Everyone has a vice. For some, it’s alcohol. For others, it’s a weekend in Las Vegas. For others, it’s simply being unable to say no to a jelly donut.
Mine is chocolate. I can’t seem to have just one piece. For me, it’s either none or the whole box.
We know that the occasional dalliance with something that is not strictly good for us is part of human nature. Yet many investors get cold feet when it comes to generating an income from companies that profit from vice.
The reality is, vice tends to pay. Beer, spirits, tobacco, and gambling businesses tend to have strong cash flows. They also tend to pay chunky dividends. In a low-interest-rate environment, like we have today, it’s difficult for income-hungry investors to justify looking past these kinds of investments.
I sit on the investment committee and board of a trust company in Nevada. In that role, I was invited to attend a fund managers’ speed-dating conference in 2019.
These kinds of events allow fund managers to pitch their strategies to potential investors. This particular conference had a lot of interesting proposals, but the presentation on ESG (environmental, social, and governance) investing stood out most to me.
One of the panelists berated the attendees for not being more receptive to the idea of investing in what she considered the future of the planet. She described us all as “stale, pale, and male.” I’ve never been to a conference where someone defined my very existence as a vice.
That’s one of the biggest challenges political correctness has created. The number of sectors it is no longer OK to invest in keeps growing.
For example, many university endowments had to sell off their energy investments. In fact, the whole energy sector is in the gutter right now, despite the outsized dividends the majors pay more often than not.
One thing I find very interesting is how cannabis is both a vice and a social good. It all depends on who you speak with. The federal government still classifies it as a Schedule I drug, which is the very definition of a vice.
Meanwhile, a number of states have introduced laws to permit recreational use. Many frequent users believe it’s better at treating chronic pain than pharmaceuticals.
The holy grail for the cannabis sector would be federal reclassification. That would allow a nationwide business to develop. It would also create growth opportunities for one of the biggest vice sectors of all.
Tobacco and cannabis flourish in similar climates. Tobacco companies have long histories of prospering in a declining market. If cannabis were legal, that would provide them with a new growth market – one without the burden of all the negative press that comes from selling products that kill people.
The only reason I’m looking at tobacco right now is it’s cheap. I like these kinds of value plays. In fact, many of the vice sectors are cheap.
Maybe the world is moving on, and human society will evolve into an ideal situation where no one demands a distraction any longer. I just doubt that’s realistic. People are still people, and that’s not going to change.
Personally, I believe in profiting from whatever is going up. The fact that other investors are willing to walk away from businesses with strong cash flows only makes me want them more.
All the best,