4205_P-00FM.qxd 1/15/04 12:30 PM Page iii STOCKING UP ON SIN How to Crush the Market with Vice-Based Investing Caroline Waxler John Wiley & Sons, Inc. 4205_P-00FM.qxd 1/15/04 12:30 PM Page viii 4205_P-00FM.qxd 1/15/04 12:30 PM Page i STOCKING UP ON SIN 4205_P-00FM.qxd 1/15/04 12:30 PM Page ii 4205_P-00FM.qxd 1/15/04 12:30 PM Page iii STOCKING UP ON SIN How to Crush the Market with Vice-Based Investing Caroline Waxler John Wiley & Sons, Inc. 4205_P-00FM.qxd 1/15/04 12:30 PM Page iv Copyright © 2004 by Caroline Waxler. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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HG4515.13 .W39 2004 332.63′22—dc22 2003021774 Printed in the United States of America. 10987654321 4205_P-00FM.qxd 1/15/04 12:30 PM Page v Acknowledgments can’t express enough thanks to my agents, Greg Dinkin and I Frank Scatoni of Venture Literary, for all their incredible hard work, thoughtfulness, example, care, and yenta-ing. They did prac- tically everything but write the book. Greg teamed me up with the perfect editor, Debra Englander of Wiley, to make this book happen. She had the vision to see the po- tential in this project and the patience to guide me through the process. I was lucky to collaborate with someone who has such a rare combination of perseverance, diligence, and talent. I am in- debted also to her colleague Greg Friedman for all his hard work. My appreciation to Randy Jones, founder of Worth magazine, for assigning the article that spawned this book and to Michael Peltz for patiently editing and shaping that article. Without them this book would not exist. I am grateful to the people who have helped and generously shared their expertise with me: John Semel, Michael Tew, Anthony Butler, Martin Vostry, Tim McDarrah, Dan Ahrens, Dr. Roderick Pettis, Adam Glickman, and Richard Laermer. I am especially grateful to Webster Stone for coming up with the title of this book, and to Sam Coolik and Gretchen Morgenson, who taught me about investing in the first place. Thanks to Carter Crum, CFA, for all his helpful research on gambling, drinking, eating, and so forth. He is the savviest money manager I have ever worked with. v 4205_P-00FM.qxd 1/15/04 12:30 PM Page vi vi Acknowledgments Brian Lerner was an enormous help. He was a great partner in making this book possible and a first-rate researcher. And to the fabulous Pan sisters, Amelia and Esther, thanks for being a godsend in times of crunch. For the daily encouragement, support, and deadline reminders: Ilana Albert, Joey Anuff, Emily Cohen, Sean Gottlieb, Brent Hoff, and Nadine Zylstra. And, for his thoughtful suggestions, not to men- tion a job that provides inspiration for all things vice, Michael Hirschorn. Enormous thanks for their encouragement and for keeping me focused: Ali Weiss, Bernadette Durham, Annalise Carol, Sabina Forbes, and Susan Mactavish Best. And, of course, to my family for all your support, particularly Aunt Joan, with her unflagging work ethic and ingenuity, kept me inspired throughout this whole process. Grandma Sylvia, the true writer in the family, would have enjoyed this book more than anyone. The book is dedicated to my mother, Barb, a woman who may not know from vice but, thanks to Miss Finney, knows a thing or two about investing. Luckily, she has passed that knowledge on to me. 4205_P-00FM.qxd 1/15/04 12:30 PM Page vii Contents Chapter 1 Why Vice Is Nice 1 Chapter 2 The Ethical Dilemma and Asset Allocation 19 Chapter 3 This Is Research? 49 Chapter 4 Tobacco 69 Chapter 5 Gambling 83 Chapter 6 Weapons/Defense/War 103 Chapter 7 Booze 115 Chapter 8 Sex 133 Chapter 9 Drugs 151 Chapter 10 Vice in Sheep’s Clothing 165 Chapter 11 Pitfalls and Risk Management 183 Chapter 12 Your Vice’s Future 195 Chapter 13 Afterglow 205 Appendix I Returns of Socially Responsible Mutual Funds vs. All Other Mutual Funds as Well as the S&P 209 Appendix II Stocking Up on SINDEX 217 Appendix III The Titillating 20 225 Notes 231 Index 237 vii 4205_P-00FM.qxd 1/15/04 12:30 PM Page viii 4205_P-01.qxd 1/15/04 12:34 PM Page 1 CHAPTER1 Why Vice Is Nice Sin Never Goes Out of Style When everything seems to be going badly in your life, do you feel like taking a drink? Pigging out? Having a—gasp—cigarette? Watch- ing a porno? (Well, maybe the last one doesn’t apply to everyone, but you get the idea.) Do you also feel like doing these things in good times too? If you do, you’re not alone. Besides having some fun, and having someone else to drink with, what does that mean for you? What does it mean for your wallet? It turns out that these common impulses mean a lot, according to Tom Galvin, who commissioned a report on vice stocks when he was the chief investment officer of banking powerhouse Credit Su- isse First Boston in 2001. What’s vice? It can be loosely defined as all those things you’re not supposed to do: drink, smoke, and make weapons for the military—what Galvin called the “Vice Squad.” This is a longstanding trend, not just a fly-by-night flirtation with sin. During the past recessions, according to Galvin’s research, par- ticularly during the ones in 1982 and 1990–1991, sectors like alco- hol, tobacco, and food consumption outperformed the market. At these times industry pricing in all these areas, with the exception of food, rises above the national average. This ability to raise prices is 1 4205_P-01.qxd 1/15/04 12:34 PM Page 2 2 Stocking Up on Sin called pricing power (you’ll be seeing this term throughout the book). These sectors are classified as a good, safe bet in all markets, their vice aspect aside, but they are at their best during the early parts of recessions. “The reason we did the Vice Squad report is that there are some sectors that tend to show better business performance during eco- nomically weak periods. They are beneficiaries of mere flaws in human character,” says Galvin. “It turns out that demand for drink- ing, smoking, and gambling remain pretty steady and actually in- crease during economically volatile conditions.” Galvin notes that these stocks significantly outperformed the market over the 18 months before the report’s release in March of 2001. What inspired Galvin to write it? The world around him. The week he wrote the Vice Squad report, the Mafiosi-centered series The Sopranos was a top-rated show. He notes that at the other end of the spectrum the docudrama The Kennedys—showing the Camelot as- pect, not the scandals—was one of the lowest-rated shows. He took this to mean that there was steadier demand for vice during times of weak economic conditions. “It was 2001 and the economy was entering a recession. It was a report on counter-cyclical stocks, defensive plays,” says Galvin. “I labeled it Vice Squad because I thought it would be a bit more fo- cused than a defensive oriented fund.” Get Active Galvin’s report was only a guidepost for investors but if you want someone to actively manage your money in a sinful way, the only dedicated fund is something called, appropriately enough, the Vice Fund.