Indulge Your Vices
So, my last post on a few contests that I’ve entered got me thinking about my propensity to play games of chance. I wouldn’t say I have a gambling problem, but I do find myself drawn to those games when I have a few extra bucks lying around. We all know that gambling whether it be a buck on the Megamillions or re-mortgaging your house in Atlantic City, rarely ever pays off. But, is there a way we can turn our vices into profit for ourselves? But of course!
Here’s the investment thesis. Vice is fun. We’re all prone to it. Smoking, drinking, gambling, fighting. Yea, they’re not the greatest qualities that mankind has to offer but, as sure as the sun will rise, there will be people indulging themselves in it. Heck, businesses have made a killing exploiting our vices for years. And, as the old saying goes, “If you can’t beat’em, join’em.” So, go out and find those publicly traded companies and buy their stock! Now, you’re the house and the house always wins, right?
Well, the idea of “vice investing” isn’t novel at all. In fact, aerospace/defense, gaming, alcohol, and tobacco have long been considered defensive industries due to their relatively better ability to sustain business in adverse climates. With talk to recession in the air, it would that there isn’t a better time than now to indulge your vices. But, do vice investing strategies work? Well, take a look at this chart.
This is the chart for The Vice Fund, started in September of 2002. In the last five years, it has achieved a Morningstar 5-star rating for both 3 and 5 year periods. It has a Lipper Ranking in the top 10 and top 5 of all “Multi-Cap Core” funds. Since inception, it’s averaging 16% return per year. And, as you can see, it has bested all major market indexes – Dow Jones, NASDAQ, S&P 500, Russell 2000 – over the last 5 years. While the Vice Fund would have more than doubled your money, the best return from a market index would not have been able to double your investment.
This isn’t a big advertisement for The Vice Fund, but more to draw your attention to the benefits of “amoral” investing. It would seem that the Vice Fund is living proof that investing is not necessarily about emotions or ethics, but instead about finding companies which can be profitable day in and day out. And, a company which sells “vice” truly has a captive audience (in this world and the next. Sorry, couldn’t resist the joke.)
Do you have to give your money over to The Vice Fund if you’d like to partake in this strategy? Of course not. Just remember the main sectors a vice strategy participates in – Aerospace/Defense, Gaming, Alcohol, and Tobacco. The fund is surprisingly un-creative in how it goes about its investing. A look at its holdings shows that it owns 38 companies though 96% of assets are tied up in its top 25 holdings. Most are large caps that we’ve all heard of. In Aerospace/Defense, we see Boeing, Lockheed Martin, and General Dynamics. In tobacco, we see Altria, Carolina Group, and British American. In alcohol, Diageo, InBev, and SABMiller. In gaming, you see MGM Mirage, International Game Technologies, and Penn National Gaming.
While you may be unfamiliar with some of these names, just think brands. F-16, F/A-18 Hornets, you name the military aircraft and it probably had Boeing, Lockheed, or General Dynamics involved in its development. Becks, Miller, Smirnoff, Baileys, Johnny Walker, and Tanqueray are made by the three largest alcohol holdings in this fund. If you’ve ever been to a casino or watched a prize fight on TV, you’ve probably heard of MGM Mirage. If you look closely next time your in front of a gaming machine, you’ve probably heard of International Gaming Technologies. And, next time you’re in a drug store, look behind the counter, almost every pack will be made by one of Altria, Carolina, and British Tobacco.
So, if you’re interested in starting a little vice strategy of your own. You don’t need to look far. Just think of how you usually indulge your own vices. Or, ask that uncle that your parents don’t like you talking to. With a long enough investment horizon, your chances of missing are probably slim.
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