I want to start with the case of a true company. The company is called High Class New York, and this company you could call if you wanted a model, who would show up at your hotel room to celebrate an occasion.
Well, not surprisingly, this was actually a cover for a prostitution ring. This company, High Class New York, was actually sending prostitutes to very wealthy, elite, New York businessmen who would pay often $10,000 a night.
Ultimately, in the summer of 2011, this ring was busted by the authorities. Shown on the screen are the 17 people who were indicted. You’ll see that the first group of people who are indicted were the owners. The next group of people who were indicted were the managers and operators, people who were doing the day-to-day business.
But you can see there’s two individuals who don’t have a label on their faces. These two individuals are investors. High Class New York was funded by two investors, Efim Gorelik, and Yakov Maystrovich, who each put in $700,000 of their own capital, and were being paid with interest. Both of them were indicted alongside the owners and operators.
In the government’s eyes, the investors were as culpable as the owners and operators, which raises a very interesting ethical and philosophical question, “is it legitimate – was it legitimate – for the government to indict these men alongside the owners and operators, given that they were simply passive investors?”
With that backdrop, let’s consider the following company, another true story, another real company. This company is in the S&P 500, and therefore many people own this company through mutual funds, and through ETFs. The company sells over $25 billion annually in cigarettes. It pays a very juicy 5.1% dividend each year. While this company is perfectly legal, is it legitimate for us to invest in such a company, and reap such profits? I hope that you can see the parallel between this company and the previous company. Although this one is legally operated, it may conflict with our values, and it certainly may conflict with our values, particularly if you have a faith-based perspective, and you have objections to this kind of a product that is fundamentally about slavery, and medical harm, and bondage, and addiction.
This takes us back to a very fundamental question that we need to have clear in our mind. The question is simply, what is the true purpose of investing? The true purpose of investing is very simple. It is to supply capital to business. We don’t need to overthink this. In exchange for that investment, the investor receives ownership in that company, some percentage of ownership in that company, as well as rights to any profits and growth. But as we saw in the first example of High Class New York, and we would make the case in the second example as well, that ownership confers to the investor ethical responsibility for the activities of the company.