WSJ recently published an article about how "Sin-Vestors" can reap large excess returns from investing in portfolios of "sin stocks," including tobacco, alcohol, gambling, and defense. They attribute this largely to the negative stigma associated with these companies and assert that this depresses the prices in the short-run, allowing investors who are less concerned with the nature of the stocks to earn long-term gains.
I'd be interested to open a discussion on this and hear everyone's thoughts.
Here is the article: http://www.wsj.com/articles/sin-vestors-can-reap-smoking-hot-returns-14…
The reality of investors trying to play the ethics card with their choice in equities is a futile endeavor, in my opinion. If you own any index funds, or most mutual funds (unless the fund is geared towards "responsible investing") you own "sin stocks". I like Jason Zweig's writing, and this is a good write up. I'm the type of investor that will put my money towards whatever gets me the most alpha, within reason. I'm somewhat of a libertarian and I think that people can make their own choices. It's hard enough to find undervalued securities without having to delve deep and figure out if the companies I'm buying are making people's lives hell. I won't invest in title loan/payday schemes, but that's really about it. Those companies literally move into the poorest parts of the US and take advantage of the financially illiterate. If people want to play some blackjack, it's their prerogative. Same with smoking a cigarette, or drinking some booze. The majority of money made in these industries isn't off of addicts (smokers not included). I wouldn't invest in tobacco simply because teen smoking is way down, and e-cigarette usage is climbing. The reality of it is that if you think that keeping your money out of the game will change things, you're probably wrong. If you don't want to buy those companies to keep a clear conscience, that's perfectly fine and is your business.
Haven't read the article, but that reasoning of why they outperform sounds like BS. MOST of these co's are defensive, staple-like names that tend to hold up better in market down cycles.
I'm not getting it -- say these stocks trade at a discount because people don't want to invest in tobacco companies in the short term. Why do we think that will iron out in the long term? It's one thing if you believe that socially conscious investing is going to drop to zero 12 months from now, but that's not what I'm reading.
Yeah I had that thought as well, but I think the point is that they're fundamentally undervalued due to the behavioral biases that cause less interest in them and that they will eventually straighten out because the fundamental strength of the companies will drive their value in the long-run more than anything else.
Sin stocks perform well because they pay nice dividends and its a row rate environment...
This - and the fact they are nice defensive stocks, which perform well over longer periods of time.
Agree. I think a little bit more interesting question is whether the other side - responsible investing - makes any sense. I tend to think it doesn't make any sense from moral or alpha point of view. But maybe it makes perfect sense for pension funds as a marketing tool. I mean at the end of the day, most huge pension funds just hold everything so if not holding a handful of stocks gets you more AUM..
ESG/Responsible/Morality/Green funds do make sense from an alpha perspective, if your investment timeline is long enough.
the thesis is two-fold: 1. Regulatory pressures will ultimately hurt sin stocks or bring their value to 0 2. Good governance and a future-looking product are good for long-term investments
Pension funds typically have long enough timeline for that investment thesis to be relevant, and, enough capital to impact companies from an activist perspective.
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