The Blue Way
By Daniel De Faro Adamson and Joe Andrew
(Simon & Schuster, 246 pages, $26)

Ever since the Puritans landed at Plymouth Rock, Americans have felt the need to prove that material fortune is endorsed from above. Prosperity, according to the early Calvinists, is the sign of a reverential spirit. If God smiles on industrious workers, then great wealth testifies to a divine soul.

The modern Republican Party has carried on in this vein; indeed, contemporary conservatism can be construed as an apologia for the rich. Profit is the market's verdict, and markets, as we know, are close to God.

The liberal response has been to flip the equation. Instead of declaiming that profit is good, liberals aver that doing good will lead to profit. As with eating spinach, doing the right thing (in this case, paying generous wages and providing comprehensive employee benefits, protecting the environment, and refraining from exploiting foreign trabajadores) brings its own rewards.

During the past generation, a passel of "socially responsible" mutual funds have sprung up to test this proposition. These funds do not invest in Exxon, Wal-Mart, or tobacco companies, having instead committed to buying shares of green firms such as Microsoft and Starbucks (but please don't mention possible health problems stemming from caffeine). The funds' results have been mediocre. Socially responsible funds do no better or worse than any others. This is altogether logical; we don't expect baseball players who are also vegetarians or who play the guitar to be better or worse than the average. However, Daniel de Faro Adamson and Joe Andrew, authors of The Blue Way, say this logic is dead wrong. According to their book, the subtitle of which is How to Profit by Investing in a Better World, the stocks of virtuous companies perform much better than other companies' stocks.

In the past, the authors maintain, investors did not know how to pick truly good (that is, moral) companies, but it turns out that it's beguilingly simple: Shares of companies whose managers lean Democratic have far outperformed the shares of companies with G.O.P.-leaning managers. Starbucks has beaten Exxon. Apple has trumped Dell. Forest Laboratories has run laps around Pfizer. You get the picture.

Adamson and Andrew, who are passionate Democrats, take their party's moral superiority as a given. (The second half of the book, oddly unrelated to the first, is a call to arms for retaking the White House that they have named "The Blue Manifesto.") That Democratic-leaning companies purportedly outperformed their competition is offered as proof that morality pays—that progressive values are better "not only for employees, the environment, and our country but for investors and for a company's financial bottom line."

The evidence for this statement, and really for the book's entire argument, comes from the authors' unique analysis of how stocks in Standard & Poor's 500-stock index performed. Previous devotees of socially responsible investing distinguished corporations on the basis of their behavior—whether or not they were eco-conscious, cooperative with unions, and so forth. But Adamson and Andrew also focus on the political contributions of executives and corporate PACs. They separate companies according to which party received the majority of the company's dollars, which yields 80 Democratic-leaning firms from the S&P 500.

They further prune their list of companies whose unsaintly deeds violate progressive values, leaving a "blue index" of 76 firms. The performance—at least the performance they report—was phenomenal. A hundred dollars invested in the blue index on May 30, 1997, would have grown in 10 years to $1,963, nearly a twentyfold gain. By comparison, the same amount invested in stocks of Republican-leaning firms over the same period would have yielded only $322.

What's more, Adamson and Andrew assert, investing in blue stocks will improve the world. But this seems far-fetched. When you invest in Microsoft, the money does not go directly to Bill Gates' political causes, nor does an investment in Dell find its way to Karl Rove. (For another perspective on socially responsible investing, see "No Obligations," by Robert B. Reich.) Moreover, the dollars involved are trivial: Political contributions from S&P 500 corporations have averaged less than $1 million per company over the past decade. The donations seem too small to encourage any meaningful and lasting shifts in government policy.

If giving to Democrats can't be expected to inflate stock prices directly, perhaps it can be considered a marker for other traits that lead to better corporate performance. The Blue Way argues that Democratic-leaning companies are more innovative, less rigid, and less apt to take a head-in-the-sand, defensive posture on such issues as environmental rules.

No doubt blue companies are hipper, but hipness does not necessarily spell profitability. And it strains credulity to believe that companies inherently become more virtuous when their executives steer, say, 60 percent of their political contributions to Democrats. Whatever the sins of the G.O.P., the Democratic Party is hardly simon-pure.

Rather than liberal politics yielding prosperous firms, it's more plausible that new, profitable industries happen to be peopled by liberals, who naturally then donate to Democratic causes. In other words, the authors have the causality reversed. Thus Google's cushy employee benefits are not the reason its stock has soared; its search engine is. Indeed, if ample employee benefits were their own reward, wouldn't General Motors be a hot company instead of one on the verge of going broke?

Another explanation for the blue index's performance is that it's not really as good as the authors report. The Blue Way does not divulge the authors' calculations, and it names only two stocks that saw a twentyfold increase. When queried about this, the authors replied, "While few of the blue stocks actually grew 20 times in value, it was their cumulative rates of growth that allowed the price of the blue index to rise as much as it did." This is nonsense. No index can rise more than its constituent parts, which leaves me with real questions about their numbers. And what of their overall investment thesis?

Go back to the baseball analogy, and suppose for a second you had to field that all-vegetarian team. Since some carnivores are good hitters, you would labor under a big disadvantage. The same holds true for stocks. When you screen for any trait that's irrelevant to a company's financial fundamentals—like its political leanings—expect to pay a hefty price.