Do you remember the question: what do you want to do when you grow up? Did you want to become a policeman, nurse or fireman perhaps? And then, as you grew older, maybe you turned to more mercenary sectors like banking, or legal services?
There are some industries I bet you never aspired to. And it probably came down to the five B’s.
Booze, bets, bombs, butts (American for pornography) and baccy. Alright, some are a bit tenuous as b’s, but you get the idea.
I don’t remember wanting to go into the tobacco business, nor hoping to spend my days at the ‘turf accountants’. But these industries are a part of our social fabric; somebody must be making money out of them.
The so-called ‘vice sector’ provides some excellent investment opportunities and have qualities that can ride out economic storms.
The vice sector
I once wrote a thesis on ethical funds, way back when they were just starting. My conclusion was that most ethical funds are really just about avoiding vice industries. They’re not really about encouraging ethics in business.
So, if some investors avoid vice sectors, then perhaps that leaves some bargains for the rest of us. This is the assertion in Dan Ahrens 2004 book ‘Investing in vice’. Better still, says Ahrens, vice stocks are kind of ‘recession proof’. Even in an abysmal economy, people always stick to their vices...
Please allow me a quick moment to have a moan about the economy (though there’s a good reason for it), then I’ll get back to vice and how you can profit.
We’ll need those vice stocks as we head back into recession
Our new PM, David Cameron and his team are likely to be leading us straight back into recession. As Mervyn King has just announced, they’ve got no choice. They’re going to have to start cutting expenditure immediately.
It’s going to be a hatchet job. You often see it when new management takes over a business. The first thing they do is make the savage cuts and get all the write-downs through the P&L account.
At an early stage all the bad news can be blamed on the ‘last lot’. Whereas starting too timidly and taking the pain later, runs the risk of the blame landing on the new team.
The fact is that the only thing that dragged the economy into growth was the previous government’s profligate spending. And even that only took GDP growth to 0.3%, or so. As government spending gets slashed, I reckon we’ll be heading back into negative figures.
And that means you’re going to need some of those vice stocks...
The best vice sectors
During the dot-com boom, I got lucky. I got in on a stock right at the ground level. It was on an online gaming business, started by a chap who’d sold his chain of 6 betting shops and put it all into his website.
At the top of the market, the shares were up 60 times. I can tell you, you don’t get many of those in a whole life-time of investing! And it’s probably why I still love the stock.
The online gaming industry is a different beast today. It has consolidated into a relatively stable sector, producing consistent revenues and reliable profits.
I’m looking at stocks trading on 10 times earnings that are growing at a rate of 25% a year. They’re paying dividends too!
It’s a bit racy for my colleague David Stevenson, who prefers tobacco. Now there’s an industry that’s certainly consolidated. David likes BATS (British American Tobacco), it’s still only on 12 times earnings and pays out over 5% in dividends.
You may not like it, but you can’t argue with the figures… over the last ten years, they’ve doubled cash-flow, as they tap foreign shores for growth.
Both tobacco and online gaming provide not only ‘vice’ protection, but also protection from a UK downturn. Here you’ll find businesses with global earnings. Whatever’s happening in the UK economy, people all over the world will still be back for their chosen vice.
Another sector that the ‘ethical guys’ don’t much care for is oil. And if the Government’s thinking about making savings, I don’t think too many people are going to complain about cuts in ‘green energy’ subsidies.
Oil is important and it’s here to stay.
My friend Tom Bulford’s getting excited about an oil explorer that’s prospecting in a location that I bet you’d never guess.
I’m going to be drawing up a longer list of vice stocks and I’ll let you in on some ideas soon. But for now I’d better get off to confession to cleanse my soul of all this vice.
Good investing...
Bengt Saelensminde
For The Right Side
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