Monday, August 17, 2009

Can a Good Catholic Be Wealthy? Part IV of IV - Stocks vs. Mutual Funds

This is the last post of the 4-part series of "Can a Good Catholic Be Wealthy?" I hope by this time, I have convinced you that it is morally acceptable for a Catholic to be wealthy. Although in theory, this is not difficult to accept, there seems to be an unwritten rule against anyone making lots of money in a short span of time without actually working for it. I believe this thinking, at least in part, has stemmed from our understanding of the original curse, "Cursed be the ground because of you! In toil shall you eat its yield all the days of your life...By the sweat of your face shall you get bread to eat" (Gen 3:17, 19).

The perfect example of such a way of earning income is, of course, gambling. No work is involved in gambling (unless you're counting cards in Blackjack!). Any earnings or losses result purely from chance. Especially in fundamentalist circles, gambling is considered a sin. What does the Catholic Church say about gambling? We don't need to look far...the Catechism of the Catholic Church (CCC) paragraph 2413 states:
Games of chance (card games, etc.) or wagers are not in themselves contrary to justice. They become morally unacceptable when they deprive someone of what is necessary to provide for his needs and those of others. The passion for gambling risks becoming an enslavement. Unfair wagers and cheating at games constitute grave matter, unless the damage inflicted is so slight that the one who suffers it cannot reasonably consider it significant.
Therefore, the Church has exonerated gambling! Next time you win a few bucks at the casino, you don't have to lie about it to your friends at church. The caveat is that the likelihood of gambling leading to sin cannot be underestimated. It can lure us into various sins including several of the 7 deadly sins: greed, wrath, envy, lust and even pride.

Using your imagination, you can visualize someone who has fallen or is on the verge of falling into sin because of gambling. He would have brought much of his family's savings to the casino and lost it all, getting involved with loan sharks, lying to his wife, etc. etc. Much of this type of visualization can be transferred to someone in the stock market. It's the year 1999 and our imaginary "investor" friend has witnessed his co-workers make a killing buying stocks like Cisco and Nortel Networks. He soon sells all of his bonds and mutual funds and buys the above mentioned stocks. At first, he sees his investment grow by 20% in a couple of months. Then, towards the end of the year 2000, his stocks begin to sink. Thinking that they would bounce back, he takes a line of credit and "averages down", buying more. A few months later, the stocks continue to drop. This time, he re-mortgages his house and averages down even more. By the time the summer of 2002 comes around, he has lost more than 80% of his original investment and is in a ton of debt. There is very little doubt that investing in stocks has led him to sin. He has put his own well being along with his family's into jeopardy.

This type of "investor" is among many who give true investors a bad rep. They are the ones who create a bad aura around stock investing. Thus, responsible investing, for many people (including Catholics), exclude buying individual stocks because the losses can be so great. Mutual funds have emerged to be the vehicle of choice for many. Because they invest in many stocks, chances of losing 80% of the original investment is very slim. To any responsible person, mutual funds are the way to go. It must be a way to go for Catholics as well, is it not? I will go to argue that it is not for several reasons.

Why Investing in Stocks is Superior to Investing in Mutual Funds in Every Way
  1. Ethical Investing - If you own a mutual fund, can you tell me what are its top 10 holdings? No? What about its top 5 holdings? Still no? What about its top holding? Well, then you're in serious trouble, my friend! As this blog will explore more down the road, ethical investing is a big part of Catholic investing! We are morally obligated to invest in companies that do not act contrary to the laws of God. For example, did you know that Merck produces vaccines made in part from aborted fetal tissue? If the mutual fund that you bought owns Merck, you are indirectly putting your money in a company that may be acting contrary to your conscience. If you want to invest ethically in a mutual fund, you should keep up to date with the hundreds of companies that it owns and ensure that each and every company are acting in at least ethically neutral ways. On the other hand, it would be much easier to do research on just a few companies.
  2. Mutual funds are not immune to market downturns - as most mutual fund investors just found out the hard way in 2008-2009, mutual funds can drop by as much as 50% in a bear market. If you think by buying mutual funds, you're reducing your risk, you may want to do some rethinking. Mutual funds simply own multiple stocks and if those stocks drop by 50%, there is nothing preventing the fund from dropping by that much as well. Your best bet against this drop is to spend some time doing your homework and buy rock solid stocks (or even liquidate in a bear market).
  3. Mutual funds really don't do that great - it's simple math. By investing in many stocks, a mutual will achieve the average of the returns of all of the stocks. Even if the fund manager has a few awesome picks, those great returns will always be dampened by the underperforming stocks. Why would you want to get an average return anyway? If you look at the S&P 500 index, from August 1999 to August 2009, the return was -22%. Say what? Yes, you would have lost 22% if you bought a S&P 500 index fund 10 years ago. That is the reality of the market average. On the other hand, if you had bought and held Apple (Ticker: AAPL) for the same period, you would have made more than 800%. How difficult was that? Not very!
Going back to the beginning, God did not intend for us to have to toil to make a living. So, why would it be contrary to His will to invest in stocks to earn good returns, as long as we invest in ethical companies and in responsible ways? In future posts, we shall explore together these various aspects of investing. Of course, we'll learn how to make some good money in the market as well!