Bernstein, and any written by John Bogle, Founder of Vanguard, can help you along here as well.

And that is about all I have to say on this subject, with one exception. Choose an asset allocation of stocks and bonds and stick with it through thick and thin. Don’t compound your sorrows, when the markets go down, by locking in your losses. For short run losses are normal, like the tide ebbing and flowing.

Update: The 35th Anniversary of Indexing.

Disclosure: The author owns shares of Vanguard Mutual Funds, and isn’t giving you investment advice.

  • http://www.blogger.com/profile/13706894435441471620 Devin Rose

    I'll take issue with part of your thesis, though I made peace with this question many years back. You're right that most retirement portfolios at companies limit your choices, and there is nothing you can do other than request different options (which is usually denied, as it was when I requested them), choose one of their offerings (in spite of some companies doing things that are morally wrong), or don't invest in retirement through the company 401k.BUT I have Roth IRAs as well, and I can invest in whatever I like. If I want the least expenses, most profit, I would go with an Index fund as you suggest, but I am willing to sacrifice some profit for the peace of mind of going with a Catholic-conscious fund (I have Ave Maria ones and an Aquinas one). Note that both of those Catholic funds take different approaches to objecting to companies: one blacklists them and the other uses its leverage to try to change policies at companies, with moderate success. For example, they have gotten companies to stop making matching grants to Planned Parenthood.So I did my best on the retirement fund aspect and accepted putting money into generic index funds, but with money I can control, I choose to go with a fund whose managers will follow Catholic teaching. Finally, investing in a company does support that company. You're right that its not the same as going in during the IPO, but even ignoring dividends, it adds demand on the stock which increases its price and the company's market capitalization. Sure, you could argue your $10,000 doesn't affect it much one way or the other, but I think the principle is important.Anyways, my two cents. I'm open to hearing rebuttals.

  • http://www.blogger.com/profile/01819831282677092730 Frank

    I hear ya Devon. Thanks for throwing your two cents in. :)

  • http://www.blogger.com/profile/18314110968832604067 Brandy Miller

    I will add my own 2 cents. When you invest in a company run by people whose focus is on serving the Lord, your money returns more to you than dividends. It returns souls. When you invest in a company run by people whose focus is not on serving the Lord, you may get a greater monetary return on your investment, but at the cost of harming souls. It's true we are all sinners, but investing in someone who is at least making an effort to live the faith is far better than putting your money in the hands of someone who either deliberately seeks to sabotage the work of the Lord or who has no care for Him.

  • Anonymous

    Frank,Thank you for this post! I'm still relatively "new" at investing, although I've been managing my own money for several years. (I say "new" because I don't do it as much as I should.)Your post is rather reassuring on what to invest. My attitude is that just invest in the company anyway if I like the financials, the reports, and the dividends. Sorry, my conscientious won't necessarily be soothed over if I have to eat cat food when I'm old. Call me callous. I am not wealthy by any stretch of the imagination, although I am doing alright, my retirement is not secured. Call me selfish, I'm ok with that. (PS: I still won't shop at WalMart if I don't have to. THAT is how I sooth my conscience. But I don't knock people who do when they can only afford Walmart to feed and clothe their families.)ANYWAY!Secondly, I wanted to ask you, do you ever watch "Mad Money" or listen to Jim Cramer? I think he's a good guy. His show (although I haven't watched in a while) and his books have helped me IMMENSELY in learning how to manage my money and play in a game that is set out against me. I've been able to make money back – even some of the 50%+ I lost back in the crash of 2007. I'm sure you've heard of Cramer and "Cramerica." :)I wanted to make a point to Devin Rose. Devin, your paragraph:"Finally, investing in a company does support that company. You're right that its not the same as going in during the IPO, but even ignoring dividends, it adds demand on the stock which increases its price and the company's market capitalization. Sure, you could argue your $10,000 doesn't affect it much one way or the other, but I think the principle is important."You're really repeating what Frank said: the money you pay for a stock for a company doesn't support the company *directly.* The demand on the stock that is created by purchasing that stock is demand on the *stock* itself. It is not necessarily demand on the company or its products / services. The demand on the stock itself is highly dependant on the demand of the goods and services that company has. If they're not making their numbers, their stock prices fall. So it's "bottom up" really that supports the cost of the stock, not the cost of the stock that supports the company.How a higher stock price DOES support a company is that it allows the company to borrow more money and at a lower interest rate. They can point to the price of their stock as showing that their product/service is valuable in that people *believe* in the company by being willing to purchase the stock.But! That support only comes when, and IF, a company decides to borrow money. Otherwise, all you're really doing is buying "coupons" that has the company name on there. You're not buying that stock directly from the company, you're buying it third, fourth, fifth, party. If you were buying directly from the company (IPO) as Frank explained the money is going into the coffers of the company. Right now, if you buy that stock on the open market you're simply putting that money into some individual investor's coffers.– Jayne

  • http://www.blogger.com/profile/01819831282677092730 Frank

    @Jayne, I don't watch Cramer but I know of him. Regarding the supply demand situation that Devon referred to. He does only see the upside potential demand may have on a company's shares. But , as Jayne mentions, it is a two edged sword. Poor results=no demand=oops.For those who would rather do something else besides worry about all that kind of stuff, The Coffee House rules make more sense to me. Like I said, I'd rather be at Mass, with my family, reading, writing, praying, etc. Your mileage may vary.

