To the extent that you can actually remember anything about it, think back to the last bachelor party you went to. Look around the room. OK, peel your brain away from the stripper, and what do you see? Bourbon? Cigarettes? A bunch of guys losing their shirts at a blackjack table? There’s a good chance you and your buddies dropped a lot of cash in a short period of time. Here’s your chance to win it back.
Your loss, of course, is someone else’s gain. So if only you could invest in, say, bourbon, cigarettes, and blackjack, it’d be a good move, right?
A recent academic study suggests the answer is yes.
Now, we’d never, ever, endorse the use of products that destroy your body, especially cigarettes, perhaps the most odious consumer good ever conceived. But we do endorse sound financial health, and even we couldn’t ignore a stunning chart by Credit Suisse comparing stock performance by various industries from 1900 to 2014. For a baseline, know that a dollar invested in the stock market back at the turn of the previous century would have grown to $38,225 by last year. Not bad. But one industry crushed all the others: Big Tobacco.
A dollar invested in smokes then is a whopping $6.2 million today. Why? Well, if a company or industry is popular, then investors will bid up the price of the stock. And the biggest predictor of future returns is current valuation. The lower the value relative to earnings, the higher it can go in the future. So, while popularity pays off for a time, eventually even the hottest companies either disappoint or fanboy investors bid up the price beyond their ability to deliver profits.
Tobacco, however, was viewed with suspicion long before people knew it was deadly. It faced various social stigmas. In 1900, the Supreme Court upheld a Tennessee law banning cigarette sales, citing the suspicion they were laced with drugs; in 1950 three medical studies linked smoking to cancer. So enough investors shunned the stocks for various reasons that they were almost always cheaper than they should have been based on the firms’ earning potential.
And cheap stocks often pay nice dividends. (A stock that pays $1 in dividends each year yields 10% to investors who pay $10 per share. If the shares run up to $20, however, that $1 dividend is just 5% of the share price.) Thanks to their scruples-depressed price, tobacco stocks have traditionally given shareholders generous annual payouts—which, when reinvested, compound returns.
And it’s not just tobacco. It turns out this phenomenon plays out across a whole Vegas-esque portfolio of vice. The authors of the new study, a trio of London Business School professors, found that “sin pays”—basically because these companies, according to the professors, have steady demand from customers all around the world in both good times and bad. They tend to earn high profits and boast what Wall Street calls “high barriers to entry,” meaning, it’s no simple matter to launch a casino or a distillery. And despite all these attractive qualities, enough investors avoid the stocks that their share prices remain attractive.