Home » sin stocks » Sin Stocks Report: Summer Of Sin #10 — Should Investors Be Worried About Sin Stock Risk?

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Sin stock investments have risks associated with them… but does that make them risky? As an investor, you need to look at the rewards of investing in sin stocks versus the risks and decide which outweighs which. To help you, we’re answering the question, “Should investors be worried about sin stock risk?

Should Investors Be Worried About Sin Stock Risk?

While answering the previous question (What are sin stocks risks like?) we identified a handful of the keys risks that sin stock investors face, including (but not limited to) market risk, business risk, political risk, and consumer/trend risk.

Market risk: Market risk is the risk that all investors face simply by investing in publicly traded companies. You can’t diversify against it. The only way to avoid market risk is to not invest at all (but then you are exposing yourself to other risks!) But sin stocks offer a compelling hedge against significant market risk because many sin stocks tend to be affected less by market risk than other stocks. Compare the overall market to a basket of sin stocks during a recession and you’ll see that sin stocks often fall later than other stocks, don’t fall as much, and bounce back sooner. While this isn’t true of every sin stock, it’s been true for average sin stocks.

Business risk: Business risks are a risk but you can diversify against them — either by acquiring other sin stock investments or by investing outside of sin stocks altogether. Fortunately, with the exception of other risks we’re about to discuss, sin stock business risk is relatively minimal because many sin stocks are cash rich and liquid.

Political risk: Political risk is perhaps the most complicated of all the risks when it comes to sin stocks. That’s because it’s possible that politicians will legislate against sin stocks. They may introduce a complete smoking ban or reintroduce Prohibition, for example. However, this is not likely going to happen. Frankly, politicians are stuck in the middle of a rock and a hard place: on the one side is their voting constituency who often love the idea of smoke-free restaurants or healthier options that don’t include alcohol and gambling and the “negative element” it supposedly attracts. However, sin stocks are highly taxed and if there’s one thing a politician can’t get enough of, it’s tax dollars, which are basically the cocaine of politicians. So will politicians do away with sin stocks? In our opinion, they’ll make small token changes (like outlawing smoking in airplanes and restaurants) but they can’t give up those sweet, sweet tax dollars that sin stocks bring in.

Consumer/trend risk: In our opinion, this is the most troubling risk that all sin stocks face — the risk that consumer taste preferences will trend away from sin stocks. This is a possibility, since smoking rates seem to be on the decline. However, smoking won’t likely disappear, and neither will alcohol and gambling. Defense will always need to be around. Marijuana stocks are on the rise. Sex sin stocks aren’t likely to vanish either. And don’t forget this: sin stocks as a category is an informal category and the term “sin stocks” is basically just a label of social taboos. Even in the unlikely event that people stop smoking altogether, there will likely be other new sin stocks that take its place. For example, we often talk about fast food companies or companies that rely on sweatshop labor as the next sin stocks. So consumer risks may diminish what we now know as sin stocks but there will always be sin stocks of some kind!

So, should you be worried about sin stock risk? In our opinion, the risks of sin stocks relative to other stocks makes the sin stock picture even more attractive, since the biggest threats to sin stocks are not really threats at all.

DISCLAIMER

Nothing on this site is a recommendation because, hey, I can't read your mind and I don't know what you have in your portfolio, and I'm not a licensed financial advisor. So never EVER trade without doing your due diligence. If you want more information about this fascinating topic, please check out the Sin Stocks Disclaimer page which basically says the same thing but more emphatically.