A Perfect Industry to Avoid
There are many types of socially responsible investing strategies, but one involves avoidance of all stocks in specific industries. Traditionally, these have been weapons, tobacco, alcohol, and pornography manufacturers. Today, though, the financial industry continues to be a good candidate for the AVOID list.
Immediately after the financial crisis, it was clear that financiers had recklessly gambled with America's economic health. Given the fact that banking touches just about all of us in some way, the negative ramifications of bankers' risky behavior certainly gave a legitimate argument as to how banking shenanigans could pretty much outdo bazookas in the casualty department.
Our leaders claimed that, without a publicly-funded bailout, the world economy could grind to a halt -- in other words, it was the financial equivalent of a nuclear bomb.
Berkshire Hathaway's Warren Buffett dubbed the derivatives that bankers had abused as "financial weapons of mass destruction" that could bust the entire economy in one of his letters to shareholders years before the financial crisis hit . (Ironically, Berkshire Hathaway has booked some paper losses on its own derivatives bets in recent quarters .)
Socially responsible fund Appleseed Fund was the first to make the case for avoiding too-big-to-fail banks due to their antisocial behavior. Over the years, I've continued to believe that individual investors -- particularly socially responsible ones -- should avoid banks. Ruthless recklessness, lack of humility, lack of transparency, and signs that few, if any, lessons were learned from the financial crisis, have completely soured me to the idea of investing in such stocks.
Meanwhile, here's another reason not to invest: It's an industry that's abused and angered its own customers so much that it's ripe for disruption, and there are signs it's already happening.
2012: Another irresponsible year in banking
Maybe this sounds like a fringe opinion to some investors, but the case is building for avoiding financial stocks regardless of whether one is a proponent of socially responsible investing or not.
JPMorganChase's "London Whale" trading loss controversy gave the distinct (and distinctly uncomfortable) impression that, even though CEO Jamie Dimon has often been lauded as the best leader in the sector, even he didn't have a proper grasp on what was going on at his own company. His once stellar reputation has taken a real tarnishing from the "London Whale" incident.
Come to think of it, 2012 was riddled with financial company controversies. For example, the Libor scandal reared its ugly head last year. UBS agreed to pay $1.9 billion to the U.S., the United Kingdom, and Switzerland in late December , opening up the possibilities other banks will be implicated as regulators investigate for collusion.
And let's not forget HSBC's $1.9 billion settlement to the U.S., which was related to accusations that it had conducted money laundering for Mexican drug dealers, as well as doing business with suspicious customers in Cuba and Saudi Arabia .
Just recently, Frank Partnoy and Jesse Eisinger provided an in-depth analysis in The Atlantic that's a must-read for financial stocks' would-be investors. "Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash," the authors wrote .
Their research focused on Wells Fargo's financial statements, which led them to the conclusion that, when this supposedly conservatively-managed bank is held up to scrutiny, it's actually terribly difficult to understand. The company's financials are full of meaningless or cryptic jargon and significant footnotes that nobody seemed to catch more than 100 pages into its annual report, for example.
The upshot of the article is actually one that individual investors should take very seriously, because it has to do with supposedly highly-sophisticated investors: "More and more, people in the know don't trust big banks either ."
Boot the bank stocks
Perhaps many investors have become lulled into a false sense of security in the years after the financial crisis, even though there's still plenty that's not even fixed since that time. Maybe it's been just enough time for a lot of people to forget.
Socially responsible investors -- and really, investors of all persuasions -- would do well to simply avoid investing in stocks in this shady, difficult to understand, and potentially highly destructive industry. Not only have the industry's actions often been reprehensible, the risk never really went away.
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The article A Perfect Industry to Avoid originally appeared on Fool.com.Alyce Lomax has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo & Company. The Motley Fool owns shares of JPMorgan Chase & Co. and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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