Since January 2006, major indexes like the Dow have gone nowhere. Inflation fears still abound in the U.S. and Europe. And many economists have warned about the property bubble bursting. Some have gone as far as predicting a recession in the U.S.
In such a market environment, an investor should consider owning stocks in the “recession-proof” sectors. One area that is historically very “recession- proof” is that of ‘sin’ or vice. We think it’s worth venturing off the moral high ground every once in a while in the search of good profits... and we’re exploring this now.
Don’t be too alarmed. We’re not about to start suggesting you invest your money in pornography or prostitution – although, in fact, I believe there are actually some listed companies in both of those businesses.
But many Profit Watch readers may be open to the idea of investing on stocks that make money from some of humankind’s other weaknesses.
See what you make of this, and then you decide... Tom Galvin, chief investment officer of Credit Suisse First Boston, commissioned an interesting report in 2001. According to the report, sectors like alcohol, tobacco and gambling rallied during recession times. Particularly during the slumps of 1982 and 1990–1991, Galvin’s research found these vice sectors outperformed.
“The reason we did the Vice Squad report is that there are some sectors that tend to show better business performance during economically weak periods. They are beneficiaries of mere flaws in human character,” explains Galvin.
“It turns out that demand for drinking, smoking and gambling remain pretty steady, and actually increase during economically volatile conditions.”
In fact, investing in vices is such a foolproof strategy that the Vice Fund (VICEX) was established in 2002. This American mutual fund invests in stocks of companies like Altria Group (MO:NYSE, for tobacco), Diageo (DEO:NYSE, alcohol) and International Game Technology (IGT:NYSE, gambling).
The Vice Fund has consistently outperformed the S&P. Now take a look at this table below that compares the S&P 500’s five-year performance with those of the major vice industries:
5-Year Returns From June 30, 1998–June 30, 2003
S&P 500 Gambling Alcohol Tobacco
-14.05% +145.13% +46.02% +56.70%
[Source: “Stocking up on Sin. How to Crush the Market with Vice-Based Investing”, by Caroline Waxler]
While the S&P 500 fell 14.05% between June 1998 and June 2003, gambling, alcohol and tobacco stocks all made investors double-digit profits! And this is typical of the vice industry. It is immune to economic fluctuations. This is because even when the economy is in a downturn, there is constant demand for alcohol, tobacco and gambling.
Perhaps, even, there is even more demand for these vices...
Watch this space...
Yours,
Frank Hemsley
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