  • Anonymous

    Thanks, Frank. :)I came back because I was thinking about "conscience investing." Really, "investing" in the stock market isn't really the way to support companies that can help "bring souls to the Lord." The "investing" is really for the individual. We're not "big money" enough to make just such a difference. You need serious hedge funds for that. :)I am more of a "conscience shopper." If I can avoid it, I don't shop at places like WalMart. I do my best to buy local when possible, and I don't waste food, electricity, water, etc.My suggestions for supporting companies that do God's work are donations to Catholic hospitals, Catholic charities, one's parish (duh! ;) ), St. Vincent De Paul thrift store (you're also doing good for the environment like that by recycling!). Direct purchasing from a specific company helps far more greatly at "bringing souls to the Lord" than investing in the stock market. Because when it comes right down to it, the stock market is really gambling. That's all it is. Gambling that a stock will go up in price in order to sell it at a profit.– Jayne

  • http://www.blogger.com/profile/01819831282677092730 Frank

    I wouldn't say it is gambling either (unless you are investing in options) which is not in the scope of this post (folks retirement savings through employer sponsored plans or their own IRA).However, I agree with you (as I said in the post) Spend…money in a virtuous way, which is the only thing you can control.

  • http://www.blogger.com/profile/01819831282677092730 Frank

    Brandy, thanks for your thoughts. Unfortunately, there is a name for investment companies that follow the criteria you have set. It is a rare earth and it's called "Unobtainium." The earth and its fullness, including the wheat and the tares, is the Lord’s. “The Catholic Ghetto Investment Fund” may sound promising, but it is unobtainable for most of us.

    But that is why I wrote the post. I'll just have to find other ways to return souls to the Lord. :)Look at the holdings the Aquinas funds and see if you see the kinds of companies that you are referring to. I think you are more likely to see the kinds companies that I refer to, since all of them are held in an index fund.Pax Christi

  • http://www.blogger.com/profile/14807873592896092136 Anthony S. Layne

    Thanks for the tip, Frank! I wish I'd known you a couple of years ago; unfortunately, when I left my last job, I had to liquidate my 401k for a little something I call "gas and groceries".The frustrating thing is, I used to work for — er, A Major Home Lender. Not long after they took over my company, their stock plunged down to single digits, then started climbing upward. I had to kick myself for not borrowing against the 401k, buying some stock, then returning it to my retirement fund after it climbed back up to double digits … I could have doubled my money!But the tip is great; I've often wondered whether I'd have done as well putting all the choices on a dart board or through a random generator.

  • http://www.blogger.com/profile/01819831282677092730 Frank

    Tony, Sorry to hear that. Of course, you were saving for future gas and groceries in the first place, and your story again points to the futility of trying to be virtuous with your investments. You could just as easily have been hit by a bus while crossing the street. Either way, it wouldn't have mattered where your money was, so it might as well have been everywhere.Guess who the patron saint of stockbrokers is? Yep, St. Matthew (pray for us).

  • http://www.blogger.com/profile/12178017432399099643 Brian Gagnon

    Hi Frank,I invest using an online brokerage to save money. Would that be included in the definition of investing like a catholic?Brian

  • http://www.blogger.com/profile/01819831282677092730 Frank

    I don't see how it couldn't. :)

  • Sandy

    This was a terrific article. Gorgon Gekko you aren’t, but you have valuable experience that, when combined with Qoheleth and some down to earth thinking, do yield multiple returns.

    I’m not one comfortable with investing, so I think in some ways this post benefitted me. I’ve studied, and studied, and feel like I know less than when I started. I have a financial advisor I trust as much as is possible, and no, when I begged for Google IPO a few years ago she couldn’t get it for me.

    I have a lot of the morality issues when spending money. And yet, like mentioned above, I won’t condemn someone who has to shop at Walmart. Plus, I affect through my donations what benefit my dollars bring.

    I like your approach and may well try it. Thanks for taking the time to write. A lot to think about.

    • Frank Weathers

      Thanks Sandy. Life is too short for the obsessive/compulsive approach. I’m sure the authors of those articles mean well.


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