February 1st, 2010
03:01 AM GMT
It’s perhaps the strangest opening of an academic paper on investing – a fall 2008 article cowritten by a Yale University finance professor and editor of the “Journal of Portfolio Management” that begins by recounting a scene from HBO mob drama, “The Sopranos.”
Tony Soprano, head of a New Jersey mob family, turns to his lieutenant Silvio Dante and says, “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.
As the authors of the paper, “Sin Stock Returns,” wrote: “Viewers of this HBO series knew what Sil meant. ‘Certain aspects of show business’ meant the adult entertainment that was often seen at Tony’s strip establishment, the Bada Bing Club, and ‘Our Thing’ meant organized crime, which involves many activities that exploit the vices of frail humanity.”
The researchers at Yale University and Stetson University put Tony Soprano's thesis to the test – not by examining organized crime, but by examining the historical returns of businesses that are considered morally suspect: alcohol, tobacco, defense, biotech, gaming and adult services. They examined 267 companies in 21 international markets from 1970 to 2007.
What did they find? The average annual return of the companies was about 19 percent, while the average stock market produced a return of just under 8 percent.
Gaming industries had the best return of 33.5 percent a year, followed closely by defense (33 percent), biotech and tobacco (both 22 percent), adult services (18 percent) and alcohol (about 13.5 percent).
No industry is full proof. For example, in the most recent downturn, the Vice Fund – a mutual fund which buys stocks in alcohol, tobacco, aerospace defense and gaming industries – fell 42 percent in 2008, mainly out of fears casinos were expanding too fast and taking on too much debt.
Still, if you have the moral stomach for this sort of investment, ‘This thing of ours’ might be the thing for you.
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