FOOL ON THE HILL
An Investment Opinion

When Morals Come to Bear

By Bill Mann (TMF Otter)
September 10, 1999

Over the last decade we have seen a tremendous rise in the concept of moral investing. The gist is that one should not put money into a company providing products or services in which one has some sort of ethical problem. One of the most cited companies is Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %>, the largest producer of tobacco products in the U.S., but other companies in almost any industry can rub SOMEONE the wrong way.

Still, tobacco, alcoholic beverages, oil, insurance companies (providing coverage for services contrary to certain beliefs), adult entertainment -- since Playboy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLA)") else Response.Write("(NYSE: PLA)") end if %> is a publicly traded company -- and military contractors are listed as companies many tend to stay away from. For each person who uses "values based" investing, there is a unique subset of companies to avoid.

There are plenty of sites available on "Values-based investing." One I find quite interesting is located at crosswalk.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMEN)") else Response.Write("(Nasdaq: AMEN)") end if %> -- not that I agree 100% with its definitions.

The choice of people to do this is as individual as it is principled. I have never specifically discounted a company for investment due to my own convictions, but at the same time I have not gone out to actively seek companies in industries I dislike. This embargo may also be seen as a type of self-restriction, but in my mind I place a high regard upon knowing something about the industry and business model of any of my investments. This is a primary tenet of Foolish investing, it just so happens that it suits my moral fiber as well.

But what does one do when a current investment assaults our moral fiber? I am going through this dilemma right now, and I am patently unsure how I will resolve it. So, in the most Foolish of fashions, I am asking you to give me your thoughts.

The story is this: two years ago I began analyzing international telecommunications companies, and found that Telekomunikasi Indonesia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLK)") else Response.Write("(NYSE: TLK)") end if %> had absolutely enormous growth prospects, significant foreign investment, and a privatization plan. Before I completed my research, however, the Asian economic crisis hit, causing Telekom Indonesia's stock to tumble by more than 80% in three months. I finally bought the stock as an arbitrage position in the middle of 1998, convinced of three things:

1. The corrupt Suharto regime was doomed;
2. Telekom Indonesia was priced on the market significantly below its liquidated asset value;
3. Telekom Indonesia was in no danger of losing its monopoly.

So, I bought. I bought the ADR (American Depository Receipt) at $2 3/8. I bought a lot.

Within two months Suharto was gone, Indonesia was in flames, and there was nowhere for the country to go but up. In the intervening time, my investment has fluctuated between 300% and 600% gains. Not half bad, and although it was not the most Foolish investment, it was one that I researched, knew, and accurately predicted the potential return on my investment.

The massacre and terror campaign in East Timor by the Indonesian military has eaten at my conscience and made me wonder if a tiny part of my investment money hasn't helped make others' lives miserable. Do I have a moral responsibility to stand up to the agents of terror?

You see, East Timor is a small Catholic enclave that was forcibly absorbed into Indonesia in 1975 and has been fighting for self-determination ever since. This year the Indonesian government finally relented, giving East Timor the right to a referendum on remaining in Indonesia, or going it alone. Simultaneously, the military set up irregular militias to bully and intimidate pro-independence factions in East Timor. This campaign of fear did not work -- the population overwhelmingly voted for freedom from Indonesia.

These militias responded by systematically killing hundreds of Timorese, forcibly removing more than 200,000 people from their homes, intimidating U.N. workers and foreign correspondents, and destroying anything of value in the region, all with the active participation of the Indonesian military.

Think about that for a second. Many in the United States feel quite threatened when Alan Greenspan raises interest rates. In Indonesia, a federal force is helping slaughter its own citizens for exercising their right to vote, while the central government waffles in response. No political commentary intended here, just an observation.

My dilemma lies in the fact that this same government that is at minimum showing reckless indifference to the well-being of its own citizens is also a 75% owner in Telekom Indonesia. By remaining invested in the stock, am I, in a small way, sending a signal of approval for the actions of this regime? It is a complicated scenario, because Telekom Indonesia is, in many ways a self-standing, private company, but at the same time, as is the case with monopolies in much of the developing world, the government has a big part in the decision-making process. Are Telekom Indonesia dividends paid to the government subsidizing the occupying force? Was Telekom Indonesia complicit in cutting off all forms of communication to and from East Timor? How can an individual investor make a rational, ethical decision based upon partial information?

As an aside, I'd like to make a tip o' the hat of the true b�te noir of my portfolio. According to many news sources, the only communications with East Timor have been via mobile satellite phone. A spokesman from Iridium World Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IRIQE)") else Response.Write("(Nasdaq: IRIQE)") end if %> confirmed that they have received a significant increase in traffic in the East Timor region on their system. Go figure that the company that everyone in the investment world loves to hate may turn out to be a lifesaver in East Timor's time of need.

So, what do I do? I held Telekom Indonesia through the violence of last year because I knew that the turmoil was an unfortunate component of the change a long-suppressed population demanded. But this? Is this government-mandated evil of the same type as the recent events in Kosovo, Rwanda, Iraq or Bosnia? If I believe it is, am I giving tacit approval by leaving my Telekom Indonesia investment in place?

In closing, I'd like to reiterate my request for input from the worldwide Foolish Community. There is no way that I can prove that there is any "bleed through" from the government's stake in Telekom Indonesia to the military's activities, so there is no direct cause and effect. But I know that I would not consider an investment to the benefit of the military regime in Burma, so by what method do I evaluate my holdings in Indonesia? Potential returns, or something higher, more based in my inner values, something money could not replace?

I'm sure that my money would scarcely be missed, just as the investment I will never make in Flip Mo' would hardly budge their market cap at all. But should I be willing to exchange my investment returns for the survival of an East Timorese person? More importantly, would it matter at all?

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