O.K., so the world is going to hell in a handbasket.
The impending disaster raises a delicate question: Can we make a buck on it? This may be a good time to invest in a well-positioned handbasket maker, preferably one with a strong market position, high margins and the kind of “deep moat” that security analysts love.
Dark thoughts like this come when I wander from the Hallmark Channel. It’s also when I wonder, “If this is the way it is, how do we make the best of it?”
Having a bit of noir-vision isn’t entirely bad. For one thing, there is no evidence to support the idea that investing in goodness produces morally superior or profitable results. Indeed, in his book “Investing in Vice: The Recession Proof Portfolio of Booze, Bets, Bombs and Butts” (St. Martin’s Press, 2004) Vice Fund (ticker: VICEX) former fund manager Dan Ahrens points out that the long established Domini Social Equity fund (ticker: DSEFX) trailed the S&P 500 index in the five years ending just before his book was published. One reason, he suggests, is that Domini, the Goody Two-Shoes of mutual funds, was over-invested in technology stocks and light on “sin” stocks like tobacco, liquor and gaming.
That wasn’t a fluke. Since then, two academic studies and another book (“Stocking up on Sin: How to Crush the Market with Vice-Based Investing,” by Caroline Waxler) pursue the same idea. More important, the underperformance of goodness has continued. At the end of 2010, the Vanguard 500 Index fund had provided a five-year annualized return of 2.2 percent while the Domini Social Equity fund had returned only 1.8 percent.
Ahrens, with some ambivalence, also includes the defense industry in his sin stocks, noting that many of the socially responsible investors think defense and guns are bad. His position is that while war and violence are deplorable, they are historical constants— along with drinking, gambling, and smoking. Personally, I have trouble including guns and defense in the sin category, particularly after visiting the civilian armory named Cabela’s or watching cannons firing on Texas Independence Day.
But when it comes to drinking and smoking, the sin investing boosters may be on to something. Any Solvent Senior who smokes, for instance, might consider investing in shares of Altria (ticker: MO), the big dog of tobacco. Over the last 3 and 5 year periods the shares have produced annualized returns of 7 percent and 11.8 percent, respectively. With returns like that you could afford to live well over your admittedly shorter life.
Actually, why limit tobacco shares to Solvent Seniors who smoke? At this point a non-smoker should have no qualms about investing in tobacco. We’ve been pretty sure that smoking is a major cause of cancer and heart disease for half a century. No one can say smokers haven’t been warned. Today, state governments bet their budgets on human vices, knowing that tobacco taxes and lottery proceeds are a reliable source of revenue.
If smoking is a gravy train for state governments, it can be one for investors, too. The same Solvent Senior would also get a current dividend yield of 6.2 percent from shares of MO. That’s more than twelve times higher than the income from the average 1 year bank CD. You could even argue that owning shares of Altria and other major cigarette companies was your way of doing an end run on the Federal Reserve policy of punishing people who actually save money.
Take that, Mr. Ben!
Then there is alcohol. Just as tobacco stocks have done better than the S&P 500 over the last 3 and 5 years, so have the brewing and distilling stocks, according to Morningstar figures. The global top gun in brewing is the new combination of Budweiser and InBev, Anheuser Busch InBev SA. Their American Depository Receipt shares have the ticker BUD. Much the same can be said of the major wine and distilling companies such as Diageo PLC (ticker: DEO).
Most analysts think of the tobacco and beverage stocks as “defensive” investments— so if you’re starting to feel the foundations of recovery, world sanity, and everything else shake, just remember— a lot of things go away in hard times, but beer isn’t one of them.
On the web:
The Vice Fund: http://www.usamutuals.com/vicefund/abt.aspx
Cabela’s shooting page: http://www.cabelas.com/catalog/browse/_/N-1100187?WTz_l=SBC
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
(c) A. M. Universal, 2011