Fools know the truth

The ninth of our extracts from Motley Fool, the best-selling investment guide

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This week: the Ethical Fool

The concept of ethics in investing has had much ink spilt over it, with many zealots beating each other around the head with their own moral codes and a number of very bad and high-charging unit trusts springing up to meet the need for people to feel wholesome about their investing endeavours. Our approach is very simple: buy what you are; buy only what you are.

Buying what you are means buying what sits with your beliefs and values. It's the only way to feel comfortable about your investments. No one else can tell you who you are, especially not the manager of an ethical unit trust. When you buy a trust you are consigning the destiny of your money to a stranger.

If you don't like British American Tobacco, don't invest in it. If you think companies that manufacture and export arms are immoral, don't invest in them. But let's take this a stage further. You don't like BAT but you have an insurance policy with Eagle Star. Whoops! Which is going to help BAT more - the shares you hold in the company and on which it pays you a dividend, or the profits it is making out of the insurance policy you hold with its wholly owned subsidiary?

If you are going to avoid investing in the shares of a particular company, make sure you are not helping it by buying its products. Make your investment work in harmony with your consumption.

The active shareholder

Quite apart from the financial reasons not to own more than 10 to 15 companies at a time, there are good reasons from an ethical point of view. Not only can you not follow details of the businesses if you hold more than this, you can't follow their ethical activities either. As an active shareholder in a business, you are well placed to make your views heard. You can attend shareholder meetings, bombard who you like with letters, faxes and e-mails, and generally make a nuisance of yourself - and at all times your views will have to be heard and answered courteously. Working from inside to change the face of the business is likely to be much more effective than standing on the outside knocking on a large, smoked-glass door. Investing like this in a company you largely respect, but which has practices you dislike, can be very positive.

What about the business you view as a shocker? How can you justify making money out of it? One approach is only to invest money in Evil Activities plc which you would otherwise donate to charity. Then, as an active shareholder, you keep up your barrage from the side of morality but channel the profits from the investment into activities that seek to counteract the damage done by your evil company. It's a neat way of changing the world but won't help your investment returns.

One thing to note is that it is worth asking your stockbroker just what shareholder rights you are entitled to if you are holding shares in nominee accounts. (These are used by many execution-only brokers to hold clients' shares communally, thus making dealing easier.) It's no good planning to be an active shareholder if you find you don't have an easily exercisable voting right at meetings.

A useful resource is the Shareholder Action Handbook, which is crammed full of information and published online at http://www.bath.ac.uk/centres/ethical/share/0home.htm. Alternatively you can buy it in paperback (ISBN 1897806000).

Execution-only brokers with a presence on the internet: Torrie & Co, 0131 225 1766, www. torrie.co.uk; Charles Schwab Europe, 0121 200 2242, www. schwab-worldwide.com/europe; ESI, www.esi. co.uk; Infotrade, www.infotrade.co.uk; Xest, www.xest. com; The Share Centre, 0800 800008, www.share.co.uk

Extracted from the 'Motley Fool UK Investment Guide' by David Berger with David and Tom Gardner, published by Boxtree at pounds 12.99. David Berger, David and Tom Gardner 1998. To order a copy with free postage call 0181- 324 5522. Find out more on the internet at www.fool.co.uk

how to open a brokerage account

Shares can only be bought and sold on your behalf by stockbrokers, who charge for the privilege. How much they charge depends primarily on whether they provide an advisory service or are "execution-only" brokers. Advisory brokers advise you what to buy and sell, often with a fairly short time perspective. They are paid commission for each trade - that's how they make money. How they can make more money is by persuading you to trade more frequently. It's against the rules for them to trade on your account simply to make themselves money, but there is a storming conflict of interest here.

Execution-only brokers just act on your instructions. They cost less, and there are plenty of them (see list on the right). All will send out introductory packs. When you find one you like, fill in the forms and send a cheque to open the account (it works like a bank account). When you receive your account number you are ready to trade.