Booze? “Never drink the stuff”
Smokes? “Well I shouldn’t”
Gambling? “Not me!”
We might tell people that we are fine upstanding citizens but let’s be honest… Deep inside our closets are a skeleton or three (right next to the casino winnings and the moonshine still and the smoking gun).
While we might never admit to our friends, neighbors, or even our family that we love sin stocks, there are several good reasons why some of these fiendish equities might be worth including in your portfolio.
Below is a list of the 10 big reasons that we love sin stocks here at Sin Stocks Report. Full disclosure: I got bored of writing after reason #7. If you get that far, I’ll be impressed. why not read the first couple then just skim the rest of the article. You know you want to. Sloth is a sin.
1. Sin stock companies are insulated from competition
When I look for a stock to buy, I like looking for a company that is insulated from competition. And many sin stocks fit the bill. After all, it’s not easy to go out and start a casino or a distillery or a tobacco company or a gun manufacturer. (Well, my grandfather had a still and it seemed pretty easy for him… but there’s always an exception to the rule).
And even if you do start one, it’s not easy to be a threat against the likes of Wynn Casinos WYNN, Anheuser-Busch Inbev (BUD), or Altria (MO) without a ton of cash and a crazy-disruptive marketing plan. Heck, it probably wasn’t that easy to compete against my bootlegging grandfather!
Not every company fits the bill (sex sin stocks — like a chain of strip clubs — are a little easier to start up but I don’t think saturation is a problem in that market).
2. Sin stock companies are insulated from government interference… because of the government!
I’m going to get some push back from some people on this one but I think sin stocks are safe from government interference. For several reasons:
- Governments rely on some sin stocks to provide them with services: Crime sin stock companies provide prison security; conflict sin stock companies provide weapons to military and police services, and provide para-military services.
- Governments rely on tax revenues earned from sin stocks. Sin stocks are cash-generators and some sin stock products are more heavily taxed than others (cigarettes and alcohol being the two obvious ones), bringing in higher tax revenues that would be missed if they were gone.
- Governments love the jobs these companies provide. (Vegas and Atlantic City would both be HUGE crap holes without casinos. Airlines and hotels would not enjoy the spin-off benefits of servicing these locations.)
- Politicians love having a foil. Okay, this one is going to seem crazy to you but I’m not joking: Politicians need a foil — a thing they can rally against (Batman had Joker; Superman had Lex Luther) and sin stock companies provide an easy foil that politicians can do something about… without doing a lot about. So they end up making meaningless laws about how much of a tobacco company’s packaging needs to include a health warning (even though it hasn’t deterred smoking).
- Governments have proven in the past that they can’t regulate a sin away. Hello: Prohibition!!! Prohibition famously didn’t stop the booze from flowing, it just robbed the government of their ability to collect taxes on it. I doubt we will see this kind of thing happen again to the scale that we saw it at.
3. Sin stock companies produce highly desired products
People love the products produced by many sin stock companies. Cigarettes, cigars, beer, spirits, wine, gambling, nudity, guns…
People love this stuff (even when we don’t want to admit it) because these things tickle our basic human desires and needs and drives. They flood our brain with endorphins. And, many of these products not only directly help us to feel better but many of them also provide a sense of community. Watch a group of smokers, or a bunch of people in a cigar bar, or gun lovers. Individuals gain a greater sense of community by buying these products.
So, sin stock companies make products that tick many of the boxes on Maslow’s Hierarchy of Need.
Just ask Don Draper himself which products are the easiest to sell — the products that people want. People will make a special trip out of their house and spend their limited funds to buy this stuff, even forgoing other things that might actually be better for them.
Not only that…
4. Sin stock companies produce products that people need to buy over and over and over
These sin stock products are evergreen. You don’t buy one pack of cigarettes. You don’t go to Vegas and gamble ten bucks then call it quits. You don’t buy a gun and only shoot one bullet.
Every purchase comes with a sort-of expiration date in which the cigarettes are smoked or the whiskey is consumed or the slot machines are hungry for coins again or whatever. These products aren’t bought once and used repeatedly, they are consumed and need to be replenished.
For companies, products that are consumed are the awesomest products to make. For investors, companies that make products that are consumed are the awesomest companies to invest in. Just ask… oh… Warren Buffett. That dude knows consumables.
5. Sin stock companies are entrenched
Sin stock companies are entrenched:
- Sin stock companies that cater to consumers have customers who are very, very loyal to a brand. Marlboro smokers are always Marlboro smokers. And, they buy out of habit, turning the transaction into an unconscious event.
- Sin stock companies that cater to governments are locked into long-term contracts.
When your product or service is a habit (either because it’s an unconscious purchase by a consumer or a long-term contract with the government), sales aren’t likely going to change.
6. Sin stock products are desired by new markets
When you were a teenager, you looked forward to your 21st birthday when you could legally buy booze. (And if you could buy it illegally before that, perhaps by getting your friend’s older brother to buy it for you, even though he charged you a usurious fee to do so then you were a magnet for new booze-thirsty friends). I’m hypothesizing on that one.
You weren’t alone. Each year, all around the world, millions of teenagers view a variety of these sin stock products as a rite of passage — alcohol, tobacco, gambling, and sex stocks benefit by these constant influx of new consumers who are eager to prove that they are all grown up and who use the world’s cheapest box of wine and rankest cigars to prove it.
And it’s not just the consumers that are aging in to become a new market. There are geographic markets that are doing the equivalent: Emerging markets are becoming flush with cash and they desire a western lifestyle (or, how they perceive a western lifestyle to be lived — which oddly enough includes copious amounts of sin product consumption). These drive alcohol, tobacco, and gambling stocks. (I haven’t seen it drive sex sin stocks yet).
7. People buy sin stock products even when the economy is rough
Did people stop smoking when the economy fell apart?
Did people stop drinking when the economy fell apart?
Did people stop gambling when the economy fell apart?
Did people stop buying guns when the economy fell apart?
Did people stop going to strip clubs when the economy fell apart?
No. Some of these took a hit (I think the overall gambling industry took a beating very early on but sprung back). Others weren’t affected at all. I haven’t seen numbers to verify this but I have my doubts that people stopped smoking because of the recession. Gun ownership has surged (for a variety of reasons).
I’m getting tired of writing and you’re getting tired of reading
… so how about I just wrap this article up?
Many sin stocks provide a dividend, which is nice, although those dividends do vary. And their dividend might not be as high as some of the energy companies out there but it’s there. Nice and consistent. And if I were investing for dividends, I’d rather have a lower dividend on a company that is likely to be around than a high dividend on a speculative company that probably won’t last the day and will be lucky to find oil in a McDonald’s hamburger.
I’m not going to play the game of “if you invested $X in 1975, your stock would be worth enough to buy the moon today”. That’s not a good measure of ROI in my opinion because we get in and out of stocks all the time and we didn’t invest a bunch of exact amounts back when dad had a mustache and drove a car that was 25 feet long. But if you look at sin stock charts, they generally go in the right direction — up. And even when the world ended in 2008, many sin stocks lost out substantially but they continued chugging along and most have regained and even surpassed where they were.
10. There will always be sin so there will always be sin stocks
I’ve listed a bunch of reasons here. As soon as I click “publish” I’ll think of a bunch more. But here’s the last one I’m going to mention: There will always be “sin”. Those sins might change. (Fast food is becoming a sin stock… slowly). But people won’t stop buying these products so investors need to consider how sin stocks fit into their portfolio and continue to pay attention not only to the markets but to social trends to stay on top of the shifting definition of sins and sin stocks.