We’ll just come out and say it…
Selling people addictive products is a profitable business.
Just look at the chart below. The blue line shows the gains of tobacco giant Altria Group (formerly Philip Morris) since 1981. The green line shows the S&P 500 over that span.
As you can see, Altria’s gains crushed the S&P 500—making 8.5 times more money.
That shouldn’t come as a surprise, either.
According to Credit Suisse, the best-performing American industry from 1900–2010 was tobacco.
And among tobacco companies, none have done better than Altria. From 1925–2003, it was the best-performing U.S. stock (that’s according to Wharton School finance professor Jeremy Siegel).
$1 invested in the general market in 1900 (with dividends reinvested) would be worth $38,255 by the end of 2014.
$1 invested in the tobacco industry would have grown to $6.3 million.
At the Daily, our goal is to look for ideas that will make you richer every day.
And so-called “sin stocks” like tobacco companies can do just that.
Companies that sell tobacco, alcohol, gambling, and other addictive products have a track record of beating the market.
In fact, one study found that sin stocks make 2.5% more per year than all other stocks.
We can’t ignore those types of returns.
If you have moral objections about investing in these types of companies, we totally understand. Every investor has to make his or her own decision on what to buy.
But we’re not here to make judgments… We’re here to help you make money.
If you find sin stocks ethically challenging, we’ll have plenty of other ideas that you may find suitable.
But if you want to learn about great companies that provide products that people want—and make big profits by doing it—read on…
What Are Sin Stocks?
Sin stocks are found in industries that are involved in or associated with activities some people may consider immoral or unethical… even though their products or services are perfectly legal.
These industries traditionally have included alcohol, tobacco, gambling, pornography, weapons manufacturers, and the military.
Some of the best-known sin stocks include Altria (tobacco), Anheuser-Busch InBev and Diageo (alcohol), General Dynamics (military weapons), Smith & Wesson (guns), and Caesars Entertainment and Las Vegas Sands (gambling).
Today, some people consider fast food companies (like McDonald’s), snack food and candy companies (like Hershey’s), and soda companies (like Coke) to be sin stocks, too.
These types of companies are widely blamed for the obesity epidemic in the United States because they sell sugary, caffeinated, or processed products that can be addictive or unhealthy.
But all these companies have one thing in common: a simple model to make money.
How Vice Pays
If people become addicted to a product (or service), they’ll be repeat customers. And repeat customers are profitable customers.
(You don’t have to be a “sin” company to get people addicted to your products. Millions of people are addicted to Apple’s iPhones.)
These are great business models from an investing standpoint.
Many studies show that sin stocks outperform the market. The study we mentioned earlier was from The Journal of Financial Economics. It showed sin stocks make 2.5% more per year than all other stocks.
That adds up to a big difference over time…
Let’s say you have $10,000 to invest. If you make 10% per year on that investment, you’ll have about $450,000 in 40 years.
But if you make 12.5% per year on that same $10,000, you’d more than double your returns to over $1.1 million.
A simple way to own sin stocks is to buy the USA Mutuals Vice Fund (VICEX).
This fund only holds stocks in “sin” industries, including tobacco, alcohol, pharmaceuticals (drugs), defense companies, and fast food.
It offers plenty of diversity if you don’t want to select your own sin stocks.
Nick Rokke, CFA
Analyst, The Palm Beach Daily
Big investors are expecting a drop in the market… That means it probably won’t happen.
You can determine investor expectations by following the volatility index (or VIX)—commonly called the fear gauge.
When the VIX rises, that means there’s more uncertainty in the market. (The stock market normally goes down as the VIX rises.)
Some traders like to buy call options when they see the index dropping. That allows them to profit if the VIX rebounds. It’s a good hedge for stock holdings.
One way to track investor expectations is to watch call option trading volume. As you can see below, traders scooped up calls after the market dropped 1.2% on Tuesday.
Here’s the thing…
Investors are hedging their stocks with call options. That means they’re not selling their stocks. So this sell-off will most likely be short-lived.
Don’t let a rise in the fear gauge spook you out of your quality holdings yet.
Two Trends Combine Into One Megatrend: Regular readers know we’re big on the blockchain and virtual reality. Now comes word that a gaming project is bringing these two groundbreaking technologies together.
Decentraland is testing blockchain technology to prove ownership of land. The blockchain acts as a registry of land, with each new transaction block signifying a new plot. If a player mines that block, they get ownership of the land allotment, which can later be traded away to other players of the game. The project plans to include support for VR headsets such as the Oculus Rift. We’ll keep our eyes on this developing story.
Advertising on the Blockchain: Meanwhile, Nasdaq has announced it’s helping to launch a new blockchain-based market for advertising contracts. The New York Interactive Advertising Exchange (NYIAX) says the exchange would provide a transparent means for buyers and sellers to trade digital media. Nasdaq is providing the technology that will power the exchange. While no launch date has been revealed, NYIAX said that it aims to complete a pilot program late this year.
Disguised Larceny: The Dow is still near its all-time high of 21,000 points. And by many measures, U.S. stocks have never been more expensive. Meanwhile, bullish sentiment among investment advisers is at a 30-year high. Consumers are more confident than they’ve been in the last 16 years.
But here’s the thing… Most of the gains from stocks have gone to the insiders on Wall Street and in Silicon Valley. Longtime PBRG friend Bill Bonner explains why these gains didn’t come by honestly…