Investing: The virtues of vice

When storm clouds gather over the economy, people often seek shelter in a glass of whiskey, a pack of cigarettes, or the green baize of a roulette table, said Thomas M. Anderson in Kiplinger’s Personal Finance. That’s why many financial advisors are telling clients to invest in sin as a bulwark against a possible recession. “Sin stocks”—shares of tobacco, alcohol, and gambling companies—have historically held up well during economic downturns. During the recession of 2000–02, the Standard & Poor’s Casinos and Gaming Index gained 115 percent, while the broader S&P 500 fell 47 percent. As that comparison suggests, sinners stay true to their vices, whatever the economic weather, and “economic turbulence might give them even more reason to indulge.” Among the companies whose shares hold up best are those with well-recognized brands and distribution deals that exclude competitors. Liquor giant Diageo, for example, owns Guinness Stout, Johnnie Walker scotch, and Smirnoff vodka, and it “has a large network of U.S. distributors that sell only its brands.” Trading recently at $78.50, it’s headed toward $108 by year’s end, says UBS analyst Melissa Earlam.

For those seeking additional safety, mutual funds offer a measure of diversification, said Richard Widows in Thestreet.com. Just remember that such funds “might be accurately described as the antithesis” of socially responsible investing. Among funds that focus on the vice sector of the economy, last year’s best performer was the unapologetically named Mutuals.com Vice Fund. Its top holdings—cigarette makers Altria Group and Carolina Group—leave no doubt as to its orientation.

Investors with more thirst for risk can bet on individual bottles of booze, said Matthew Swibel in Forbes. High-end auction houses Sotheby’s and Christie’s report that rare wines and liquors have fetched record prices at recent auctions. In October, for example, “Sotheby’s persuaded a buyer to bid $262,900 for a case of 1990 Romanée-Conti, 4 percent higher than the record high for Burgundy set at rival Christie’s a few days before.” Bear in mind, though, that transaction costs are high—both buyer and seller typically pay 20 percent to the auctioneer—and price appreciation isn’t guaranteed. Then again, if the value of these liquid assets fails to grow, “consuming the portfolio is an option.”

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