You must wonder why a smoking James Gandolfini and Cherry Coke are in the same picture.
In Episode 40 of the HBO series “The Sopranos,” Anthony “Tony” Soprano, Sr., played by James Gandolfini, asks his right-hand man Silvio Dante (by Steven Van Zandt): “Sil, break it down for ‘em. What two businesses have traditionally been recession-proof since time immemorial?” “Certain aspects of show business and Our Thing,” Sil replies.
For those of you not familiar with this HBO series, “certain aspects of show business” was the adult entertainment in Tony’s Bada Bing Club. “Our Thing” was the organized crime which exploits the vices of frail humanity.
Before satellite radio, Howard Stern had 12 million daily listeners. Now his program is the number one–rated show on satellite radio. Jerry Springer had an 8.1 Nielsen Rating (8.1% of the television viewing audience), which approximated 13 million viewers, at his television show’s peak in 1998. At one time, Jerry Springer had higher ratings than Oprah. But how many people would admit they listen to Howard Stern or watch Jerry Springer?
Sin is defined in the Random House Unabridged Dictionary as “any act regarded as such a transgression, especially a willful or deliberate violation of some religious or moral principle” and by theology as “deliberate disobedience to the known will of God.” Clearly, “sinful” behavior is often dictated by the religious environment in which the economic behavior is performed. Different societies at different times have had various disagreements with respect to what is considered acceptable behavior.
A good example of this is the way the Western and Eastern cultures view debt. In the Western world, incurring debt is considered a sound business practice and even rewarded with government tax incentives. But for thousands of years in the Eastern culture, the act of borrowing money, which implies the inability to live within one’s means, is viewed as “losing face.”
In most Arab countries, the Koran bans giving or receiving interest. The words from Chapter 2, Verse 278, of the Koran are quite clear: “O you who believe! Have fear of Allah and give up what remains of what is due to you of usury.” A better translation would be: “Don’t make money on money.”
Consequently, Arab investors can only receive dividend income but not interest income. This would also explain why the traditional Western banking industry, considered a sin industry, should not exist in the eyes of those who follow the teachings of the Koran.
In the sixth century, Pope Gregory handed down a list of “seven cardinal vices.” After another 1,500 years, on March 11, 2008, the Vatican issued a list of seven “social” sins, which includes the commission of bioethical violations, amassing excessive wealth, drug abuse, littering, genetic tampering, widening the divide between rich and poor, and creating poverty.
Yet, ask any vice stock investor: What is the major difference in investing in vice versus “regular” stocks? The first response is that vice investors or vice stocks generally have a “bad reputation.” Society, using current moral standards, does not approve of the products or services that these firms provide or of investors who profit from activities that exploit others’ habit-forming, or sin-seeking, behaviors.
It is often hard to differentiate among the social implication of a product, image of the producing firm, economic value of the stock, and integrity of the investor. When the product is controversial or is not accepted by the majority of society, the producing entity is viewed as being involved in a dubious business. Whether the economic entity is legitimate or involved in organized crime depends on the legality of its product.
A firm making a “bad” product is often presumed to be a “bad” firm. The negative publicity of a bad firm is further equated to a bad stock, whose valuation, according to traditional finance theory, should only be determined by its unique properties of risk and return. The further assumption is made that investors in bad stocks of this sort lack character or integrity. This chain reaction starts and ends with misperceptions.
In the popular press, a wealth of anecdotal evidence exists of several well-known sin stocks that have produced impressive returns. In practice, some evidence suggests that sin stocks have earned higher risk-adjusted returns than the market. The Vice Fund, launched in 2003, invests in only alcohol, tobacco, weapons, and gaming companies in the U.S. and foreign countries. This fund has earned an annualized return in excess of 20%.
Stay tuned for the explanations of the sin stock excess returns in Part 2 of this article.
After 2016’s the infamous Berkshire Hathaway’s annual shareholder meeting, the most celebrated investor Warren Buffett was interviewed by a CNBC reporter regarding what he, one of the largest shareholders of Coke Cola, thinks of the mountain of complaints that the Coke has been a major contributor to the high obesity in the country. Buffett, obviously embarrassed by the question, shoving his shoulders and replied, “Well, I have a Cherry Coke and a donut every morning. If I have a twin brother growing up side by side with me and he hasn’t (a Cherry Coke and a donut a day), I bet I look better than he does.”
After all, for the 50-year period between 1965 and 2014, Buffett has returned 1,826,163% to his shareholders, an annual return of 21.6%, compared with 9.9% S&P 500 total return.
At the age of 51, James Gandolfini (Tony Soprano) died of a heart attack on June 19, 2013.